The Student Loan Payment and Interest Holiday Could be Administratively Expanded to Benefit More Borrowers

May 10, 2021 by Aburiyeba Amaso

by John Huston

The Secretary of Education and Congress have waived the accrual of interest and the requirements that student loan borrowers make monthly payments on their student loans for a period beginning on March 13, 2020 and ending on September 30, 2021. The purpose of this student loan interest and payment holiday is to provide economic relief to borrowers during the coronavirus pandemic.[1]

The holiday applies to loans held by the U.S. Department of Education (Department).[2] The program excludes private student loans, loans originated under Federal Family Education Loan (FFEL) Program that are  held by commercial lenders and guaranty agencies (herein referred to as “FFEL Owners”),[3] and Federal Perkins Loans that are held by institutions of higher education (herein referred to as “Perkins Loan Institutions”).[4] On March 30, 2021, the Department expanded the student loan interest and payment holiday to borrowers with FFEL loans that are in default, but not to other borrowers with loans held by FFEL Owners.[5]

The FFEL and Perkins Loan programs were both created and authorized by the Higher Education Act of 1965, as amended (HEA).[6] Both programs have been discontinued and are no longer originating new loans, [7] but millions of borrowers still have outstanding balances that total $169.3 billion under the FFEL loans program[8] and $4.7 billion for Perkins Loans Institutions. [9]

Some Members of Congress have decried the significant inequity associated with providing a student loan interest and payment holiday to borrowers with loans held by the Department, while simultaneously denying similar benefits to borrowers with FFEL and Perkins Loans.[10]

In response, the Department announced on April 3, 2020 that the commercial and educational institutions that hold loans under the FFEL and Perkins loan programs may voluntarily provide the same interest and payment holiday to their borrowers.[11] However, the cost of providing such relief would likely be shouldered by the loan holders.[12]. Some lenders have provided payment relief to borrowers but continued to allow interest accrual on the same loans.[13] Additionally, borrowers in these programs may consolidate their loans into a Direct Consolidation Loan, which enables them to take advantage of the interest and payment holiday. However, if borrowers consolidate, they may lose progress they have made toward time-based loan forgiveness on such loans.[14]

To ensure that all borrowers who have loans held by FFEL Owners and Perkins Loans Institutions are provided equitable relief, the Department of Education should utilize its authority under the Higher Education Relief Opportunities for Students (HEROES) Act of 2003. Prior to the passage of the CARES Act, the Department used the HEROES Act authority to waive  interest accrual under 34 C.F.R. §685.207 and the requirements for borrowers to repay their loans under 34 C.F.R. §682.209.[15] The use of the HEROES Act prior to passage of CARES Act, is of special importance because the Department’s legal rationale may be expanded to provide benefits tantamount to the student loan interest and payment holiday to borrowers with FFEL and Perkins Loans. Therefore, the remainder of this post will assess the viability of such an approach.

The HEROES Act allows the Secretary of Education to “waive or modify any statutory or regulatory provision applicable to the student financial assistance programs… as … necessary” during a national emergency.[16] In order to use this extraordinary authority, the Secretary must find that any waiver granted  is needed to ensure that borrowers impacted by the national emergency are not placed “in a worse position financially.”[17] It is unclear if this determination is subject to judicial review or if it would be considered a political question left to agency discretion.

The Department is required to publish a Federal Register notice when it exercises its authority under the HEROES Act.[18] The Department published such a notice on December 11, 2020 detailing that it had provided a student loan interest and payment holiday for borrowers with Department held loans .[19] That notice, however, merely stated that the Secretary has found that such waivers are necessary and did not include legal analysis as to how the student loan interest and payment holiday is tailored to ensure that borrowers are not placed in a worse financial position.[20]

I will assume for the purposes of this post that the Department acted lawfully in accordance with the HEROES Act in providing the waivers, even though it did not announce its legal rationale as to how it found that providing a student loan interest and payment holiday ensured borrowers with loans held by the Department are not placed in a worse position financially due to the coronavirus pandemic.[21] If the Secretary concluded that holidays could be extended to loans held by the Department without placing borrowers in a worse financial position, that finding could likely be used to extend the same benefits to FFEL and Perkins Loans that are not held by the Department.

