When it comes to new student loan legislation, I try to take a glass-half-full approach. Every bill or policy will inevitably have shortcomings, but if it is helping some borrowers, I view it as a positive.
Sadly, there is no positive spin to be put on legislation recently re-introduced in the Senate by Marco Rubio. The bill is objectively bad. Despite Rubio’s stated intention of offering help, it would do more harm than good for student loan borrowers.
Rubio wants to create an automatic one-year deferment on student loan payments for victims of terrorist attacks. On the surface, this is an almost comically small amount of help for borrowers and terrorism victims. Twitter had fun with the proposal, but looking beyond a few obvious jokes, the bill is somehow worse than it first appears.
A Deferment is a Bad Choice for Many Borrowers
At first glance, a deferment looks like help. A struggling borrower who can’t afford payments gets a break for an entire year. The downside to a deferment is that the loan continues to charge interest, but those who can’t make payments are often willing to live with the consequences.
The problem with a deferment is that there are better alternatives available. For many borrowers, enrolling in the Revised Pay As You Earn (REPAYE) Plan is the best alternative. If an unemployed borrower signs up for REPAYE, they can qualify for $0 per month payments. These $0 payments can be renewed year after year until the borrower finds a job. Additionally, borrowers on REPAYE get a federal interest subsidy, so less interest accrues during the $0 payment period. Best of all, REPAYE counts towards multiple federal forgiveness programs.
Unlike REPAYE, time on a deferment is limited and does not count towards forgiveness. Plus, the lack of an interest subsidy makes a deferment more expensive than REPAYE.
Even if the Rubio bill became law, most borrowers should steer clear of this help.
Automatic Deferment Might Further Hurt Terrorism Victims
Rubio’s website mentions his desire “to provide automatic federal student loan deferments to any survivor of a terrorist attack.”
An automatic deferment could be financially devastating to some terrorism victims with student loans. For example, suppose a borrower is working towards Public Service Loan Forgiveness (PSLF). Time on a deferment usually does not count towards the required 120 payments. Thus, these borrowers, victims of terror attacks, would be forced to work an additional year in public service if they received an automatic deferment.
Even if a borrower could decline the automatic deferment, it means an additional headache for a terrorism survivor.
The danger of an automatic deferment impacts other borrowers as well. Some federal borrowers have large amounts of uncapitalized interest. Going on a deferment causes interest to capitalize. This interest capitalization would create larger balances and make repayment more difficult.
Rubio’s Bill Offers No Help for Private Loan Borrowers
A deferment could help borrowers with private student loans.
Unlike federal loans, private loans don’t have forgiveness options or repayment plans with federal subsidies. As a result, a deferment during a hardship might help.
Unfortunately, the full text of the proposed legislation makes no reference to private student loans. These borrowers do not receive any relief.
The Worst-Case Scenario
Senator Rubio’s bill could devastate some public servants. Instead of delaying PSLF for a year, some borrowers might miss out entirely.
One of the less known federal programs is Temporary Expanded Public Service Loan Forgiveness (TEPSLF). Under TEPSLF, borrowers who enrolled in the wrong repayment can still qualify for PSLF, provided they meet all other requirements. Congress created the TEPSLF program to help borrowers who were given inaccurate information by the federal student loan servicer. The problem with TEPSLF is that there is limited funding, and once the funds run out, the program ends.
If a borrower was delayed for one year due to an automatic deferment from a terrorism attack, they might miss out on the TEPSLF relief. In many cases, this could mean missing out on over $100,000 worth of loan forgiveness.
Terrorism Victims and Student Loan Borrowers Deserve Better
The worst-case scenario is an unlikely event. However, it could happen if Senator Rubio’s bill becomes law.
Well-crafted legislation shouldn’t create devastating outcomes for terrorism victims. Well-crafted legislation should offer relief that is better than the options already available.
Senator Rubio is either pretending to care, or he hasn’t put in the time and effort necessary to come up with a bill that actually helps. Either way, he needs to do better.
