At midnight on Friday, January 19, 2018, the federal government officially shut down after congressional Democrats and Republicans, and President Trump, could not agree on a compromise to continue funding the government. 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 $1.4 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 May Be Disrupted
There are other student loan matters that require some level of U.S. Dept. of Education involvement or approval, and I expect that we will see some disruption in these areas. 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 may also be impacted, as these issues often necessitate involvement by federal employees.
IRS and Tax-Related Impacts
The recent tax bill passed by Congress thankfully did not include some of the unpopular provisions originally proposed that would have impacted student loan borrowers, such as the elimination of the federal tax deduction for student loan interest paid. However, a large portion of the IRS workforce is going to be furloughed as a result of the shutdown. 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. 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 850,000 federal employees will 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 (like within a week or two, which was the case for the last shutdown in 2013), 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.