Batch-Based Student Loan Relief Approach: Biden Administration Extends CARES Relief to Defaulting FFELP Student Loans Borrowers; Evaluates options for other measures – Finance and Banking

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United States: Batch-Based Student Loan Relief Approach: Biden Administration Extends CARES Relief to Defaulting FFELP Student Loans Borrowers; Weighing options for other measurements

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In a March 30, 2021 announcement, the Biden administration announced it would extend relief to approximately 1.14 million student loan borrowers who were previously not covered by the enacted CARES Act relief. ‘last year. These are borrowers who have defaulted on loans issued under the Federal Family Education Loan Program (“FFELP”). More specifically, as part of the measure, borrowers who have defaulted on FFELP loans will not be subject to further penalties (and will see penalties already assessed unwound) and will also see their current interest rates reduced to 0. %.1 The Biden administration’s action will be retroactive to March 13, 2020 – the day the government officially declared a state of emergency due to the COVID-19 pandemic – and will make FFELP loans that were in default during this period, credit agencies being invited to do so. remove any related negative credit reports, allowing affected borrowers to rehabilitate their credit scores.2

FFELP loans were enacted as part of the Higher Education Act of 1965. The original purpose of the program was to help all Americans pursue higher education with the goal of strengthening middle-class families. Banks and other private entities would make loans while the federal government guaranteed them by agreeing to pay a certain percentage of the overdue loans to lenders.3

Lenders often shifted their FFELP loans to student loan asset-backed securitizations or “SLABS” offering investors the option of investing in government guaranteed assets and, in turn, allowing lenders to offer even more. FFELP loans. However, following the 2008 financial crisis, asset-backed securities like SLABS faced an increasingly illiquid market, which forced many FFELP lenders to hold more loans on their books and threatened the future of the program. In an effort to temporarily support FFELP lenders, the Bush administration authorized the government itself to purchase more than $ 100 million in FFELP loans in late 2008. In 2011, President Obama officially ended the FFELP program by transferring most of the FFELP loans remaining on the books of the federal government. by encouraging borrowers receiving FFELP loans to convert their loans into direct federal loans; and by subsidizing payments to private lenders. Nevertheless, millions of FFELP loans remain private.4

The distinction between FFELP loans held by the federal government and FFELP loans held by private investors had not been particularly significant until the COVID-19 pandemic struck in early 2020. Notably, the CARES 2020 law enacted following the pandemic provided several protections for FFELP borrowers whose loans were held by the government, including a moratorium on payments and the suspension of enforcement mechanisms such as wage garnishments or social security benefits.5 However, the CARES Act did not grant similar benefits to FFELP borrowers whose loans were held by private investors. The Biden administration’s new measure removed that distinction and extended the protections of the CARES Act to all FFELP borrowers, regardless of who owns their loans. However, these benefits will only apply to FFELP borrowers who have by default on their loans. No relief is offered to the more than 10 million FFELP borrowers whose loans are not federally owned and are up to date on their loans.6

The Biden administration’s announcement comes against the backdrop of increased discussion regarding the cost of higher education in the United States and the treatment of student loans in bankruptcy or otherwise. Student loan debt was a major topic in the 2020 Democratic presidential debates; for example, staunch critics of the current system such as Senators Bernie Sanders and Elizabeth Warren have called for comprehensive reform. In response to the Biden administration’s FFELP measures, Senator Warren publicly urged the president to go even further, suggesting that the federal government should eliminate up to $ 50,000 in federal student loans for any borrower who earns less than $ 125,000. per year. President Biden has so far resisted the proposals, suggesting instead that he was more open to considering up to $ 10,000 in loan forgiveness per student borrower.7

Perhaps counterintuitively, it’s not clear that the Biden administration’s granting of relief to FFELP borrowers will negatively impact investors in applicable loans. Instead, market sources have suggested that lowering the risk of future defaults could drive SLABS and other similar securities to an increase in price.8

Ultimately, President Biden has signaled that while student loan relief is an issue his administration will consider, it will likely do so in a gradual and piecemeal fashion without immediate large-scale forgiveness in the direction of Senator Warren and others. The exact position the president will take on future efforts will likely become clearer in the months to come.

Footnotes

1 US Dep’t of Edu., Expansion of COVID-19 Emergency Flexabilities to Additional Federal Student Loans in Default, (March 30, 2021).

2 Aarthi Swaminathan, Student debt relief has been extended to 1.14 million borrowers with FFELP loans in default., Yahoo! Finance, (March 30, 2021), https://finance.yahoo.com/news/student-debt-relief-defaulted-ffelp-loans-175359465.html.

3 Username.

4 Jack Du, Student Loan Asset Backed Securities: Safe or Subprime?, Investopedia (April 22, 2020), https://www.investopedia.com/articles/investing/081815/student-loan-assetbacked-securities-safe-or-subprime.asp.

5 Zach Friedman, Student loan relief for 1 million more borrowers – after Biden cancels $ 2.3 billion in student loans, Forbes (April 1, 2021), https://www.forbes.com/sites/zackfriedman/2021/04/01/biden-grants-student-loan-relief-to-1-million-more-borrowers-but – his-student-loan-cancellation-not-exactly /.

6 Username.

7 Lisa Kashinsky, Pressley, Warren and Healey team up to push Biden to cancel student loan debt, Boston Globe, (April 1, 2021), https://www.bostonherald.com/2021/04/01/pressley-warren-healey-team-up-to-push-biden-to-cancel-student-loan – debt/.

8 Report on the securitization of US bankers’ assets, Canceled student loans can be a bonanza for bonds, American Banker (March 22, 2021), https://asreport.americanbanker.com/articles/canceled-student-loans-may-be-boon-for-bonds.

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This article by Mayer Brown provides information and commentary on legal issues and developments of interest. The above is not a comprehensive treatment of the subject matter and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action on the matters discussed in this document.

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