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Mnuchin Plans to End Some Emergency Fed Facilities

WASHINGTON — Treasury Secretary Steven Mnuchin said he does not plan to extend several key emergency lending programs beyond the end of the year and asked the Federal Reserve to return the money supporting them, a decision that could hinder President-elect Joseph R. Biden Jr.’s ability to use the central bank’s vast powers to cushion the economic fallout from the virus.

Mr. Mnuchin on Thursday said he would not continue Fed programs, including ones that support the markets for corporate bonds and municipal debt and one that extends loans to midsize businesses. The emergency efforts expire at the end of 2020, but investors had expected some or all of them to be kept operational as the virus continues to pose economic risks.

The pandemic-era programs are run by the Fed but use Treasury money to insure against losses. They have provided an important backstop that has calmed critical markets since the coronavirus took hold in March. Removing them could leave significant corners of the financial world vulnerable to the type of volatility that cascaded through the system as virus fears mounted in the spring.

By asking the Fed to return unused funds, Mr. Mnuchin could prevent Mr. Biden’s incoming Treasury secretary from quickly restarting the efforts at scale in 2021.

“The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy,” the central bank said in a statement.

The emergency programs were backed by $454 billion that Congress appropriated in March as part of a broader pandemic response package. Because of the way the Fed’s emergency lending powers work, Jerome H. Powell, the Fed chair, needs the Treasury secretary’s signoff to make major changes to the programs’ terms. Extending the end date counts as one of those changes that need approval.

The decision to close the various programs and remove the funding appeared to come as a surprise to the Fed, which received a letter announcing the Treasury’s desire to claw the money back on Thursday afternoon.

“I am requesting that the Federal Reserve return the unused funds to the Treasury,” Mr. Mnuchin said in the letter. He noted that he had been “personally involved in drafting the relevant part of the legislation” and believed it was Congress’s intent that the programs stop at the end of the year.

Earlier this month, Mr. Powell had said the central bank and Treasury were just beginning to discuss whether to extend the programs.

Mr. Mnuchin did agree to extend other emergency loan programs that are not backed by the congressional appropriation, including ones that service the short-term market for corporate debt, one for money market funds, and one that backstops government small-business loans.

The Fed avoids taking credit losses when extending loans, and throughout the pandemic crisis it has asked for Treasury backup for its riskier programs. If it returns any unused money that the Treasury has already dedicated to support the programs, as Mr. Mnuchin requested, the Biden administration will have less financial backup to restart the programs.

That’s because the congressional appropriation — $195 billion of which has been earmarked to specific Fed programs — cannot be used to make new loans after the end of the year. But while the law prohibits the Treasury from putting money into the Fed’s facilities after 2020, it does not obviously prevent the Fed from using already-earmarked Treasury funding to insure its own loans and bond purchases.

“The loans, loan guarantees and investing that the Treasury does is the applicable language,” said Peter Conti-Brown, a lawyer and Fed historian at the University of Pennsylvania. He said that while it may be possible to read the law as preventing new Fed loans, that is not the “obvious reading.”

The Fed and the next Treasury secretary do have an alternative to continue the programs: They could use money in the Treasury’s Exchange Stabilization Fund, which still contains about $74 billion in uncommitted funds, to back the programs. It is unclear exactly how much of the fund can be used, but the programs have not to date needed substantial capacity.

Mr. Mnuchin’s move could leave the government with fewer options to help the economy just as the new administration takes office.

“Treasury is right that a limited set of objectives have been achieved in terms of stabilizing bond markets,” Jason Furman, a prominent Democratic economist, said on Twitter. “But what is the downside to continuing them as insurance against worse developments?”

Many of the Fed’s programs, including one that buys state and local debt and another that encourages banks to lend to small- and midsize businesses, have been lightly used. But that is because they were designed as backstops — meaning that borrowers would likely only use them when times are bad.

And it is Mr. Mnuchin himself who has been conservative in setting the program’s terms. With a more permissive head at the Treasury, the terms could have been made more generous.

In fact, Democrats had been eyeing both the municipal bond-buying program and the Main Street lending effort for small- and medium-size businesses as potential backup options if it proves difficult to pass additional government relief. Without them, businesses and state and local governments would have one less potential source of help.