There is no discernable reason why borrowers of loans not held by the Department would be adversely affected by a holiday when the Department found that borrowers of loans held by the Department are not negatively impacted. For example, there is no class-based distinction between these types of borrowers that would lead to the conclusion that borrowers with Department held loans were disparately impacted by the coronavirus pandemic in such a way to justify different treatment. In fact, the Department extended the student loan holiday to all of the FFEL and Perkins Loans that it holds.[22] So, the only difference between which borrowers received the holiday and those who did not is whether the Department owns the loan.[23] The Department must have concluded, as required by the HEROES Act, that providing the holiday to FFEL and Perkins Loan borrowers with loans that are held by the Department would ensure that such borrowers “not placed in a worse position financially.” Similar logic may be applied to extend the holiday to loans not held by the Department.

Operating under this assumption, the Department could provide additional waivers to induce FFEL Owners and Perkins Loan to provide a student loan interest and payment holiday. These waivers would enable the Department to reimburse the lenders for the cost either immediately or over time. To operationalize this proposal, the Department would need to offer innovative waivers because it has never issued HEROES Act  waivers to non-Department loan holders to  induce them to provide benefits to student loan borrowers. Specifically, it could issue the following waivers and make them voluntary:

  • Under current law, FFEL Owners make payments to the Department based on the excess interest payments the lender has received on certain FFEL loans. [24] To induce FFEL lenders to provide a student loan interest and payment holiday to its borrowers, the Department could waive these excess interest payments until the sum of waived payments is equal to the cost of providing an interest and payment holiday. The amount required to be returned to the Department varies based on how many and what type of loans the lender holds and only applies to loans originated after 2006.[25] Specifically, the Department could waive the requirement under 20 U.S.C. §1087-1(I)(v) and 34 C.F.R. §682.305(d) until the sum cost of the waiver is equal to cost to the lender of providing a student loan interest and payment holiday. This may effectively reimburse some FFEL Owners for providing such relief over a period of several years.
  • At the inception of the Perkins Loan program, institutions that desired to participate in the program were required to match payments made by the Department into revolving institutional loan accounts. [26] All institutions that participated in the program had their own account and managed the funds independently from the Department while subject to certain restrictions.[27] Funds in these accounts were used as capital to originate Perkins Loans and borrower payments were deposited back into the revolving account to be used to originate new loans.[28] Institutions were required to keep track of what funds were federal funds and what funds were institutional funds based on the original matching ratio.[29] In general, upon expiration of the program and after loans originated under the program have been repaid, institutions keep their contribution to the fund but must return the federal contribution to the Department.[30]To induce Perkins Loan Institutions to provide a student loan interest and payment holiday to its borrowers, the Department could waive the requirement that federal contributions to Perkins Loan revolving accounts be returned to the Department. Specifically, the Department could waive the requirement that Federal Perkins Institutions return federal matching funds to the Department until the sum of waived payments is equal to the cost of providing the interest and payment holidays.[31] Because Federal Perkins Loan funds are currently in the possession and control of Perkins Loan Institutions, this waiver could effectively reimburse institutions immediately for the cost of providing such relief because they already have access to the funds. The waiver would remove current restrictions on those funds and relieve them of the duty to return them to the Department.

It is unclear if the Department has the legal authority to require lenders and institutions to participate in a mandatory student loan interest and payment holiday under the proposed waiver regime outlined in this post. The U.S. Constitution prohibits the government from taking private property for public use without just compensation.[32] Here, it is unclear if the sum cost of waiver to the Department could fully compensate for the total cost of program a student loan interest and payment holiday. Determining if the waivers could fully compensate these FFEL Owners and Perkins Loan Institutions would be a fact specific inquiry that would be dependent on how long the national emergency lasts, when the waiver program begins, and how much revenue the Department is forgoing. If the national emergency lasts for an extended period of time, then the waivers may not fully offset the cost of providing the holiday. Additionally, even if entities were fully compensated for the cost of the interest and payment holiday, it’s unclear whether the delayed compensation nature of the waiver would be constitutional under the Takings Clause.[33] For the foregoing reasons, requiring participation in the waiver program could create significant legal risk to the Department.

