The COVID-19 Pandemic Education Relief Act, as part of the CARES Act, was passed by Congress on March 27, 2020, creating several changes that impact the student lending industry. For approximately 99 percent of the federal student loan portfolio – over $1.5 trillion in debt held by one in five American adults – all student loan payments and involuntary collections are suspended until September 30, 2020.
- No interest will accrue during this period
- Every suspended payment will be treated as a regularly scheduled payment for debt forgiveness purposes
- The Secretary of the Department of Education must notify all impacted borrowers by March 11, 2020, of this suspension
- They must notify that group a further six times between August 1 and September 30 of the resumption of regular payment schedules
- The sheer volume of outreach required means this requirement will likely be delegated to the federal student loan servicers and their existing communication infrastructure.
How will this impact the market?
Federal lenders and student loan-servicers will need to develop strategies to encourage voluntary payment from those who can continue to do so, while simultaneously using the right methods to maintain healthy cash flows and manage liquidity throughout the crisis.
How will the crisis and Act specifically impact federal student loan servicers? Immediately, their communications structure will be used by the Department of Education to communicate the suspension of payments during April. Systems will need to be adjusted to account for the Act’s forbearance and other exceptions regarding eligibility calculations, interest accrual, and principal forgiveness. Beginning in August 2020, these firms will be required to send at least six communications out to borrowers informing them of when payments resume, as well as about how to enroll in an income-driven repayment plan if a borrower is eligible and chooses to.
Throughout the period, federal student loan servicers will see their cash flow negatively impacted as well. Collections revenue will cease, and borrowers financially affected by coronavirus may elect to suspend their payments until October 1, 2020. Depending on the percentage of a servicer’s portfolio this represents, this could harm their top (and bottom) lines during this period.
Additionally, some financially stable borrowers may choose the lower interest rates of private student loans over the additional covenants and protection offered by their federal student loans. As a result, servicers may increase their origination and securitization activities in the private loan/PSLAB market.
Amid this rapidly changing environment, Capco sees several opportunities for student loan servicers who react quickly. These center around three main areas:
Communications: Transparent and consistent communication by student loan servicers of the requirements of the Act, the higher the probability that it may improve borrower perceptions of the lender. Those that best convert their existing customer data into insights and recommendations tailored to each type of borrower and incorporate those into their communications, the better their return to normalcy after September 30, 2020, will be.
Personal Loans: In addition, borrowers impacted financially by COVID-19 may need various other types of personal loans to supplement their existing cash flow during this time. Student loan servicers with existing non-student loan offerings and origination capabilities are well-positioned to grow those services into more significant components of their bottom-line. For servicers lacking those capabilities, the next six months may present an opportunity to gain them – via acquisition, partnership, or in-house development.
Refinancing, Origination, and Securitization: Individuals interested in continuing to pay down their principal may elect to refinance their student loans into a package at a lower rate. This presents an opportunity for student loan servicers to grow their private student loan business. This may lead to an increased rate of securitization in the PSLAB market in the second half of 2020.
How can we help?
Capco is uniquely positioned to help navigate the complexities ahead. Some ways we can assist include:
*US Census Bureau July 2019 projections, US Dept of Education loan portfolio statistics through Federal Q1 2020 (ends 12/31/2019).
- Guidance and advice from Capco’s Center of Regulatory Intelligence as the CFPB and other regulating bodies define customer expectations
- Provide strategy and implementation support for business process and technology changes, program management and governance, and borrower outreach planning and tracking
- User Journey Mapping, client portal design, and other activities that work to streamline processes, educate borrowers about their options, expand existing customer relationships, and more
- Strategic Planning of revenue alternatives for federal student loan servicers