With coronavirus cases on the rise, the economy may sour again, making the programs more necessary. As recently as Tuesday, Mr. Powell warned of the potential for economic scarring and said that the economic recovery had “a long way to go.” But Treasury officials have expressed optimism that the economy is poised for a steady rebound and that the likely rollout of a vaccine by the end of the year further improves the economic picture.

Senator Patrick J. Toomey, Republican of Pennsylvania, who had been pushing Mr. Mnuchin to end the programs, applauded the decision.

“These temporary facilities helped to both normalize markets and produce record levels of liquidity,” Mr. Toomey said in a statement. “Congress’s intent was clear: These facilities were to be temporary, to provide liquidity, and to cease operations by the end of 2020.”

Treasury’s move prompted concern from Democrats, some of whom said the Fed should simply refuse to return the money — a route it is unlikely to take.

Bharat Ramamurti, a Democrat who sits on the congressional oversight body in charge of reviewing the various Fed and Treasury programs, suggested on Twitter that, legally, the Fed was under no obligation to give back the funds.

“Under its contracts with Treasury, the Fed can and should reject the request,” he said. “While Secretary Mnuchin claims congressional intent was to halt all new loans at year-end, the text of the CARES Act doesn’t say that. At a minimum, the Fed can continue to make loans using the $195 billion in equity Treasury has already committed.”

Emily Cochrane contributed reporting.

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Economic Demands Test Biden Even Before Inauguration

President-elect Joseph R. Biden Jr.’s first economic test is coming months before Inauguration Day, as a slowing recovery and accelerating coronavirus infections give new urgency to talks on government aid to struggling households and businesses.

With a short window for action in the lame-duck congressional session, Mr. Biden must decide whether to push Democratic leaders to cut a quick deal on a package much smaller than they say is needed or to hold out hope for a larger one after he takes office.

A continued standoff over aid could set the stage for sluggish growth that persists long into Mr. Biden’s presidency. Republican and Democratic leaders remain far apart on the size and contents of a rescue package, though both sides say lawmakers should act quickly.

Mr. Biden has until now sided with top Democrats in Congress. A Biden transition adviser said Friday that he had begun to have conversations with lawmakers about what a lame-duck package should look like.

The shifting dynamics of both the pandemic and the recovery are complicating the debate. Even as it has slowed, the economy has proved more resilient than many experts expected early in the coronavirus outbreak, leading Republicans, in particular, to resist a big new dose of federal aid. But the recent surge in hospitalizations and deaths from the virus has increased the risk that the economy could slow further.

Last spring, economists were nearly unanimous in urging Congress to provide as much money as possible, as quickly as it could. Now, many conservative economists say a much smaller follow-up package would suffice. Even as progressives point to slowing job creation and soaring long-term unemployment rates to argue for trillions of dollars in aid, a growing number of liberal economists are urging Democrats to compromise and accept a smaller package to get money flowing quickly.

“A meaningful something is a lot better than nothing,” said Jason Furman, who was a top economic adviser to former President Barack Obama. “Preventing damage to the economy today puts it in a better position a year from now.”

But others with ties to Mr. Biden’s team see the economic and political trade-offs differently. William E. Spriggs, a Labor Department official under Mr. Obama, agreed that it was vital for Congress to act quickly. But he urged Democrats not to accept too small a deal because it might prove insufficient and make it harder to win support for more aid later on.

“You will get people saying it didn’t work, so we don’t need to do it again,” said Mr. Spriggs, whom prominent Democrats have pushed for a role in the Biden administration. “You make it harder to go to the well again.”

Polls continue to show strong bipartisan support for more spending, including another round of direct payments to households. But it appears increasingly likely that if Congress reaches a deal by the end of the year, it will be for a package that is far smaller than the deal that Democrats and the White House were discussing before the election, which called for an outlay of more than $1.5 trillion.

Senator Mitch McConnell of Kentucky, the majority leader, said relatively strong employment numbers for October showed that the economy was “really moving to get back on its feet” without much government aid.

