Approaching Student Loan Relief Piecemeal: The Biden Administration Extends CARES Relief to Defaulted FFELP Student Loan Borrowers; Weighs Options for Further Measures

In a March 30, 2021 announcement, the Biden administration announced that it would be extending relief to approximately 1.14 million student loan borrowers who previously were not covered under the CARES Act relief enacted last year. These are borrowers who have defaulted on loans issued pursuant to the Federal Family Education Loan Program (“FFELP”). Specifically, under the measure, borrowers who have defaulted on FFELP loans will not face further penalties (and will see penalties already assessed unwound) and will also see their current interest rates reset to 0%.[1] The Biden administration’s action will be retroactive to March 13, 2020—the day the governmental formally declared a state of emergency due to the COVID-19 pandemic—and will return FFELP loans that defaulted during this period to good standing, with credit bureaus asked to remove any related negative credit reporting, allowing the applicable borrowers to rehabilitate their credit scores.[2]

FFELP loans were enacted as part of the Higher Education Act of 1965. The original goal of the program was to help all Americans pursue higher education in an effort to strengthen middle class families. Banks and other private entities would provide loans while the federal government guaranteed them by agreeing to pay a certain percentage of defaulted loans to lenders.[3]

Lenders often transferred their FFELP loans to student loan asset-backed securitizations or “SLABS” offering investors an opportunity to invest in government-guaranteed assets and, in turn, allowing lenders to make even more FFELP loans available. Following the 2008 financial crisis, however, asset-backed securities like SLABS faced an increasingly illiquid market, which forced many FFELP lenders to hold more loans on their books and threatened the future of the program. In an effort to prop up FFELP lenders temporarily, the Bush administration authorized the government itself to purchase more than $100 million of FFELP loans in late 2008. In 2011, President Obama formally terminated the FFELP program moving most remaining FFELP loans to the federal government’s books by encouraging borrowers with FFELP loans to convert their loans into federal direct loans and by subsidizing payments to private lenders. Nevertheless, millions of FFELP loans remain privately-held.[4]

The distinction between FFELP loans held by the federal government and FFELP loans held by private investors had not been particularly meaningful until the COVID-19 pandemic hit in early 2020. Notably, the 2020 CARES Act enacted in the wake of the pandemic provided several protections for FFELP borrowers whose loans were held by the government, including a moratorium on payments and the suspension of enforcement mechanisms like wage or Social Security benefit garnishments.[5] However, the CARES Act did not extend similar benefits to FFELP borrowers whose loans were held by private investors. The Biden administration’s new measure has removed this distinction and extended the CARES Act protections to all FFELP borrowers, regardless of who holds their loans. That said, these benefits will extend only to FFELP borrowers who have defaulted on their loans. No relief is offered to the more than 10 million FFELP borrowers whose loans are not held by the federal government and are current on their loans.[6]

The Biden administration’s announcement comes against the backdrop of increased discussion regarding the cost of higher education in the United States and the treatment of student loan debt in bankruptcy and otherwise. Student loan debt was a major topic in the 2020 Democratic presidential debates; for example, outspoken critics of the current system such as Senators Bernie Sanders and Elizabeth Warren called for wholesale reform. In response to the Biden administration’s FFELP measures, Senator Warren has publicly urged the President to go even further, suggesting that the federal government should eliminate up to $50,000 in federal student loan debt for any borrower who earns less than $125,000 annually. President Biden has to date resisted these proposals, instead suggesting that he is more open to considering up to $10,000 in loan forgiveness per student loan borrower.[7]

Perhaps counterintuitively, it is not clear that the Biden administration’s grant of relief to FFELP borrowers will adversely impact investors in the applicable loans.  Instead, market sources have suggested that the decreased risk of future defaults may lead SLABS and other similar securities to increase in price.[8]

Ultimately, President Biden has signaled that, while student loan relief is an issue his administration will consider, it likely will do so on a gradual, piecemeal basis without any immediate wide-scale forgiveness along the lines pushed by Senator Warren and others. The exact stance the President will take on future efforts will likely become clearer in the coming months.

[1] U.S. Dep’t of Edu., Expansion of COVID-19 Emergency Flexibilities to Additional Federal Student Loans in Default, (March 30, 2021).

[2] Aarthi Swaminathan, Student debt relief extended to 1.14 million borrowers with defaulted FFELP loans., Yahoo! Finance, (March 30, 2021), https://finance.yahoo.com/news/student-debt-relief-defaulted-ffelp-loans-175359465.html.

[3] Id.

[4] Jack Du, Student Loan Asset-Backed Securities: Safe or Subprime?, Investopedia (April 22, 2020), https://www.investopedia.com/articles/investing/081815/student-loan-assetbacked-securities-safe-or-subprime.asp.

[5] Zach Friedman, Student Loan Relief For 1 Million More Borrowers—After Biden Cancels $2.3 billion of Student Loans, Forbes (April 1, 2021), https://www.forbes.com/sites/zackfriedman/2021/04/01/biden-grants-student-loan-relief-to-1-million-more-borrowers-but-its-not-exactly-student-loan-cancellation/.

[6] Id.

[7] Lisa Kashinsky, Pressley, Warren, Healey team up to push Biden to cancel student loan debt, Boston Globe, (April 1, 2021), https://www.bostonherald.com/2021/04/01/pressley-warren-healey-team-up-to-push-biden-to-cancel-student-loan-debt/.

[8] American Banker Asset Securitization Report, Canceled student loans may be boon for bonds, American Banker (March 22, 2021), https://asreport.americanbanker.com/articles/canceled-student-loans-may-be-boon-for-bonds.