What A Potential Government Shutdown Means For Student Loan Borrowers - Forbes

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Congress is hurtling towards a potential shutdown if lawmakers cannot reach an agreement to fund the federal government.

House Democrats passed a government funding bill last week to keep federal agencies open, but Republicans — led by Senate Minority Leader Mitch McConnell — blocked the bill in the Senate. Even though Democrats hold a slim majority in the Senate, 10 Republicans have to join with Democrats to overcome a filibuster. Senate Republicans indicated they opposed the measure because it involved raising the debt ceiling — something that congressional Democrats and Republicans had agreed to resolve several times during the Trump presidency.

Democrats are reportedly considering de-linking the government funding measure and the debt ceiling. But time is running out, and if lawmakers cannot find a solution, the government could shut down by the end of the week, sending ripple effects across federal agencies.

With around $1.8 trillion in outstanding student loan debt — most of which is comprised of federal student loans held or guaranteed by the government -- many borrowers may be nervous about how a shutdown would impact their student loans. If a shutdown does occur, here’s what borrowers can expect.

No Impacts On Federal Student Loan Terms And Conditions or Borrower Obligations

A federal government shutdown would not change the terms and conditions underlying federal student loans, nor would it alter any borrower obligations. In August, the Biden administration extended the ongoing student loan payment pause and interest freeze to the end of January 2022; that would not change as a result of a shutdown.

No Direct Impacts On Student Loan Servicing — But Indirect Impacts Are Possible

The U.S. Department of Education contracts out federal student loan operations to a collection of third-party student loan servicing companies. These loan servicers collect payments, process applications for repayment plans and other programs, and send correspondence to borrowers. Student loan servicing operations should not be impacted by a government shutdown, since a loan servicer’s employees are not directly employed by the government.

However, federal student loan servicing is about to go through a potentially disruptive upheaval. Earlier this year, two major student loan servicers — FedLoan Servicing, and Granite State Management and Resources — announced that they would not be renewing their contracts with the federal government and would effectively be exiting the federal Direct loan servicing space. Their contracts expire in December, which means the Biden administration will need to find new student loan servicers to take over approximately 10 million borrower accounts.

The Department has not yet announced specifics regarding a plan or a timeline, but the administration has suggested it might utilize bridge contracts — short term arrangements with other servicing companies — to keep the federal student loan system afloat. It is possible that an extended government shutdown could disrupt the Department of Education’s loan servicing contracting process, potentially leading to more trouble and uncertainty for borrowers impacted by the upcoming student loan servicing changes.

Federal Employees

One potential direct impact of a government shutdown is that employees of the federal government could be furloughed. Given that most federal student loan payments remain paused through the end of January, a shutdown at this juncture should not have a direct impact on these employees’ federal student loans. However, if a shutdown lasts for months (which would be unprecedented), or if Congress only manages to pass a short-term funding measure (which could raise the prospect of another shutdown early next year), some federal workers may not be able to afford to pay their student loan bills when payments resume in February.

Borrowers can talk to their student loan servicer about options. They could temporarily postpone payments for a month or two through an emergency forbearance, although forbearance can have significant interest consequences. Borrowers on an income-driven repayment plan can apply to lower their monthly payment based on changed circumstances, such as a reduction in income.

Other Potential Student Loan Impacts of A Government Shutdown

A government shutdown can have other lasting impacts on borrowers through indirect effects, particularly if the shutdown lasts a long time. For example, in 2019 the Department of Education’s Default Resolution Group — the agency tasked with managing the Department’s sprawling portfolio of defaulted federal student loans — was faced with a significant staffing shortage that, in turn, led to unprecedented delays and problems for borrowers who were trying to resolve their defaulted student loans. The staffing shortages were reportedly caused by ongoing delays in background checks, which some speculated were aggravated by a month-long government shutdown that occurred earlier that year. This kind of downstream ripple effect caused by a shutdown can lead to significant and lasting disruptions, but are difficult to predict.