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Student debt relief extended to 1.14 million borrowers with defaulted FFELP loans

·4 min read


The Education Department (ED) is halting interest and debt collection on about 1.14 million defaulted loans in the Federal Family Education Loan Program (FFELP).

“At a time when many student loan borrowers have faced economic uncertainty, we’re ensuring that relief already provided to borrowers of loans held by the Department is available to more borrowers who need the same help so they can focus on meeting their basic needs,” Education Secretary Miguel Cardona said in a statement. “Our goal is to enable these borrowers who are struggling in default to get the same protections previously made available to tens of millions of other borrowers to help weather the uncertainty of the pandemic.”

The 0% interest rate and pause on collections will affect 1.14 million borrowers who have defaulted on privately-held FFELP loans (also known as FFEL loans). The action is also retroactive to March 13, 2020, meaning that borrowers who had had their wages garnished, tax refunds seized, or have made payments since then would be able to get a refund. Furthermore, FFELP loans that went into default since March 13, 2020, will be returned to good standing and ED will also request credit bureaus to remove records of the defaults.

US First Lady Jill Biden and Education Secretary Miguel Cardona arrive at Erie International Airport in Erie, Pennsylvania, on March 3, 2021. - Biden and Cardona will tour Fort LeBoeuf Middle School in Waterford, Pennsylvania. (Photo by MANDEL NGAN / POOL / AFP) (Photo by MANDEL NGAN/POOL/AFP via Getty Images)
US First Lady Jill Biden and Education Secretary Miguel Cardona arrive at Erie International Airport in Erie, Pennsylvania, on March 3, 2021. (Photo: MANDEL NGAN/POOL/AFP via Getty Images)

All of the roughly 5 million borrowers holding about $135 billion in debt from privately-held FFELP loans were left out of federal protections amid the coronavirus pandemic.

"Today’s announcement will help some borrowers who had been ignored by Washington, even as the pandemic grew and the economy collapsed," Seth Frotman of the Student Borrower Protection Center, one of the groups calling on ED to expand the moratorium, said in a statement. "Unfortunately, this action is incomplete — it does nothing for the more than 5 million commercial FFEL borrowers who are not in default."

Asked if the pause would be expanded to all FFELP borrowers, a senior ED official told reporters: "We're still looking at what options there are." However, the official added, the process is "little bit more complicated" for extending the moratorium to all FFELP loans because the government has "already made a payment to the lender" on defaulted FFELP loans "so we've already essentially acquired the debt" — whereas the loans that are not in default are still "held by a private entity."

Borrowers who have defaulted on federally-backed student loans are already benefitting from a payment pause ordered by former President Donald Trump in March 2020 and extended by President Joe Biden in January 2021.

(Graphic: David Foster)
(Graphic: David Foster)

Decade-old quirk

The FFELP has a complicated backstory.

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 — but a few million of these loans were left in the commercial market.

The latest move comes on the back of advocacy efforts to include borrowers with privately-held FFELP loans as part of the payment pause and debt moratorium.

"Borrowers with commercial FFEL loans need Washington to stop drawing arbitrary lines that leave them without any protection or assistance," Frotman stated. "It is clear that the Department has the legal authority to protect all federal student loan borrowers during the pandemic and provide real relief — it is long past time for them to use it."

Aarthi is a reporter for Yahoo Finance. She can be reached at aarthi@yahoofinance.com. Follow her on Twitter @aarthiswami.

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