News Release: The CARES Act fails to provide sufficient relief to federal student loan borrowers


March 26, 2020

CONTACT: Alexis Goldstein,

The CARES Act fails to provide sufficient relief to federal student loan borrowers

Statement from Alexis Goldstein, Senior Policy Analyst, Americans for Financial Reform:

The 43 million federal student loan borrowers are not getting meaningful relief from the CARES Act. It leaves an estimated 9 millions of federal student loan borrowers without any relief at all, does not guarantee that borrowers won’t face large principals when they return to repayment, and doesn’t include cancelling student debt, a move that both provides crucial relief to distressed borrowers and stimulates a fast-contracting economy. 

There are several major gaps with the proposed relief to student loan borrowers:

The suspension on payments and waiving of interest outlined in the bill only goes to borrowers with federally-held loans. The bill includes a six month suspension on payments for federally-held loans, six months that will still count toward loan forgiveness or rehabilitation programs, and will not create any negative credit reporting. But the nearly 2 million borrowers with Perkins loans and over 7 million borrowers with commercially-held FFEL loans will be unfairly left out. This differing treatment based on loan type will create confusion among those with older loans that don’t qualify for the suspension. Leaving out borrowers with Perkins and commercially-held FFEL loans is fundamentally unfair, and it will be difficult for these borrowers to get answers, as many are already having trouble contacting servicers due to reduced hours and the closing of call centers

Borrowers with ineligible loans who consolidate to become eligible may end up with increased loan balances. The Department itself has noted that the only way borrowers with commercially-held federal loans can get relief is through consolidation, but the Department has not guaranteed that consolidation will occur without capitalization of interest. Thus, some borrowers would have to increase their own student loan principal balance just to qualify for a temporary suspension. By contrast, Speaker Pelosi’s Take Responsibility for Workers and Families Act covered all federal loan types–this is the approach Congress must take, to ensure that all federal student loan borrowers get help in this urgent time. 

The halt to involuntary collections in the bill also applies only to Direct and federally-held FFEL loans. It is important and welcome that this bill includes a 60-day halt to involuntary collections on federally-held loans. But borrowers in default on commercially held FFEL loans will still face wage and social security garnishments, seizure of their tax refunds, and other involuntary collections, just because they have a kind of loan not covered by the bill.

The bill lacks clarifying language on whether outstanding interest will capitalize. Because there is no language clarifying that outstanding interest will not capitalize, when borrowers return to repayment, many may see significantly larger principal balances than before the suspension. 

The temporary income tax exclusion for employer-paid student loans leans heavily toward helping the least needy borrowers, and does nothing to help the most distressed borrowers who are out of work. This tax break has been pushed by large companies that offer student loan payment as a recruitment technique, and is generally not afforded to low wage or contract workers. 

The bill lacks any federal student debt cancellation. The best way to create student debt relief is cancelling federal student debt, which would both short and long term economic stimuli. Because 43 percent of people in default have less than $10,000 in loans, cancelling a minimum of $10,000 in federal loans would drastically improve the financial situation for the most distressed student borrowers. Research shows that federal student debt cancellation increases borrowers income by about $3000 over a three year period, and would boost GDP overall by as much as $108 billion.

The bill provides funds to for-profit colleges without bans on using them for executive compensation or advertising. The bill provides a $14.25 billion emergency relief fund for colleges and universities, and importantly, requires at least 50% of these grants go to students–for things like housing, cost of attendance, or food. But the relief fund includes all types of institutions, including for-profit colleges that are not exclusively online. Despite a few strings that impose few restrictions on the use of these funds, such as not using the funds to pay contractors for pre-enrollment recruitment activities, there is no requirement that the grants not be used for executive compensation or advertising. This is especially worrying, given that the for-profit college sector has a track record of paying its executives millions despite widespread fraud and terrible outcomes for students. 

For those the bill does impact, it still leaves the specter of their debt looming in the future. For those it leaves out, it will create confusion around why the type of loan they have disqualifies them for any relief. And the bill does not provide the kinds of economic benefits that research has shown that cancellation would create. Congress must ensure that the broad and meaningful student debt relief included in the Take Responsibility for Workers and Families Act is included in the Phase 4 stimulus.