Thu. Aug 22nd, 2019

What Student Loan Borrowers Can Expect From The Shutdown

On December 22, 2018, the federal government officially shut down after Congress and President Trump could not agree on funding for the President’s proposed border wall. When the government shuts down, it means that nonessential employees are sent home without pay, and federal agencies cease most nonessential operations, until the impasse is resolved.

With over $1.5 trillion in outstanding student loan debt – much of it held by the federal government – many student loan borrowers are feeling nervous about how this shutdown may impact their student loans. The good news is that I expect any direct impacts to be fairly minimal for most student loan borrowers. However, certain people will definitely experience some disruption. Here’s my take on what to expect.

Federal Student Loan Servicing Should Be Unaffected

While most federal student loans are “owned” by the U.S. Department of Education, the federal student loan system is dependent on private contractors (like Navient, Nelnet, Great Lakes Higher Education, and FedLoan Servicing) to handle day-to-day servicing operations like billing, correspondence, and application processing. The people who work for these servicers are not federal employees, and most of the servicing operations take place entirely within the walls of these private companies. So when it comes to things like processing your payments, sending you notices, and reviewing applications for deferments or income-driven repayment, we shouldn’t see any major impacts as a result of the shutdown.

Any Matters Before the U.S. Dept. of Education Should be Unaffected

There are other student loan matters that require some level of U.S. Dept. of Education involvement or approval. For example, many types of federal student loan discharge programs – like a disability discharge or a closed school discharge – require final approval by U.S. Dept. of Education officials, even though the initial application is reviewed by private contractors. Settlements of defaulted federal loans, completion of rehabilitation programs, FAFSA application reviews, and consumer complaint resolution also may necessitate involvement by federal employees. However, I expect that those matters should also be unaffected. Unlike some prior government shutdowns, this is only a partial government shutdown, impacting specific departments of the federal government. The U.S. Department of Education was already funded through previous congressional legislation, so for now, operations there should continue.

IRS and Tax-Related Impacts

Unlike the U.S. Dept. of Education, the U.S. Dept. of Treasury is directly impacted by the shutdown. As a result, a large portion of the IRS workforce may be furloughed. If the political impasse isn’t resolved soon and the shutdown drags into tax season, we might see delays in terms of tax return processing and the issuance of federal tax refunds. This could impact student loan borrowers who are applying for, or re-certifying for, income-driven repayment plans. People who need to speak with the IRS to resolve questions or tax issues may also experience extremely long wait times on the phone.

Furloughed Federal Employees

Somewhere around 800,000 federal employees may be furloughed as a result of the shutdown. And that’s not counting the hundreds of thousands of additional people who perform contract work for the government. If the shutdown is resolved relatively quickly, then the financial harm to these workers should (hopefully) be fairly minimal. However, if the shutdown drags on for a month or more, some federal workers may not be able to afford to pay their bills – including their student loan payments.

If you’re one of these people, you can talk to your student loan servicer about options. You may be able to temporarily postpone your billing for a month or two using a forbearance request, but keep in mind that there might be significant interest consequences, including capitalization. Borrowers on an income-driven repayment plan can apply to lower their monthly payment based on changed circumstances; this might be a better option for some people, since it could preserve progress towards loan forgiveness and avoid the interest repercussions of a forbearance.

Private Student Loans Should be Unaffected

Since private student loans operate entirely outside of the federal system, there should be no impacts for borrowers who have private loans, whether those loans are in good standing, collections, or litigation.