Mr. Biden will almost certainly propose a broader stimulus effort, but unless Democrats take control of the Senate — which would require them to win two runoff elections in Georgia in January — his ability to push a deal through Congress will be limited. Republicans have cited concerns about the record budget deficit in opposing another large round of government spending.

Prospects for a new relief bill have been further clouded by ambiguous economic readings that can support seemingly any policy preferences.

To those pushing for a smaller package, recent data suggests the economy is on firmer footing. The trillions of dollars that Congress provided in the spring largely succeeded in buoying the economy, and while progress has slowed, it has not stopped: Employers have added almost three million jobs in the last three months, and the unemployment rate — nearly 15 percent in April — has fallen by more than half.

“We have an unemployment rate below 7 percent right now,” said Michael R. Strain, an economist at the conservative American Enterprise Institute. “That calls for a very different amount of stimulus than if the unemployment rate were in the range of 10 percent, which is where we all thought it would be.”

Many progressives, however, argue those aggregate figures obscure more severe harm beneath the surface. White-collar professionals, many of whom can work from home and have benefited from the strong stock market, have done relatively well during the pandemic, and some industries, like construction and automaking, have bounced back. But service businesses, like restaurants and hotels, are still suffering, with little chance of revival before a vaccine is widely available.

“Things have improved more quickly than I expected, but we still have an enormous gap,” said Heidi Shierholz, a Labor Department economist in the Obama administration who is the policy director for the liberal Economic Policy Institute in Washington. She said the economy still needed trillions of dollars of support over the next two years.

The need is particularly acute among historically disadvantaged groups that have been hit hardest by the recession. The unemployment rate for Black Americans remains in the double digits, and hundreds of thousands of women are no longer working or seeking work, often because they must care for children who are home from school. More than 3.5 million Americans have been unemployed for more than six months.

“To say we don’t need as much aid is ridiculous,” said Olugbenga Ajilore, an economist at the Center for American Progress, a liberal group. “What that signals is all we care about is white men and no one else matters.”

Then, there is the pandemic itself. Many epidemiologists warn that infection rates are likely to keep rising as people gather indoors and travel for the holidays. That could bring a wave of new layoffs as consumers pull back on activity and businesses face new restrictions.

“We do see the economy continuing on a solid path of recovery, but the main risk we see to that is clearly the further spread of the disease here in the United States,” Jerome H. Powell, the Federal Reserve chair, said Thursday. “People may lose confidence that it is safe to go out.”

Some forecasters are skeptical that the latest rise in cases will be as damaging, at least economically, as earlier waves. Businesses and consumers have learned to adapt to the virus — or, in some cases, have chosen to ignore the risks — and states have generally resisted reimposing the strict lockdown policies that were common last spring.

“I had really not appreciated how much economic activity we would keep doing in the face of a pandemic,” said Wendy Edelberg, director of the Hamilton Project, an economic policy arm of the Brookings Institution. “It could well be that the economy can continue to muddle along despite a surge in the virus this winter.”

But muddling along could have long-term consequences. After the last recession, the federal government pulled back on aid before the economy had fully recovered, leading to a slog that was particularly hard on Black and Hispanic households.

And without aid, the virus may push more businesses over the edge, setting off ripples through the entire economy.

“You’re never quite sure if you’re near to some kind of tipping point where the stimulus might be just enough to keep you from tipping,” said Chris Varvares, co-head of U.S. economics at IHS Markit, a forecasting firm. “Especially for those affected families that are about to be evicted or about to have foreclosure proceedings brought against them, or for small-business owners that are about to throw in the towel, the stimulus could provide that lifeline.”

Economists broadly agree that Congress should focus on aid to state and local governments, support for small businesses and an extension of the expanded unemployment benefit programs that are set to expire at the end of the year. Mr. Biden discussed a similar list of priorities on Thursday with the top congressional Democrats, Representative Nancy Pelosi of California and Senator Chuck Schumer of New York, according to a summary from the participants.

On Friday, a transition adviser to Mr. Biden, Jen Psaki, brushed aside several questions from reporters about the president-elect’s views on the size and timing of a stimulus package, other than to say that on Capitol Hill “there have been conversations started that he’s engaged with.”

