Student Loan Suspensions Won’t Help Worst-Off Borrowers
WHY YOU SHOULD CARE
Before this economic freeze, most low-income Americans weren't paying off their loans.
By Carly Stern
Last year, Mariana Anchante began what she knew would be a Herculean effort: paying off her student loans. The 26-year-old University of Nevada, Las Vegas, alum landed a job in public relations after graduation. But Anchante recently learned she’d be furloughed until June due to the coronavirus pandemic.
As a likely recession looms, one function of the massive CARES Act — which was signed into law to counter the impact of the coronavirus — is meant to offer student loan relief to people like Anchante through September. But a new report from the Urban Institute suggests that loan provisions in the relief package won’t free up cash for many of the Americans it aims to help — in particular, those who need the money most.
A new loan payment suspension will make no difference in cash flow for an estimated 70 percent of the lowest-income borrowers — because they already weren’t making loan payments.
First, let’s backtrack: What does the law do? It pauses federal student loan payments for six months, unless people opt in to keep paying, without interest accruing. It also temporarily halts involuntary collection from those in default, like through garnishment of wages or tax refunds. This suspension isn’t the same as loan forgiveness, which means the government would cancel debt owed in those six months. But it does mean that borrowers who pause payments will simply owe whatever they owe now come September without penalty, explains Matthew Chingos, the researcher at the Urban Institute who authored the report. The hope is to give borrowers a break so they will be in a better place in September than now — which, given the uncertain economic forecast, remains a looming question mark.
In belt-tightening times, this could free up cash for those who were paying off loans — but a surprising percentage of Americans couldn’t afford to. The report shows only about 30 percent of the lowest-income households with debt, those making up to $22,000, were making payments on student loans at all in 2016, the latest year with available data. The payment rate rises to 50 percent in the second income bracket ($23,000 to $40,000) and just over 60 percent for the middle tier ($41,000 to $65,000).
The plan could, however, free up funds for the 90 percent of the highest-income households (earning at least $110,000) who were making payments and now will not be. The big takeaway? This provision is helpful only if paying loans was part of your cash flow, says Chingos. And it matters because the households that couldn’t afford to pay before are likely to be those immediately hurt by a downturn now.
While the package aims to offer immediate financial relief, another goal is economic stimulus: Put money in Americans’ pockets so they keep spending it. But even if Congress had forgiven the loans rather than suspending them, it’s not a particularly efficient method. Sending a $10,000 check to someone who didn’t attend college and doesn’t hold debt — to increase their disposable income immediately — would likely boost the economy more than progressively relieving someone who owes $10,000 over many months, Chingos says. “Student loans are such a complicated, tricky territory that, often, what seem like the obvious solutions to people don’t get at the goal they have in mind,” says Chingos.
Another new aspect of the law is that, through the end of this year, it makes employer contributions of up to $5,250 toward employees’ student loans tax-free for the first time — like a 401(k). This unprecedented move boosts incentive for companies to offer these programs as a perk, says Gregory Poulin, CEO of Goodly, a platform that facilitates student loan repayment as an employee benefit. “Now those benefits dollars go so much further,” he says.
This type of loan matching is a recruitment and retention strategy that, in normal times, could be a game-changer when considering where to work. But with unemployment skyrocketing at record speed, benefits that only help those holding on to their jobs may not go very far, especially when small businesses struggling to stay afloat are unlikely to be jonesing to shell out extra cash. It’s poorly targeted to help those most vulnerable, argues Chingos. “It means you have a job; it means you probably have a pretty good job,” he says. “People working low-wage jobs tend to not have those fancy benefits, and the size of the benefit is based on your income tax rate.”
On the flip side, Poulin highlights that employers of all sizes and industries tapped into this before the health emergency. And such benefits could aid people with advanced degrees in medical and legal fields — graduate students constituted 15 percent of students but borrowed 42 percent of student debt in the 2018–19 school year, according to the College Board. Though it won’t help the worst off, this opportunity could be transformative for middle-income earners lucky enough to remain employed but who never had much wiggle room to pay down debt faster.
The bottom line? People should now be able to get temporary relief from their loan servicers. To be sure, navigating a byzantine system is a challenge even in normal times — but the point of these adjustments is to leave borrowers in a stronger starting spot when lockdowns lift.
Anchante, whose primary information source is the news, can attest to the lack of directions on her federal servicer’s website. Because she took out federal and private loans, she’ll still owe private loans even if she pauses federal payments. She applied to pause the latter — though the pause means she does not need to apply at all, according to Chingos. She’s a hyper-organized type who always plans, and without any clear direction from her servicer, she’s left unsettled.
“The more … policymakers can do to make the system more straightforward to navigate,” says Chingos, “the better position they’ll be in to pay their loans, especially when the rest of the world is falling apart.”