Student Loan Defaults!

Written by Jeff Lancaster
June 29, 2020

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Shared from Forbes:


A Massive Wave Of Student Loan Defaults Is Coming

There are increasingly urgent signs that an unprecedented wave of student loan defaults could be arriving within a matter of months. A cratering economy and expanding pandemic are about to collide with the expiration of critical temporary student loan relief programs, and the end result could be catastrophic.

Here’s what’s going on.

The Economy Continues To Stagnate

Unemployment remains at levels unseen since the Great Depression, with no signs of dramatic improvements. Last week, yet another 1.5 million Americans filed for unemployment benefits. Nearly 50 million Americans have filed for unemployment benefits over the past three months, and while this week’s numbers are far lower than initial jobless claims filed in March, the economy is not showing any signs of dramatic or rapid improvement. The Federal Reserve recently indicated that it expects unemployment to remain high through the end of the year and beyond.

The Pandemic Appears To Be Worsening

While the stay-home orders of March and April were successful in slowing the spread of the Coronavirus, those trends have now been reversed. Several states with large populations — Florida, Texas, and California — are seeing record increases in daily confirmed cases of Covid-19. Those three states contain over a quarter of the entire population of the United States. And Coronavirus cases are also increasing in two dozen other states, as well. Hospitalizations are also increasing in many localities. It is becoming quite clear to health experts that the pandemic is far from over, and we may be entering a new, even worse phase of the outbreak.

In the wake of the pandemic and economic collapse, Congress passed the CARES Act. Although the implementation of the CARES Act has been hugely problematic, the stimulus bill has provided critical relief to student loan borrowers in the form of an automatic suspension of payments and interest for all government-held federal student loans.

That suspension, however is scheduled to expire on September 30, 2020 — less than 100 days from now. Over 40 million student loan borrowers will be hit with student loan bills by October, and many will be unable to afford their payments. Others who may be directly impacted by Covid-19 may not be able to manage the act of making a payment, even if they could afford to do so.

Temporary Private Student Loan Relief Expires Imminently

Congress limited the student loan relief under the CARES Act to government-held federal student loans. This effectively left millions of private student loan borrowers without any relief at all. However, several states stepped in to negotiate voluntary relief programs with dozens of private student loan lenders and servicers. The resulting multi-state pact provided millions of private student loan borrowers with temporary relief in the form of suspended payments and a cessation of negative credit reporting.

That temporary relief, however, was typically limited to 90 days. Private student loan borrowers who took advantage of those relief options in March or April may have no other options when that relief imminently expires. Since private student loans are not eligible for income-driven repayment programs or long periods of hardship-based forbearance, defaulting will be an inevitable outcome for many borrowers.

Bottom Line

All signs point to a looming catastrophe for millions of student loan borrowers. To avoid disaster, Congressional action is likely required.

The Democratic-controlled House of Representatives recently passed the HEROES Act, which would extend the CARES Act’s student loan provisions by a full year to September of 2021. But Senate Republicans have rejected this bill. A coalition of over 60 organizations have also called on Congress to extend the CARES Act for student loan borrowers and forgive a substantial amount of student loan debt, although Senate GOP leaders have shown no interest in such broad relief to date.

Without a bipartisan solution, student loan borrowers will start falling into default at an ever-increasing rate. Time is running out.


Jeff Lancaster

Jeff Lancaster

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