“You should expect that he will continue to be engaged in those discussions,” Ms. Psaki said, “and certainly wants to see the American people receive the relief they need.”

The most important thing, many economists agree, is speed. Karen Dynan, a Harvard economist and a Treasury Department official in the Obama administration, said the better-than-expected economic data was no excuse to delay assistance. Rather, she said, it is evidence that the aid so far has been effective — and that as it fades, Congress needs to do more.

“We need to recognize that the economy has only done as well as it has because we had such aggressive fiscal stimulus early on,” she said.

Thomas Kaplan contributed reporting.

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For Millions Deep in Student Loan Debt, Bankruptcy Is No Easy Fix

With two mortgages, three children and $83,000 in student loan debt, the financial strain finally became too much for George A. Johnson and Melanie Raney-Johnson.

New bills kept piling up: The couple had to buy another car when Mr. Johnson wrecked one in a snowstorm, but their insurance didn’t fully pay off the totaled vehicle. Old debts never seemed to get any smaller, either: A mortgage modification they spent months working on fell through when the bank lost their paperwork.

And their student debt, an albatross born of aspiration, grew heavier each month.

Bankruptcy was the only way out.

“It was not an easy decision,” Ms. Raney-Johnson said of filing for bankruptcy in 2011. “It was a feeling of despair, for sure.”

Bankruptcy gives over 700,000 debtors a fresh start every year. Bills for credit cards and medical expenses can be wiped away by a few strokes of a judge’s pen, and debts that don’t vanish are reduced.

But student loan debts don’t go away as easily. For decades, politicians have slowly made them harder to discharge, while differing standards in courts across the country mean a debtor’s chances can depend on where he or she lives.

The few debtors who attempt it are subjected to a morality play unlike anything else in the world of personal finance: so-called adversary proceedings, where they must lay themselves bare in court as opposing lawyers question how much they pay for lunch or give to their church.

The Johnsons tried anyway. They had borrowed about $45,000 for Mr. Johnson’s degree in sociology at the University of St. Mary in Kansas and Ms. Raney-Johnson’s pursuit of a bachelor’s degree from the University of California, Davis. Unable to pay, they had received permission to put off their payments, but their balance nearly doubled as interest charges continued to pile up.

Mr. Johnson lost his job after they filed for bankruptcy and, unable to afford a lawyer, Ms. Raney-Johnson prepared their case. She remembers how she felt when they arrived at the Robert J. Dole Federal Courthouse in Kansas City, Kan., on a sunny September day seven years ago.

“My heart was beating, and I was sweating,” said Ms. Raney-Johnson, now in her mid-40s and a billing supervisor for a federal agency.

In 2015, the year the Johnsons got their ruling, 884,956 personal bankruptcy cases flowed through the courts. Only 674 sought to discharge student debt, according to a recent analysis by Jason Iuliano, assistant law professor at Villanova University.

The New York Times reviewed dozens of cases in which a judge issued a published opinion — the Bankruptcy Class of 2015 — to understand the pains and payoffs five years later. Some debtors are on a better course. But for others, the struggles never went away — or came back after they thought they were free.

Bankruptcy begins with debt, and student loans are the second-biggest form of household debt in the United States. More than 43 million borrowers hold over $1.6 trillion in student loans, a sum that has more than tripled in 13 years. It exceeds what Americans owe on credit cards or auto loans and trails only mortgages.

Sixty-two percent of students who graduated from nonprofit colleges in 2019 had student loan debt, according to an Institute for College Access & Success analysis. Their average balance was $28,950 — not including borrowing by their parents.

Many struggle mightily to pay: Before the government’s coronavirus relief efforts paused federal student loan payments, 7.7 million borrowers were in default and nearly two million others were seriously behind.

The solution has been a public-policy patch job.

About eight million additional borrowers use income-driven repayment plans, which can be challenging to enter. And while the plans lower payments, borrowers accrue interest on the unpaid difference. The debt is eventually forgiven — usually after 20 or 25 years — but the forgiven amount is taxable income.

