Private student loan borrowers received some good news last week, as nine US states announced a coordinated effort to partner with private student loan servicers and offer relief for private student loan borrowers (the “Multi-State Initiative”). The measures announced by these states are very similar to those announced by New York on April 7, 2020 (the “NYDFS Guidance”).1 The Multi-State Initiative and the NYDFS Guidance both came after the federal government enacted relief measures as part of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") that were designed to help federal student loan borrowers.2 This Legal Update provides a brief overview of the Multi-State Initiative and how it compares to the relief measures provided by the CARES Act and the NYDFS Guidance.
On March 27, 2020, President Trump signed the CARES Act into law. The CARES Act was designed to provide emergency assistance to those affected by the COVID-19 national emergency, and it includes certain temporary relief for federal student loan borrowers. Subsequently, on April 7, 2020, New York became the first state to announce relief measures specifically designed to aid private student loan borrowers. New York Governor Andrew Cuomo announced an agreement with the largest student loan servicers in New York to provide relief to private student loan borrowers experiencing financial hardship due to COVID-19, and the New York Department of Financial Services published the NYDFS Guidance, which outlined these relief measures and encouraged the adoption of these measures by holders and servicers of private student loans.
A number of states publicly announced their participation in the Multi-State Initiative starting on April 21, 2020. Although some of the relief measures proposed by the NYDFS Guidance and the Multi-State Initiative are similar to those provided to federal student loan borrowers under the CARES Act, as we noted in our prior Legal Update, there are some critical differences. Those differences include whether relief measures are automatically applied to borrowers’ accounts, the type of relief available, the duration of such relief, and whether the relief is mandatory or voluntary.
2. Multi-State Initiative Participants
The following jurisdictions have joined the Multi-State Initiative:
- New Jersey8
- Washington State10
Announcements regarding the initiative mention at least 13 private servicers that have agreed to provide relief, although some announcements list more servicers or do not list specific partner institutions at all. Partner servicers include some, but not all, of the largest private student lenders and servicers.
3. Relief Measures
Servicers participating in the Multi-State Initiative have agreed to provide eligible borrowers with the following relief, where applicable:
- A minimum of 90 days of forbearance
- Waived late payment fees11
- Suspension of negative credit reporting
- Suspension of debt collection lawsuits for 90 days
- Working with borrowers to enroll them in other borrower assistance programs, such as income-based repayment.
Borrowers must contact their servicers in order to request forbearance and the other forms of relief. Although announcements regarding the Multi-State Initiative are not clear on this point, it appears that borrowers must demonstrate some sort of financial hardship as a result of COVID-19 in order to obtain the above relief.
A. Comparison to the NYDFS Guidance
The relief measures provided by the Multi-State Initiative are largely the same as those announced by the NYDFS on April 7, 2020. As with the NYDFS Guidance, the Multi-State Initiative does not waive interest on eligible loans or set eligible borrowers' interest rates at 0% for a specified period—a critical difference between the relief options urged by states and those provided to federal student loan borrowers under the CARES Act.
The most notable difference between the NYDFS Guidance and the Multi-State Initiative is that the NYDFS Guidance asks servicers to affirmatively notify borrowers about the existence of relief measures while the Multi-State Initiative does not. Some servicers may choose to notify borrowers about the existence of relief measures of their own volition, however. Moreover, unlike the NYDFS Guidance, the Multi-State Initiative does not expect private student loan servicers to make enhancements to their compliance management systems to adequately assist borrowers in obtaining relief, although enhancements of this nature may be implied.
B. Comparison to the CARES Act
There are three especially notable differences between the relief measures within the CARES Act and those provided through the Multi-State Initiative. As discussed above, the Multi-State Initiative does not waive interest on eligible loans or set eligible borrowers' interest rates at 0% for a specified period. The CARES Act waives interest on eligible loans through September 30, 2020.
Borrower eligibility is also an important difference between the CARES Act and both the Multi-State Initiative and the NYDFS Guidance. Although the CARES Act automatically provides the prescribed relief to all consumers with federal student loans, private student loan borrowers residing in a state that has provided relief must affirmatively contact their loan servicers to request an accommodation.
The press releases, executive orders, and other documentation announcing the Multi-State Initiative do not indicate whether a private student loan borrower must provide any information or documentation to confirm they are experiencing a financial hardship related to COVID-19 in order to qualify for the outlined relief measures. However, if the Multi-State Initiative follows the NYDFS Guidance in this regard, borrowers must have suffered a hardship in order to obtain the requested relief. This approach would differ from the CARES Act, which automatically provides relief to all borrowers with federally held student loans. Further, as with the NYDFS Guidance, if borrowers must demonstrate a hardship in order to be eligible for the relief offered by the Multi-State Initiative, it is unclear if servicers can automatically assume that borrowers are suffering from a financial hardship as a result of the COVID-19 pandemic, if they will be expected to rely on borrowers’ self-certification to that effect, or if additional documentation can be requested.
