Lifting the Student Loan Repayment Burden

Millions of student loan borrowers recently received a welcome reprieve: the Biden administration extended through September 30, 2021 the payment pause that began at the start of the COVID-19 pandemic. This is important news for many who struggle with payments, though not all borrowers are eligible.

Under this suspension, borrowers with student loans owned by the federal government—at a total of $1.3 trillion, the vast majority of such loans—do not have to make payments, and do not accrue interest on their loan balances. They are also exempt from federal collections, including the offset of tax refunds and Social Security benefits.

Last summer, one estimate found that 88 percent of all student loan borrowers were not actively making payments. And these benefits are not solely for younger borrowers—AARP estimates that roughly 6 million to 7 million 50+ borrowers are also eligible for relief.

Suspended Payments Give Borrowers Options

During this pause, borrowers who have the resources may still choose to make payments toward principal, ultimately reducing their debt more quickly. In turn, getting ahead on student loans may help them tackle other financial goals, such as saving for retirement. Meanwhile, for borrowers in income-driven repayment plans, even without making payments, each month still counts toward eventual loan forgiveness, which requires ten years of payments for borrowers in certain public service careers, and 20 or 25 years for others.

The absence of student loan payments may bring more than just temporary relief. Borrowers who have maintained steady employment have an opportunity to get ahead on their other loans, or possibly build up their savings. A 2019 study of borrowers whose private student loans were discharged after a legal dispute found that they improved their credit, raised their incomes, and even took on greater risks, such as moving to locations with higher-paying jobs.

Under the extension, borrowers will need to make payments again starting in October. The pandemic altered the financial reality of many borrowers including through job loss, job changes or new family situations.  For those facing a new financial reality, it is especially important that they evaluate loan repayment options before the pause lifts in October. For struggling borrowers, income-driven repayment may mean lower payments or even continuing zero payments until circumstances change. Additionally, borrowers moving to public service opportunities should educate themselves about the potential for loan forgiveness.

Some Borrowers Left Out from Relief                                                 

Unfortunately, the extension does not help everyone. About a fifth of all outstanding student loan debt—amounting to more than $300 billion—is not eligible for the pause. While exact numbers are hard to quantify, AARP estimates that as many as two million to three million borrowers ages 50+ may be left out. Excluded borrowers include those with federally guaranteed loans owned by private companies or schools rather than the government. Borrowers with these non-federally held loans tend to be older, as these loans were largely taken out prior to student loan reform in 2010. This largely arbitrary distinction leaves out many borrowers who have made payments for over a decade. With echoes of the mortgage crisis when servicers and investors faced conflicting incentives, assisting these borrowers whose loans are not owned by the federal government becomes much more complex. In addition, private student loans made by banks and other lenders are also ineligible, including loans older borrowers may have co-signed for a child or relative.

Excluded borrowers may still have options, especially in places where state attorneys general and other officials have voluntarily negotiated with companies to offer more flexibility. Meanwhile, policymakers continue to debate whether additional steps are necessary to reach left-out borrowers and provide greater relief.

Other Measures: Expanding the Value of Employers’ Student Loan Benefits

In addition to providing the payment pause, Congress addressed another student-loan issue. Late in 2020, Congress passed a year-end spending bill extending a temporary tax measure first included in the CARES Act last March. Prior to enactment of the CARES Act, current students could receive up to $5,250 in tuition assistance benefits from their employer each year without being taxed, but student loan repayment benefits for past education were taxable. In some cases, this led to surprises at tax time, with student loan borrowers owing hundreds or even thousands of dollars. Congress’s action late last year removes the taxability of such benefits through 2025.

As noted in an AARP Public Policy Institute report last year, repayment programs and other student loan benefits remain relatively rare; in recent surveys about 8 percent of companies reported offering them. Their effectiveness remains unclear, and some have argued that these benefits are poorly targeted. But, taking away a pain point for borrowers may increase adoption of these programs.

For right now, however, the matter remains clear: borrowers continue to face challenges with student loans. The roughly $1.6 trillion in outstanding student loan debt presents a significant intergenerational challenge. As millions of borrowers are poised to see their balance sheets strengthen this year, it will be important to watch the additional steps being contemplated by policymakers to improve borrowers’ finances moving forward.