A related program forgives the federal student loan debts of public-service workers, tax free, after 10 years, but it has been deeply troubled. Borrowers have made payments for years only to learn they were in the wrong kind of payment plan. It got so bad that Congress had to create a separate pot of money to try to fix it.

Although some lawmakers have proposed changing bankruptcy rules to treat student loans as if they were any other consumer debt, there is no broad bipartisan support for any existing proposal. A bill in the House has one Republican co-sponsor, Representative John Katko of New York, but the Senate version, led by Senator Richard J. Durbin of Illinois, has only Democratic support.

Election Day did little to change the fraught nature of student debt in Washington, where the Trump administration has explored shortcomings in the bankruptcy law but his Education Department has strongly opposed relief for indebted students — even if their schools defrauded them — and Joseph R. Biden Jr. once voted to make private loans harder to discharge, though he has vowed to try to reverse the rule.

All that debt poses a problem. Its weight, experts say, has macroeconomic effects, dragging on homeownership and small-business formation. But the fallout goes beyond simple economics.

There is also a mental toll.

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Credit…Terry Ratzlaff for The New York Times

Noelle DeLaet earned a bachelor of fine arts degree from Nebraska Wesleyan University in 2008 — the teeth of the Great Recession. She tacked on another year for a degree in English to make herself more attractive to employers. Perhaps in publishing, she thought.

She left school with $110,000 in debt: roughly $27,000 from the federal government and the rest in private loans co-signed by her mother. The $810 monthly bill, set to climb when the payment plan on one private loan expired, soon overwhelmed her.

Ms. DeLaet, now 34, landed in the child welfare field as a foster care review specialist in Lincoln, Neb. — rewarding, but not lucrative. She sent out hundreds of résumés for better-paying jobs and pleaded with her lenders to reduce her payments. Soon, the creditors started in on her mother and put her on the verge of bankruptcy, too.

Ms. DeLaet’s breaking point came in May 2012 when she ran up against the $4,000 limit on her credit card while trying to buy a burrito at a Mexican grocery. She felt so helpless at times that she considered suicide.

“I looked all over Google for some sort of support group for others going through this,” Ms. DeLaet said. “I felt like there was no way out.”

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When Ms. DeLaet squared off in court against her student-loan creditors, they quibbled with the $12 she spent each month on recycling. She should have tried harder for a promotion, they argued. Or moved somewhere else for more money.

Judge Thomas L. Saladino bristled at that idea. In his opinion, he wrote that she lived in the state’s second-largest city, “as good a place as any to seek a better-paying job.”

The judge discharged about $119,000 in private loans, and an additional $23,000 was forgiven by one of her lenders. But her $27,000 in federal loans stuck: She’s paying those back through an income-driven repayment plan costing about $260 a month. Because she works at a nonprofit, her debt should eventually disappear via the Public Service Loan Forgiveness program.

For Ms. DeLaet, the process was worth it: She has married her boyfriend, had two children and bought a home. Her mother is an “amazing” grandmother, she said, although they still cannot discuss the past.

“It is an untouchable subject,” she said.

The transformation in the bankruptcy rules began in 1976, with unfounded rumors.

A handful of legislators claimed to have heard about a parade of young doctors and lawyers who were trying to game the system and shed their debts while embarking on lucrative careers. The lawmakers toughened the rules, largely preventing borrowers from seeking a discharge within five years of graduation. The rules only got tougher over the next three decades.

Borrowers must show that their student loans are an “undue hardship” — a standard interpreted differently, depending on where you live. Some judicial circuits, including those in Nebraska, where Ms. DeLaet filed, have the judge review a “totality of the circumstances” for the debtor and make a decision.

Other jurisdictions employ a less flexible standard, the Brunner test, named for the case that established it. Judges must answer three questions affirmatively to discharge the debt. First, has the debtor made a good-faith effort to repay the loans? Second, is the debtor unable to maintain a minimal standard of living while making the payments? And, finally, is the debtor’s situation likely to persist?

But even jurisdictions that use the Brunner test apply it differently. Some require the judge to find that the borrowers have a “certainty of hopelessness” in paying off their debt. Other jurisdictions do not.

Here, the Johnsons may have benefited from geographic good fortune.

