Student Loan Related

Biden Department of Education Halts FFEL Loan Collections

Written by Steve Rhode

This is excellent news or is it a bad news situation. It has so many layers and complexities that it is hard to put it into one bucket truly.

With millions of these Federal Family Education Loan (FFEL) student loans still out in the wild lingering and festering, some relief has arrived. Kind of. Sort of.

But they are truly the bastard stepchild from an unholy marriage. While well-intentioned, they have created student loans that appear to be government loans but are privately funded. This leaves them without a country to call home.

FFEL loans are not eligible for all federal student loan assistance programs. And as a perfect example, FFEL loans were not subject to a pause in collections and interest because of the pandemic like all the rest of the federal student loans.

The Department of Education wised up or woke up and took action to correct this screwup. Yesterday the Department of Education announced an expansion of the pause on federal student loan interest and collections to all defaulted loans in the Federal Family Education Loan (FFEL) Program.

“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,” said Education Secretary Miguel Cardona. “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.”

Under the FFEL Program, private lenders made federal student loans to students, and guaranty agencies insured these funds, which were, in turn, reinsured by the federal government. After these loans enter default, they are transferred from the lender to the guaranty agency. While the Department now holds some FFEL Program loans because the federal government purchased them during the financial crisis over a decade ago, many others remain private entities.

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The Department of Education announces that it will expand the 0% interest rate and pause of collections activity to 1.14 million borrowers who defaulted on a privately-held FFEL Program loan. This action will protect more than 800,000 borrowers at risk of having their federal tax refunds seized to repay a defaulted loan. This relief will be made retroactive to March 13, 2020, starting the COVID-19 national emergency.

The Department will work to automatically return any tax refunds seized or wages garnished over the past year. Borrowers who made voluntary payments on any of these loans during the past year will have the option to request a refund of those amounts. The Department will also work with the guaranty agencies, who hold these defaulted FFEL Program loans, to implement the 0% interest rate for these borrowers.

Any of these loans that went into default on March 13, 2020, will be returned to good standing. The guaranty agencies that hold those loans will assign them to the Department and request that the credit bureaus remove the default record.

So Here is the Flip Side

Student loan programs that cease interest and pause collections are a good short-term solution for unusual events like an economic crisis and a pandemic.

But what is the plan for dealing with getting all these loans back on track in the future?

What do you think will happen when the loan payments become due again, and people have expanded their monthly expenses to fill the void left by the student loan payments on vacation?

I predict a mess is brewing.

Who knows, maybe as a country, we will actually deal with student loans’ foundational problems. But I doubt it.

About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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