C. Applicability to Servicers
As with the NYDFS Guidance, the measures announced by the Multi-State Initiative are not mandatory. Student loan servicers are not required to comply with the suggested relief measures, although a number of servicers have agreed to do so voluntarily as part of a partnership with applicable states. However, in many instances, a student loan servicer does not own the underlying student loan contracts it services and, as a result, may not have the authority to implement the suggested measures of its own volition.
As with the NYDFS Guidance, some state participants in the Multi-State Initiative seem to have contemplated this scenario. Some announcements state that if applicable student loan servicers are limited in their ability to take these actions due to investor restrictions or contractual obligations, servicers are committed to working proactively with loan holders whenever possible to relax those restrictions or obligations. Some—but notably not all—state announcements state that prudent and reasonable actions taken to support relief for borrowers during the pandemic will not be subject to criticism from applicable state regulators.
States arguably do not have the authority to dictate borrower relief options offered by servicers or holders of private student loans, but many states (including seven that are part of this initiative) have licensing laws applicable to private student loan servicers. As a result, servicers licensed under those laws are generally subject to examination for compliance with applicable law. It is possible that states could use this authority to examine student loan servicers that do not adequately offer the abovementioned relief measures to applicable borrowers.
D. Other Potentially Applicable Relief Measures
This appears to be the first multi-state effort to provide relief to private student loan borrowers. However, even before this announcement and the earlier announcement by New York, there were news reports of many private student lenders voluntarily offering similar relief measures to borrowers. Many holders of private student loans have also historically offered forbearance and repayment plan options to borrowers experiencing financial hardship (for reasons unrelated to COVID-19), although the specifics of those programs vary considerably.
Student loans are the second largest category of consumer debt in the United States. Relief for federal student loan borrowers was a focal point of the CARES Act, and the NYDFS Guidance served as a starter’s pistol, indicating that some states wanted to extend similar relief measures to private student loans. The Multi-State Initiative appears to be the manifestation of that desire among other large states. Given the similarities between the NYDFS Guidance and the relief measures proposed by the Multi-State Initiative, it will be interesting to see whether additional states join this initiative.
We continue to monitor developments related to COVID-19’s impact on student loans and will report on any additional updates.
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And for any legal questions related to this pandemic, please contact the authors of this Legal Update or Mayer Brown’s COVID-19 Core Response Team at FW-SIG-COVID-19-Core-Response-Team@mayerbrown.com.
1 Amid Ongoing COVID-19 Pandemic, Governor Cuomo Announces State Will Invest in Private Companies to Bring Rapid Testing to Scale, Governor Andrew Cuomo (April 7, 2020), https://www.governor.ny.gov/news/amid-ongoing- covid-19-pandemic-governor-cuomo-announces-state- will-invest-private-companies.
3 Cal. Exec. Order N-57-20 (April 23, 2020), available at: https://www.gov.ca.gov/wp-content/uploads/2020/04/4.23.20-EO-N-57-20.pdf; California Provides Expansion of Student Loan Relief: Most Private Loan Servicers Agree to Help, Cal. Dept. of Bus. Oversight (April 23, 2020), https://dbo.ca.gov/2020/04/23/california-provides-expansion-of-student-loan-relief-most-private-loan-servicers-agree-to-help.
4 Attorney General Weiser Announces Expanded Payment Relief for Student Loan Borrowers, Colo. Attn’y Gen. (April 23, 2020), https://coag.gov/press-releases/4-23-20-2/.
5 Governor Lamont Announces Payment Relief for Student Loan Borrowers, Conn. Dep’t of Banking (April 21, 2020), https://portal.ct.gov/DOB/Newsroom/2020/Relief-for-Student-Loan-Borrowers.
6 Governor Pritzker Announces Expansion of Payment Relief for Student Loan Borrowers, Governor JB Pritzker (April 21, 2020), https://www2.illinois.gov/Pages/news-item.aspx?ReleaseID=21430.
7 Private Student Loan Relief Announced for Borrowers in Massachusetts Affected by COVID-19, Mass. Div. of Banks (April 21, 2020), https://www.mass.gov/news/consumer-advisory-private-student-loan-relief-announced-for-massachusetts-borrowers.
8 COVID-19 and Student Loan Relief, N.J. Dept. of Bank. & Insurance (April 22, 2020), https://www.state.nj.us/dobi/covid/studentloan.html.
9 Student Loan Relief Secured for Borrowers Not Covered by Federal CARES Act, Governor Phil Scott (April 21, 2020), https://governor.vermont.gov/press-release/student-loan-relief-secured-borrowers-not-covered-federal-cares-act.
10 Washington Part of Multi-State Student Loan Servicer Initiative to Provide Borrowers Financial Relief During COVID-19 Pandemic, Wash. Dept. of Fin. Inst. (April 21, 2020), https://dfi.wa.gov/news/press/student-loans-covid19-relief.