Lawyers for the Educational Credit Management Corporation — a nonprofit that collects defaulted loans on behalf of the federal government — examined how the Johnsons spent their $2,100 monthly income.

Every expense was scrutinized, including Ms. Raney-Johnson’s $35 monthly union dues, her $100 retirement contribution and $215 to repay loans from her retirement plan. None, the nonprofit’s lawyers argued, were necessary to maintain a “minimal standard of living.”

In his opinion — written more than a year after hearing arguments — Judge Robert D. Berger disagreed. He wrote that the U.S. Court of Appeals for the 10th Circuit, which covers Kansas, had shifted from the most rigid interpretation of the three-part test, which he described as “an unfortunate relic.”

Judge Berger wasn’t sure how the Johnsons were subsisting at all based on their income, and he said courts shouldn’t rely on “unfounded optimism” about a debtor’s future.

“It is disconsonant with public policy and bankruptcy’s fresh start to leave debtors in virtual lifetime servitude to student loans,” he wrote.

The judge discharged their student loans: $83,000 in debt, wiped away.

“I was ecstatic,” Ms. Raney-Johnson said of the moment she received the decision letter. “I probably said some curse words.”

Their good fortune didn’t last.

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Credit…Joseph Rushmore for The New York Times

Opposing lawyers — whether they work for the federal government or for private lenders — are tenacious. Their approach can feel like bullying, if not humiliation.

When Pamela Monroe went to an Arkansas bankruptcy court in 2015, she was 57 with a student-loan balance of about $56,000. She was working in the fragrance section of a Dillard’s department store, and her lunch habits — like $6.10 at Taco Bell and $12.72 at Olive Garden — were a focus of intense interest.

Eating out, Ms. Monroe testified, was her primary form of recreation and a midday necessity: Co-workers would sometimes steal colleagues’ lunches from the break room.

“They laughed about that when I told them,” she said. “I felt at that moment like I was a cornered animal and they were poking sticks at me.”

Ms. Monroe said she had spent her life making choices that others seemed to dictate — marrying two years out of high school and becoming a mother, as her parents seemed to want. After two divorces, she reached for higher education in a bid for independence.

She graduated from the University of Arkansas-Fort Smith with a communications degree and pursued a master’s in speech language pathology. She didn’t finish that program, leaving her with the debt but not the advanced degree. And she couldn’t seem to break out of low-paying work.

“I would have loved to pay them back,” Ms. Monroe said. “But I never could, because nobody ever saw any value in me.”

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Credit…Joseph Rushmore for The New York Times

Judge Ben Barry found Ms. Monroe’s restaurant spending excessive, but noted that she had changed jobs frequently seeking higher pay. Her income, he wrote in his opinion, about doubled between 2010 and 2015, to over $26,000.

But even a reduced budget he outlined would not leave her enough money to make her student loan payments, so he discharged just over half of her student loans.

She would most likely have been paying that off until she was in her 80s. But last year, Ms. Monroe, now 63 and dealing with osteoarthritis and other health problems, received a disability discharge for the rest of her debt.

Now all she wants to do is live out her days in her $510-a-month apartment in a retirement community. “It has a sprinkler system and an elevator, very safe,” she said.

But she hasn’t stopped thinking about the way the system and its actors — like the lawyer on the opposite side in her case — seemed to render judgment on her life choices.

“I didn’t do anything wrong,” she said. “I was just living, but I got in trouble for eating.”

In 2016, the Johnsons learned their loan discharge was being appealed by lawyers for Educational Credit Management Corporation.

Paradoxically, they were worse off because their financial situation had improved: Ms. Raney-Johnson earned a promotion, and Mr. Johnson, now in his mid-40s like his wife, found a stable government job. A year after discharging their loans, Judge Berger concluded that the couple could now “easily” maintain a minimal standard of living and reinstated their debt — which had ballooned even more because of interest charges.

Preparing to send their own children to college, the Johnsons requested another forbearance. Their balance continues to grow: It’s roughly $104,000 today.

