Millions of student loan borrowers left out of pandemic payment pause amid decade-old quirkFebruary 22, 2021
When the U.S. government bailed out student loan lenders during the Great Recession, legislators unintentionally set off a series of cascading events that has left more than 6 million student loan borrowers locked out of a crucial benefit more than 10 years later amid the coronavirus pandemic.
Two consumer advocacy groups are pressing the Biden administration to change that.
“The Trump administration exercised executive authority to cancel student loan interest charges and pause loan payments for over 40 million federal student loan borrowers,” a joint letter from the Student Borrower Protection Center and the National Consumer Law Center stated in a recent letter to the Education Department’s (ED) Acting Secretary Philip Rosenfelt. “The Biden administration can and should use the same tools to finally offer immediate relief to millions of federal student loan borrowers who have been left behind.”
While the vast majority of the roughly 46 million U.S. student debtors are included in the interest-free payment pause, first enacted by former President Donald Trump in March 2020 and extended to September 2021 by President Biden, roughly 6 million borrowers holding about $160 billion in debt with commercially-held Federal Family Education Loan Program (FFELP) loans have been left out.
A spokesperson from ED confirmed that the agency had received the letter and “are taking a close look at options for addressing the needs of FFEL borrowers who are experiencing financial hardships.”
The twisted history of FFELP
FFELP loans are one of the most complicated types of student loans because of how much went on in the background during and after the Great Recession.
Created in 1965 as part of the Higher Education Act, the FFELP was created to help Americans pursue higher education. Banks and private entities administered the loans, which were guaranteed by the federal government. Banks then securitized those loans as Student Loan Asset Backed Securities (SLABS) to sell to other investors. Just like the mortgages that were repackaged, SLABS were based on debt repaid by borrowers.
Meanwhile, the government also offered federal loans directly — “Direct Loans” — as a much smaller program that operated alongside FFELP.
When the capital markets seized up in 2008 and banks found it hard to sell SLABS, the administration of then-President George W. Bush bailed out the student loan industry by buying more than $100 million of these FFELP loans directly from private lenders — thereby making the federal government the largest single creditor in the student loan market overnight.
“We ended up constructing a vehicle where essentially the federal government could essentially be that secondary market for the FFEL… kind…