What Happens When Student Loan Payment Deferral Ends?

The Coronavirus Aid, Relief and Economic Security (CARES) Act included two provisions that were critical to helping Americans with student loan debt. One allowed borrowers to suspend payments through September 30, and that relief was later extended to December 31.

Laurel Taylor, founder and CEO of FutureFuel.io, a company that supports student loan borrowers, explains that the payment suspension in the CARES Act allowed anyone who had a federal student loan to get a reprieve. Borrowers could pause their payments through the end of year. Anyone who did make payments had the opportunity to double the impact of those payments because they were all applied to principal; there was 0% interest. She says about 90% of all student loans are federal student loans.

As of January 1, employees with student loan debt will need to get back on their payment schedules. Taylor says payments student loan debtors are submitting are on average $350 each month.

A recent TIAA survey found that student loan debt is a significant burden for employees, especially for those in the nonprofit sector. Among survey respondents, 58% reported having more than $50,000 in debt. Sixty-one percent identify it as a significant source of stress, and 75% associate negative feelings with their loans. Forty-one percent feel frustrated, 34% feel hopeless, 26% feel angry and 22% feel ashamed.

According to Snezana Zlatar, senior managing director and head of financial wellness and innovation at TIAA, 80% of survey respondents said they benefitted from the CARES Act provision allowing them to defer payments until 2021. “They said that without the provision, it would have been difficult to impossible to make payments during the coronavirus crisis, given that one-quarter experienced either job loss, a loss of hours, changes in work assignments or a change from full-time to part-time [work],” she says.

The survey found that those 80% who benefitted from the CARES Act said they will have difficulty meeting their payment obligations when the forbearance ends.

How Employers Can Help

One thing employers can do is shift a benefit budget item to help student loan borrowers, Taylor says. She explains that many employers offer tuition assistance or reimbursement programs, but most see low take-up for this benefit. According to Taylor, 95% of employees don’t use these programs. She recommends that employers not let those dollars go to waste in 2021. “They can use that budget to offer student loan debt repayment help to employees,” she says.

Even those employers that don’t have a tuition reimbursement budget, or that used to have one but no longer do, can provide access to a platform or tool to help employees understand ways they can pay down or reduce their student loan debt. “Integrating student debt repayment benefits in the workplace is a core action employers can no longer ignore,” Taylor says. “Employees may have spent that money to get the job they’re doing. We’ve seen a 5,000% increase in searches for options to help with student loan debt.”

Taylor says there are many types of income-driven repayment programs and there’s not enough awareness of them among employees. “Employers can educate employees about them and help make it easy to enroll in them. That way, if employees feel they cannot get back into their regular payment plans, they can lower their payments commiserate with income,” she says.

“For employers that are furloughing or laying off employees, the education should be integrated into furlough packages and exit paperwork,” Taylor adds. “Some employees can reduce payments to $0 when they become unemployed.”

Zlatar says that as employers re-evaluate benefits packages for 2021, TIAA recommends they focus on topics that cause the most stress for their employee base, and student loan debt is certainly one of those.

For example, TIAA partnered with social impact technology startup Savi to offer a benefit that will help employees sign up for an income-driven payment plan, which can lower their payments. The tool also helps employees find out whether they are eligible for forgiveness programs. The issue with the Public Service Loan Forgiveness (PSLF) program is that employees find it difficult to understand and to fill out paperwork, Zlatar says. The TIAA and Savi solution can also help with that.

Zlatar notes that when employees were asked what they would do with money they saved on student loan debt repayment, some indicated they would contribute to their retirement plan and 60% reported they would use the money to pay off other debt. “Such a student loan debt benefit will help improve employees’ overall financial wellness,” she says.

Zlatar adds that offering a student loan repayment benefit also helps employers because it makes employees feel more loyal and gives them peace of mind, which makes them more engaged.

More Help May Be on the Way

“We have been studying all of [President-elect Joe] Biden’s policies in depth, including his proposal to cancel $10,000 in student loan debt,” Taylor says. “What he has actually proposed is forgiveness for each year of national or community service. It’s an expansion of the PSLF program.”

She explains that if a borrower is in the PSLF program, he has to work for 10 years before his remaining student loan debt is forgiven. Taylor says only 1% of borrowers actually had loans forgiven on the anniversary of the program. “So what Biden is proposing, which I think will drive more to work for public school systems, is that for every year of service, $10,000 in student loan debt is forgiven,” she says.

Though she mentioned the benefit for school systems, the PSLF program is for any qualifying institution, including Internal Revenue Code (IRC) Section 501(c)(3) nonprofits. Employees of a number of different entities could qualify.

Taylor says she recently spoke at Johns Hopkins Hospital and found that one of the challenges for employees is that it is difficult to work for below-market salaries when they have student debt, so there is a depletion of employees within teaching hospitals and 501(c)(3) institutions. “With the Biden proposal, employees will be able to see progress on paying off student loan debt each year,” she says. Taylor adds that she’s not sure how Biden would get his proposal enforced in the new administration.

Taylor says there is broad bipartisan support for the recently introduced legislation called the Securing a Strong Retirement Act of 2020, which includes a provision that would allow retirement plan sponsors to offer matching contributions on employee student loan repayments. She notes that 31% of employees who have access to retirement savings don’t participate in the program, and the Massachusetts Institute of Technology (MIT) AgeLab found that, of those who have student loan debt, 86% said that is the No. 1 reason they don’t participate. Taylor adds that those who are younger than 30 have half the savings as those without student loan debt.

“The provision would liberate some $13 billion to $14.5 billion dollars of savings for workers paying student loan debt,” she says.

In addition to the payment deferment in the CARES Act, the provision allowing employers to make a $5,250 tax-free payment toward employees’ student loan debt is also sunsetting at the end of the year. Taylor says she is meeting with senators about potential next steps.

“What’s exciting to see is when I spoke with the Ways and Means Committee this week, the one issue that both sides of the aisle can agree on is helping workers save for retirement while paying down student loan debt,” Taylor says.