Ms. Raney-Johnson took the final class she needed for her biology degree over the summer. But the debt was already piling up for the next generation. Their oldest, a college sophomore, expects to owe about $45,000 when she graduates. Their middle child, a high school senior, is looking at colleges now. Ms. Raney-Johnson said she and her husband — who are putting about $5,000 a year toward their daughter’s tuition — would try to remain in forbearance for now.

In August, they received a notice about an income-driven repayment plan, which would start out costing about $550 a month. From there, the cost depends on many factors, including job changes, raises and eligibility for forgiveness programs. If they’re able to get into the public service program, the debt could go away a decade after they start paying. If not, the bills could continue coming for about 20 years — right around the time the Johnsons will be trying to retire.

The experience, Ms. Raney-Johnson said, has been “disheartening.” She and her husband had run up against opposition that could keep going with little regard for time or expense, knowing that they couldn’t.

“It feels like getting screwed over by someone with a lot more power and money,” she said.

Susan Beachy contributed research.

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The Fed’s $4 Trillion Lifeline Never Materialized. Here’s Why.

WASHINGTON — As companies furloughed millions of workers and stock prices plunged through late March, Treasury Secretary Steven Mnuchin offered a glimmer of hope: The government was about to step in with a $4 trillion bazooka.

The scope of that promise hinged on the Federal Reserve. The relief package winding through Congress at the time included a $454 billion pot of money earmarked for the Treasury to back Fed loan programs. Every one of those dollars could, in theory, be turned into as much as $10 in loans. Emergency powers would allow the central bank to create the money for lending; it just required that the Treasury insure against losses.

It was a shock-and-awe moment when lawmakers gave the package a thumbs up. Yet in the months since, the planned punch has not materialized.

The Treasury has allocated $195 billion to back Fed lending programs, less than half of the allotted sum. The programs supported by that insurance have made just $20 billion in loans, far less than the suggested trillions.

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The programs have partly fallen victim to their own success: Markets calmed as the Fed vowed to intervene, making the facilities less necessary as credit began to flow again. They have also been undercut by Mr. Mnuchin’s fear of taking credit losses, limiting the risk the government was willing to take and excluding some would-be borrowers. And they have been restrained by reticence at the central bank, which has extended its authorities into new markets, including some — like midsize business lending — that its powers are poorly designed to serve. The Fed has pushed the boundaries on its traditional role as a lender of last resort, but not far enough to hand out the sort of loans some in Congress had envisioned.

Lawmakers, President Trump and administration officials are now clamoring to repurpose the unused funds, an effort that has taken on more urgency as the economic recovery slows and the chances of another fiscal package remain unclear. The various programs are set to expire on Dec. 31 unless Mr. Mnuchin and Jerome H. Powell, the Fed chair, extend them.

Here’s how that $454 billion failed to turn into $4 trillion, and why the Fed and Treasury are under pressure to do more with the money.

The Fed can lend to private entities to keep markets functioning in times of stress, and in the early days of the crisis it rolled out a far-reaching set of programs meant to soothe panicked investors.

But the Fed’s vast power comes with strings attached. Treasury must approve of any lending programs it wants to set up. The programs must lend to solvent entities and be broad-based, rather than targeting one or two individual firms. If the borrowers are risky, the Fed requires insurance from either the private sector or the Treasury Department.

Early in the crisis, the Treasury used existing money to back market-focused stabilization programs. But that funding source was finite, and as Mr. Mnuchin negotiated with Congress, he pushed for money to back a broader spate of Fed lending efforts.

The central bank itself made a major announcement on March 23, as the package was being negotiated. It said it was making plans to funnel money into a wide array of desperate hands, not just into Wall Street’s plumbing. Officials would set up an effort to lend to small and medium-size businesses, the Fed said, and another that would keep corporate bonds flowing. It would go on to expand that program to include some recently downgraded bonds, so-called fallen angels, and to add a bond-buying program for state and local governments.

Congress allocated $454 billion in support of the programs as part of the economic relief package signed into law on March 27. When the Congressional Budget Office estimated the budget effects of that funding, it did not count the cost toward the federal deficit, since borrowers would repay on the Fed’s loans, and fees and earnings should offset losses.

