President Trump signed an executive order on August 8, 2020, extending the payment pause and interest waiver for federal student loans held by the U.S. Department of Education through December 31, 2020.
The payment pause and interest waiver enacted by Congress in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is set to expire on September 30, 2020.
Limited to Federal Loans
The executive order does not expand the payment pause and interest waiver to federal loans held by commercial lenders or to private student loans.
FFELP loans for which title was transferred to the U.S. Department of Education under the Ensuring Continued Access to Student Loans Act (ECASLA) in 2008-2009 and 2009-2010 are eligible, as are federal loans in the William D. Ford Federal Direct Loan Program (Direct Loans).
Borrowers of federal student loans held by commercial lenders in the Federal Family Education Loan (FFEL) program can consolidate their loans into a Federal Direct Consolidation Loan to qualify.
More than 35 million borrowers have federal student loans in the Direct Loan program that qualify for the payment pause and interest waiver.
The executive order does not provide any financial relief for borrowers of private student loans.
Use our Cost of Deferment Calculator to evaluate the impact of interest capitalization at the end of a deferment or forbearance on the monthly loan payment and the cost of the loan, assuming that the loan payments are re-amortized after the deferment or forbearance.
Not All Benefits May Be Extended
The extended payment pause and interest waiver is expected to be automatic, just like the one enacted by the CARES Act.
It is unclear, however, whether the paused payments will still count toward Public Service Loan Forgiveness and the forgiveness after 20 or 25 years in the income-driven repayment plans. It is also unclear whether the paused payments will count toward the rehabilitation of defaulted federal student loans.
The executive order implements the extension of the payment pause and interest waiver by modifying the economic hardship deferment.
However, the statute limits the economic hardship deferment to 3 years for borrowers who have experienced or are experiencing an economic hardship. The federal government pays the interest on subsidized loans during the economic hardship deferment but not unsubsidized loans.
The economic hardship deferment counts toward the forgiveness after 25 years in an income-driven repayment plan, per 20 USC 1098e(b)(7), but does not count toward Public Service Loan Forgiveness.
An economic hardship is defined in 20 USC 1085(o) as limited to borrowers who are working full-time and earning less than the federal minimum wage or less than 150% of the poverty line or who satisfy criteria based on the borrower’s income and debt-to-income ratio.
The House passed the Heroes Act on May 15, 2020, which would not only have extended the payment pause for a year, as opposed to just three months, but also expanded it to include commercially-held federal loans and private student loans in addition to Direct Loans.
This legislation is stalled in the Senate, where the HEALS Act does not include any extension to the payment pause and interest waiver.
President Lacks Legal Authority for an Interest Waiver
The President does not have the legal authority to implement the executive order. Only Congress has the authority to appropriate funds. Waiving the interest on Direct Loans for 3 months will cost more than $15 billion.
Although the U.S. Department of Education could issue new regulations to modify the economic hardship deferment through an interim final rule or negotiated rulemaking, they are limited to operating within the confines of the statute.
The executive order mentions “waivers and modifications” to the economic hardship deferment, an allusion to the waiver authority under 20 USC 1087hh(2), which allows the Secretary of Education to “enforce, pay, compromise, waive, or release” government-held federal student loans. (The authority under 20 USC 1087hh(1) is perhaps more appropriate, since it allows the Secretary of Education to “consent to modification, with respect to rate of interest, …”
This is the same authority that some people have argued would have provided Senator Warren, had she been elected President, to forgive all federal student loans without Congressional action.
However, the preamble to that section of the Higher Education Act of 1965 says “In carrying out the provisions of this part, the Secretary is authorized,” so the authority is constrained by the programs as defined by Congress.
Nevertheless, it is unlikely that anybody is going to file a court challenge to the executive order extending the student loan payment pause and interest waiver.
The President may have issued the executive order to goad Congress into action, since Congressional leadership may not want to set a precedent in which the President asserts such authority. The CARES Act, for example, encoded the previous payment pause and interest waiver into law two weeks after the President announced it on March 13, 2020.
Advice to Borrowers
Just as with the original payment pause, borrowers who are still employed should first use the savings to build an emergency fund and then pay off high-interest debt, such as credit card debt.
Borrowers with federal student loans in the FFEL program may wish to consolidate those loans into the Direct Loan program to qualify for the payment pause and interest waiver.
Private student loans are offering a 90-day COVID-19 forbearance upon request. Borrowers of private student loans who are struggling financially should contact their loan servicer to ask about this forbearance and other options for financial relief.