When the U.S. government bailed out student loan lenders during the Great Recession, legislators unintentionally set off a series of cascading events that has left more than 6 million student loan borrowers locked out of a crucial benefit more than 10 years later amid the coronavirus pandemic.

Two consumer advocacy groups are pressing the Biden administration to change that.

"The Trump administration exercised executive authority to cancel student loan interest charges and pause loan payments for over 40 million federal student loan borrowers," a joint letter from the Student Borrower Protection Center and the National Consumer Law Center stated in a recent letter to the Education Department's (ED) Acting Secretary Philip Rosenfelt. "The Biden administration can and should use the same tools to finally offer immediate relief to millions of federal student loan borrowers who have been left behind."

While the vast majority of the roughly 46 million U.S. student debtors are included in the interest-free payment pause, first enacted by former President Donald Trump in March 2020 and extended to September 2021 by President Biden, roughly 6 million borrowers holding about $160 billion in debt with commercially-held Federal Family Education Loan Program (FFELP) loans have been left out.

A spokesperson from ED confirmed that the agency had received the letter and "are taking a close look at options for addressing the needs of FFEL borrowers who are experiencing financial hardships."

The twisted history of FFELP

FFELP loans are one of the most complicated types of student loans because of how much went on in the background during and after the Great Recession.

Created in 1965 as part of the Higher Education Act, the FFELP was created to help Americans pursue higher education. Banks and private entities administered the loans, which were guaranteed by the federal government. Banks then securitized those loans as Student Loan Asset Backed Securities (SLABS) to sell to other investors. Just like the mortgages that were repackaged, SLABS were based on debt repaid by borrowers.

Meanwhile, the government also offered federal loans directly — "Direct Loans" — as a much smaller program that operated alongside FFELP.

When the capital markets seized up in 2008 and banks found it hard to sell SLABS, the administration of then-President George W. Bush bailed out the student loan industry by buying more than $100 million of these FFELP loans directly from private lenders — thereby making the federal government the largest single creditor in the student loan market overnight.

"We ended up constructing a vehicle where essentially the federal government could essentially be that secondary market for the FFEL... kind of like a buyback program of already federally-guaranteed loans," Julie Peller, who worked on the Hill on the House Committee on Education and Labor when Congress was grappling with the FFELP saga and is now the executive director at Higher Learning Advocates, told Yahoo Finance.

At that point, the crisis also "made everyone stop in their tracks and finally question whether or not we needed this kind of guaranteed program in general," Tamara Hiler, director of education at Third Way, told Yahoo Finance.

In October 2011, President Obama signed an executive order ending FFELP and moving most student lending to the government. Borrowers with FFELP loans were encouraged to convert their commercially-held loans into federal ones and the smaller Direct Loans would replace FFELP as a loan issuer.

Millions of the FFEL borrowers stayed in private lenders' hands, however.

For years, the difference didn't really matter. But amid the pandemic payment pause, borrowers with federally-held FFEL loans are benefitting from the interest-free payment pause with borrowers with commercially-held FFEL loans are not entitled to the same benefits.

“This has become a crucial distinction which each and every month becomes more and more important," Seth Frotman, head of the Student Borrower Protection Center, told Yahoo Finance. The recent letter to the ED noted that the FFEL borrowers left out of the student loan pause hold a cumulative balance that is "larger than the entire private student loan market, larger than the payday loan market, and larger than the total outstanding balance of past-due medical debt in the U.S."

Outstanding federally-held student loan debt currently stands at $1.56 trillion as of the fourth quarter, according to the New York Fed, and the payment pause led to a steep drop in student loan delinquencies.

As of September 2019, according to data from the Office of Federal Student Aid (FSA), student loan giant Navient owned the largest chunk of $160 billion in debt related to the federally-guaranteed but privately-held FFELP loans.

About 1.2 million of the 6 million borrowers with commercially-held FFEL loans are in either forbearance or default, according to the SBPC and NCLC, collectively amounting to over $41 billion in bad debt.

“These are borrowers who need help," Frotman said.

And while Peller said the law allows commercially-held FFEL loans to be consolidated into federal Direct Loans, the advocacy groups stressed that the "design of the student loan system" and the "financial penalties" for doing so can be costly.

For instance, borrowers on an income-driven repayment plan working towards forgiveness would restart their count at zero. They'd also be subject to a higher interest rate.

'I’m gonna die with it'

One of those adversely affected FFEL borrowers is Michelle, a 54-year-old retired grandmother from Southern California with $63,000 in student loans. (Michelle asked that her full name be withheld for privacy reasons.)

When the payment pause was enacted, Michelle initially thought she qualified.

"So I'm looking for emails and of course there was nothing," she recalled in an interview with Yahoo Finance. "And then I finally called them or asked them, and they said, 'Well, yours isn't one of the ones that qualifies.'"

The advocacy groups, recognizing that many have been in Michelle's position, asked ED to consider three executive actions immediately: Allow FFEL borrowers to be extended the interest-free payment pause, "remedy the wide breadth of policy errors and industry abuses that commercial FFELP borrowers have had to endure over time," and to stop debt collection efforts on 830,000 borrowers in default on over $24 billion in commercially-held FFEL.

Debt collection efforts have been ongoing even during the pandemic, the groups stated, using wage garnishment and other efforts to collect on over $100 million borrowers, the SBPC calculated based off of data on the FFEL program from FSA.

And if borrowers with privately FFEL loans were left out of any student debt forgiveness — which Democrats have been urging — that would be a "bummer," Michelle said.

"I'm the perfect candidate" for loan forgiveness, she added, laughing. "They're talking about minorities, women, all this other stuff. And I'm in every category — but I don't get to benefit from it... [so] I just think I’m gonna die with it."

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Aarthi is a reporter for Yahoo Finance. She can be reached at [email protected]. Follow her on Twitter @aarthiswami.

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