Mr. Mnuchin and congressional leaders did not settle on that sum for a very precise economic reason, a senior Treasury official said, but they knew conditions were bad and wanted to go big.

Overdoing it would cost nothing, and the size of the pot allowed Mr. Mnuchin to say that the partners could pump “up to $4 trillion” into the economy.

It was like nuclear deterrence for financial markets: Promise that the government had enough liquidity-blasting superpower to conquer any threat, and people would stop running for safer places to put their money. Crisis averted, there would be no need to actually use the ammunition.

Still, the huge dollar figure stoked hopes among lawmakers and would-be loan recipients — ones that have been disappointed.

Key markets began to mend themselves as soon as the Fed promised to step in as a backstop. Companies and local governments have been able to raise funds by selling debt to private investors at low rates.

Corporate bond issuance had ground to a standstill before the Fed stepped in, but companies have raised $1.5 trillion since it did, Daleep Singh, an official at the New York Fed, said on Tuesday. That is double the pace last year. The companies raising money are major employers and producers, and if they lacked access to credit it would spell trouble for the economy.

While self-induced obsolescence partly explains why the programs have not been used, it’s not the whole story. The Main Street program, the one meant to make loans to midsize businesses, is expected to see muted use even if conditions deteriorate again. In the program that buys state and local debt, rates are high and payback periods are shorter than many had hoped.

Continued lobbying suggests that if the programs were shaped differently, more companies and governments might use them.

The relatively conservative design owes to risk aversion on Mr. Mnuchin’s part: He was initially hesitant to take any losses and has remained cautious. They also trace to the Fed’s identity as a lender of last resort.

Walter Bagehot, a 19th-century British journalist who wrote the closest thing the Fed has to a Bible, said central banks should lend freely at a penalty rate and against good collateral during times of crisis.

In short: Step in when you must, but don’t replace the private sector or gamble on lost causes.

That dictum is baked into the Fed’s legal authority. The law that allows it to make emergency loans instructs officials to ensure that borrowers are “unable to secure adequate credit accommodations from other banking institutions.” The Fed specified in its own regulation that loan facilities should charge more than the market does in normal conditions — it wants to be a last-ditch option, not one borrowers would tap first.

The Fed has stretched its “last resort” boundaries. The Main Street program works through banks to make loans, so it is more of a credit-providing partnership than a pure market backstop, for instance.

Yet Bagehot’s dictum still informs the Fed’s efforts, which is especially easy to see in the municipal program. State finance groups and some politicians have been pushing the central bank to offer better conditions than are available in the market — which now has very low rates — to help governments borrow money for next to nothing in times of need.

The Fed and Treasury have resisted, arguing that the program has achieved its goal by helping the market to work.

Congress is not uniformly on board with wanting a more aggressive Fed that might become a first option for credit. Senator Patrick J. Toomey of Pennsylvania, a Republican on the committee that oversees the central bank, has repeatedly underlined that the Fed is a backstop.

And replacing private creditors during times of crisis would put central bankers — who are neither elected nor especially accountable — in the position of picking economic winners and losers, a role that worries the Fed.

Such choices are inherently political and polarizing. Already, many of the same people who criticize stringency in the state and local programs regularly argue that the programs intended to help companies should have come with more strings attached.

And it could become a slippery slope. If the Fed shoulders more responsibility for saving private and smaller public entities, Congress might punt problems toward the central bank before solving them democratically down the road.

“It’s opening Pandora’s box,” said David Beckworth, a senior research fellow at the Mercatus Center at George Mason University.

Being too careful could also carry an economic risk if it meant that the Fed failed to provide help where needed. The midsize business segment, which employs millions of people, has had few pandemic relief options. Struggling states and cities are also huge employers.

Yet those entities may be past the point of needing debt — all the Fed can offer — and require grants instead. And it is worth noting that just because the Fed and Treasury are not rewriting their programs to support broader use now does not mean the Fed would stand back if conditions were to worsen.

If that happens, “it’s going to stop pointing to the fact that it has a fire hose,” said Peter Conti-Brown, a Fed historian at the University of Pennsylvania. “It’s going to take it out and turn it on.”

Alan Rappeport contributed reporting.