Have we seen the bottom of the student loan crisis?

Long before the advent of the COVID-19 epidemic and the litany of financial and economic disruptions brought about in its wake, the student loan situation in the United States was already approaching a point of crisis. As the amount of money owed on student loans has managed to decrease a little late yesr – from $ 1.49 trillion to $ 1.48 trillion in the quarter – the amount of this past due debt has increased.

On average, about one million borrowers default on their student loans each year, and the Brookings Institution estimates that about 40 percent of borrowers will default by 2023. Or at least that’s what he estimated in 2018 – an update to those numbers for 2020 taking into account the tens of millions of Americans without work, the closing economy and general uncertainty as to when the recovery will begin in earnest and what that recovery will look like would likely increase that number.

In particular, it seems that borrowers whose loans are owed to private institutions.

Because when Congress passed the CARES Act at the end of March, it remembered those in debt for their education. By law, those who have student loans are entitled to a six-month suspension of their payments, without interest. But there’s a catch: this protection is only promised to students whose loans are owned or held by the federal government.

A restriction, it turns out, that caused some complications. For example, about 43 million Americans received an education funding via the federal student loan program, which could lead to the assumption that the $ 43 million would qualify for this assistance program. But, according to the Wall Street newspaper reports, the wording of the law as it excludes about 7 million of these borrowers because their loans are technically held by banks, credit unions or other private entities. These loans echo a program of guaranteed loans that Congress ended in 2010, this oddly excluded tranche of loans is worth about $ 170 billion of the nearly $ 1.5 trillion in federal student debt.

And, in particular, the students themselves, now excluded, have never chosen these loans. Universities opted for or not – and students simply had no choice but to comply with their school’s choice.

“It’s very arbitrary,” Emily Nevill told The Journal. Nevill is a 36-year-old librarian with $ 8,600 in federal corporate loans, leaving her excluded from the program. At the same time, her husband was able to take advantage of six months of suspended payments. Borrowers who find themselves in this unintentional program gap can refinance their loans into a Federal Qualified Offer – a fact very few borrowers are aware of and comes with costs. Most borrowers would face a higher interest rate and longer loan terms, in addition to the fact that refinancing would shorten that month’s relief window.

In addition, a report by the Consumer Financial Protection Bureau’s former student loan ombudsperson, Seth Frotman, now of the student loan protection center, said the CARES law also completely ignores the growing number of borrowers with purely private student loans.

This market, according to the report, has grown by more than 70% in the past decade alone, surpassing growth rates in the auto, credit card and mortgage markets and reaching $ 130 billion this year. . “These findings should be a wake-up call that the true scale of the student debt crisis is even worse than many realize and in the private student loan market, the most vulnerable borrowers will be hit hardest. “

The law as drafted was a compromise between Democrats advocating simply reducing each federal borrower’s balance by $ 10,000 and Republicans pushing to simply suspend payments but not interest. The possible compromise measure – a six-month break, without interest – was then quickly pushed towards the package and the passage. This is easy for loans held directly by the federal government, but loans held by banks would take time to come to netting agreements. In the name of opportunism, the government has moved ahead.

Private lending can be less controlled directly through regulatory action, although private lenders have notably worked with state officials in California and elsewhere to create forbearance agreements that allow customers to withhold payments for 90 days. without penalty.

“I just want to applaud these (…) for their willingness to step in and help those who are struggling to pay off their student loan debts,” California Governor Gavin Newsom told his daily. press conference last week.

And it may still be that relief may come for those who hold loans not yet eligible under CARES ACT. Reports say there is growing momentum in Congress – as complaints from ineligible voters unable to make their loan repayments have flocked in recent weeks – to expand aid on federal loans held by lenders private. Democrats have insisted more on the change, although GOP advisers say there is support for the change on the other side.

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