Will Student Loan Payments Resume
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Activists and artists are calling on President Biden not to resume student loan payments and cancel student debt on December 15, 2021. The White House is determined to resume payments in February, but there is still time to improve the process for borrowers. Paul Morighi/Getty Images for We the 45 Million
Will Student Loan Payments Resume
In February, the Department of Education plans to turn on the national student debt collection machine for the first time in nearly two years. There’s a real danger it won’t go well.
Biden Still Plans To Restart Federal Student Loan Payments In February
Many student debtors have been shaken by unemployment, displacement and trauma during the pandemic. Even before the crisis, more than 1 million people defaulted on student debt each year. Bad loans can be a disaster, ruining your credit and clouding your financial future. And recent history shows that restarting student loans could trigger a default crisis of unprecedented proportions.
In 2017, student borrowers living in areas affected by wildfires and hurricanes automatically qualified for “forbearance,” which is student loan lingo for “not having to make monthly payments.”
Forbearance periods end next year. Federal officials overseeing the loan program soon began to notice a troubling pattern.
. If you miss a payment, you fall into a type of limbo called “delinquency,” where you can stay for up to nine months. If you keep missing payments, you fall into another level of hell: default, where your wages, tax refunds and even Social Security checks can be garnished.
Biden Administration Officially Extends Student Loan Pause
When borrowers in forbearance had to start making payments again in 2018, the number of delinquencies began to rise. This lasted for nine months and was immediately followed by an increase in the number of defaults. Some people may have come into contact with the loan system and not known they owed money again. Either they were unemployed and couldn’t afford it, or they had lost the habit of making monthly payments.
The risk is that these fire and rain failures will reoccur on a much larger scale. This time the disaster area is the entire country. The task is huge and unprecedented: to help more than 40 million people start paying off their loans at once. Some of the people hardest hit by the pandemic will be the most vulnerable to the revival of a dormant student loan machine.
A small group of for-profit and for-profit organizations called servicers manage the day-to-day operations of the loan system: contacting borrowers after they leave college, setting up repayment plans and answering phone calls. Servicers such as Nelnet and Great Lakes typically receive $2.85 per month for each paying borrower they manage who is currently paying back their loan, and less for those in arrears.
Many of the decisions facing the department and service providers in restarting payments come down to choosing between different types of problems. For example, many borrowers pay off their loans by setting up automatic payments from their bank accounts. Do these payments just have to start again after almost two years and risk incurring overdraft fees or withdrawals from non-existent accounts? Or should they require borrowers to take payment action and risk people inadvertently falling behind because they assumed their previous arrangement would simply resume? So far, the department has chosen the second.
Biden Extends Federal Student Loan Payment Freeze Through May 1
But the biggest challenge may be whether the government and servicers can find borrowers before their loans are due, and whether servicers will have the capacity to help them if they run into payment problems.
Millions of people moved to find new jobs after the pandemic shock of unemployment or to be closer to family members who could care for children whose schools were closed. The federal eviction ban expired in August, pushing households that are also financially vulnerable into default. The more time passes, the more email addresses and phone numbers change, and the more difficult it is for servicers to reach borrowers.
There are also millions of people in the system who have never paid off a loan before. About 70 percent of 18- to 29-year-olds took out a loan for their bachelor’s degree; the class of 2020 went through the (mostly virtual) graduation stage a year and a half ago. They may have given university email addresses to credit servicers that were subsequently disabled. Housing instability, unemployment, and student loan problems can come crashing down on people suddenly. Those most in need of high-quality credit servicing may also be the hardest to reach.
Officers tasked with tracking them down may not have the staff to do so in the meantime. Working in a call center requires a background check and learning about the ins and outs of different loan plans. In normal times, servicers vary their staffing levels in response to demand, hiring more workers at the end of the calendar year, when people graduating from college in May typically begin paying off loans. February 2022 will be the craziest time in student loan history, and servicers will be hiring in a job market clogged with “help wanted.” If even a small number of borrowers call at once, the system will be overwhelmed.
Student Loan Payments Resume In 2 Months — The First Time Under Biden
This would be difficult enough if the service industry was stable. But since the start of the pandemic, four services that collectively manage 15 million accounts have announced plans to exit the business. Most were criticized for poor performance. In April, after the CEO of a service company testified at a congressional hearing, Sen. Elizabeth Warren told him to his face that he should be fired, then slammed another CEO for multiple lawsuits against his company. Both servicers subsequently decided to leave the federal system, and the accounts they were processing were transferred to other servicers – creating additional logistical work and confusion for borrowers and increasing the burden on servicers still in the system.
In October, the Biden administration added another complication, expanding eligibility for the troubled Public Service Loan Forgiveness Program. It was the right move to help teachers, nurses and others who deserve forgiveness. But it also adds even more complexity and strain to a service system that’s been challenged — especially since the servicer tasked with running the pardon program is among those who will leave the system.
Federal officials understand the scope of the problem. The Department of Education’s chief operating officer, Richard Cordray, told Congress at a recent hearing that restarting the loan system is a “big, big challenge.” But as the Obama administration learned to its regret during the failed Healthcare.gov debut, knowing in advance that it would be terrible to fail to roll out a vital government service on a tight deadline is no guarantee of success. A recent Government Accountability Office report found that the department’s student loan office has roughly 700 fewer workers than it needs to manage a program that has grown significantly in size and complexity over the past 10 years.
The government could give servicers more money to hire and train a wave of officers to track borrowers and handle the inevitable surge in the need for guidance. It’s now making it easier to enroll in income-based repayment plans by temporarily accepting a verbal declaration of income instead of standard documentation requirements like tax forms and W-2s.
Student Loan Payments Will Resume In January, But You May Have A New Loan Servicer
The Department of Education is also considering creating a one-time grace period in early 2022 that would give borrowers more leeway to start paying off their loans. But this only delays the crisis for people in deep financial difficulties. The department could make a more permanent solution to the problem by automatically putting people who were in default before the pandemic back into good standing and enrolling them in affordable, income-based repayment plans.
The department faces a ticking clock. The administration has repeatedly said there will be no more repayment delays, and President Biden seems unlikely to implement the kind of broad, unilateral loan forgiveness that some advocates are calling for. There is no doubt that the federal officials tasked with managing the restart have the best of intentions. But without immediate and aggressive action, it could still lead them, along with millions of former students, down the road to bankruptcy hell.
Kevin Carey writes about education and other issues. He is a vice president at New America, a think tank in Washington, DC.
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Student Loan Payments Restart Next Year. It Could Go Very Wrong.
The student loan moratorium was extended until August 2022.
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