In sum, this post outlines a method the Department might be able to use under its authority to provide more equitable relief to borrowers with Perkins Loans and FFEL loans. Congress has passed two stimulus bills since the onset of the coronavirus pandemic and neither included relief for these borrowers.[34] Likewise, the American Rescue Plan Act of 2021 does not include relief for these borrowers, so it seems unlikely that Congress will provide relief to these borrowers in the future.[35]

 

 

 

[1] See White House Press Release, President Donald J. Trump Has Mobilized the Full Resources of the Federal Government to Respond to the Coronavirus, (Mar. 13, 2020); available at https://trumpwhitehouse.archives.gov/briefings-statements/president-donald-j-trump-mobilized-full-resources-federal-government-respond-coronavirus/; see also White House Press Release, Pausing Federal Student Loan Payments, (Jan. 20, 2021), available at https://www.whitehouse.gov/briefing-room/statements-releases/2021/01/20/pausing-federal-student-loan-payments/.

[2] See Cong. Rsch. Serv., R46409, Proposals to Extend CARES Act Provisions to Federal Student Loans Not Held by the Department of Education: Frequently Asked Questions 1 (2020),

https://crsreports.congress.gov/product/pdf/R/R46409 [hereinafter CRS Report].

[3] Id.

[4] Id.

[5] See Federal Student Aid website, Coronavirus and Forbearance Info for Students, Borrowers, and Parents, (updated Mar. 30, 2020), available at https://studentaid.gov/announcements-events/coronavirus.

[6] The Higher Education Act of 1965, Parts B and E, Title IV (codified as amended at 20 U.S.C. §§ 1071-1087-2, 1087aa-1087ii).

[7] The Federal Family Education Loan (FFEL) program was discontinued by amendments made in Section 2201 of the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, 20 U.S.C. §1071, (providing that no new FFEFL loans shall be made after July 1, 2010); The authority for schools to make new Perkins Loans ended on Sept. 30, 2017 for undergraduate borrowers and on September 30, 2016 for graduate borrowers.  20 U.S.C. §1087aa(b)(1)(A)—(C).

[8] CRS Report, supra note 2, at 3.

[9] Id. at 12.

[10] See Press Release, Rep. Elise Stefanik, Stefanik Announces Introduction of the Bipartisan Equity in Student Loan Relief Act, (April 22, 2020),https://stefanik.house.gov/media-center/press-releases/stefanik-announces-introduction-bipartisan-equity-student-loan-relief.

Guidance for interruptions of study related to Coronavirus (COVID-19), U.S. Dep’t of Educ. (April 3, 2020), available at: https://ifap.ed.gov/electronic-announcements/040320UPDATEDGuidanceInterruptStudyRelCOVID19 [hereinafter Department Federal Register Notice].

[12] Id.

[13] Danielle Douglas-Gabriel, D.C. joins states in getting student loan companies to provide relief amid pandemic, Wash.Post (May 5, 2020),https://www.washingtonpost.com/education/2020/05/04/dc-joins-states-gettingstudent-loan-companies-provide-relief-amid-pandemic/.

[14]Consolidating your federal education loans can simplify your payments, but it also can result in the loss of some benefits, U.S. Dep’t of Educt https://studentaid.gov/manage-loans/consolidation (last visited Mar. 6, 2021).

[15] Department Federal Register notice, supra note 14.

[16] 20 U.S.C. §1098bb

[17] Id.

[18] 20 U.S.C. §1098bb(b)

[19] Department Federal Register notice, supra note 14.

[20] Id.

[22] Department Federal Register notice, supra note 14.

[23] Id.

[24] 34 C.F.R. §682.305(d)

[25] Id.

[26] NACUBO Advisory Guidance 18-03, Perkins Loan Program Close-Out, Nat’l Ass’n of College & U. Bus. Officers (Nov. 2018), https://www.nacubo.org/Advocacy/Issues/Ed%20Regs/Perkins%20Loans.

[27] Id.

[28] Id.

[29] Id.

[30] 20 U.S.C. §1087bb(e)(3)(c)

[31] Id.

[32] U.S. CONST. amend. V

[33] Id.

[34] The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Pub. L. No. 116-136 (2020); see also

and Coronavirus Response and Relief Supplemental Appropriations Act, 2021 (CRRSAA), Pub. L. No. 116-260, (2020)

[35] The American Rescue Plan Act of 2021, Pub. L. No. 117-2 (2021).