After an unprecedented three-year moratorium on federal student loan payments due to the pandemic, millions of borrowers began paying off their debt when billing resumed late last year. But not nearly as many people have.
That reality, along with court decisions that regularly uphold the rules, has complicated the government’s efforts to restart its system to collect the $1.6 trillion it owes.
At the end of March, six months after the moratorium ended, about 20 million borrowers were making their payments as scheduled. But nearly 19 million were not, leaving their accounts delinquent, in default or still on hold. Latest data from education department.
“The default rate is really a symbol of a system that’s not doing its job,” said Persis Yu, managing counsel of the Student Borrower Protection Center, an advocacy group.
Seven million borrowers with federally managed loans were at least 30 days past due on their payments at the end of 2023. That’s the highest crime rate since 2016, as far as the department’s public records go. Because of a policy adopted by the Biden administration, those borrowers will face no penalties for their nonpayment until October at the earliest.
Millions more had their accounts frozen through moratoriums or forbearances (which allow borrowers to temporarily stop making payments), and nearly six million borrowers are stuck in defaults that began before the pandemic.
There are various reasons why borrowers do not pay. Some say they can’t afford it, while others are caught in the red tape. Many people are taking advantage of it “On-Ramp” period That lasts until September, during which time late payments will not be reported to credit bureaus and borrowers will not be placed in default, although interest will continue to accrue.
When President Biden President Donald J. When Trump ended the moratorium that began in March 2020, he promised to fix key parts of the long-troubled federal loan program. While the Supreme Court overturned Mr. Biden’s most far-reaching policy — forgiving at least $10,000 of debt for each of the millions of borrowers — his administration revived other avenues for debt relief.
Mr. Trump’s Education Department halted relief programs for government and nonprofit workers, permanently disabled borrowers and those defrauded by for-profit schools. Under Mr. Biden, the agency revamped and expanded those and other initiatives and used them to strip nearly five million people of $167 billion.
Mr. Biden also created a new repayment program, SAVE, that reduced payments for many borrowers or reduced them to zero for millions of low-wage workers. Consumer advocates praised the move to ensure borrowers’ bills are in order.
But a flurry of changes to repayment rules, and a barrage of lawsuits from Republican-led states attacking them, have worsened the already challenging task of getting more than 40 million people back on track to pay. The Education Department and its five loan servicers are struggling to adapt their systems and guide borrowers through payment options that sometimes change overnight.
Last week, federal judges in Kansas and Missouri temporarily blocked elements of the SAVE program, ruling in favor of states that contested the president’s power to impose such generous terms without congressional approval. In the Kansas suit, the states called the president’s debt relief maneuver “a hasty product to do what the Supreme Court had already told the defendants they could not do.”
But on Sunday, the U.S. Court of Appeals for the 10th Circuit temporarily reversed the Kansas decision, clearing the way for the department to move forward with planned payment reductions this month for millions of borrowers.
Travis Wattles, 39, has had his account in abeyance since the payment break ended in the fall because his servicer, AidVantage, hasn’t been able to determine what his monthly bill should be. (An assistant declined to comment and referred questions to the Education Department.)
Mr. Wattles, who works in automotive product marketing, spent several years overseas. During that time, his earnings were below the limit Exclusion of foreign income (a tax break that shelters some income), so he had no taxable income and nothing owed on his student loan debt.
But Mr. Wattles, who moved to near Nashville in early 2020, now makes a six-figure salary. He enrolled in the SAVE plan in August, and has twice sent paperwork to Advantage to have his payment recalculated based on his current earnings.
“They put me back into forbearance because they don’t understand it,” he said. “I don’t want that. I don’t mind paying; I understand that I have taken a loan.”
Carlin Granger, a 36-year-old graphic designer, received her master’s degree in 2019. When the pandemic freed her from the obligation to repay her federal loan, she married, bought a house in Atlanta, and had a child. The cost of caring for her family consumes most of her salary and “feels much more present and dire” than her loans, she said.
A flood of emails from Aidvantage fueled her efforts to figure out which payment plan was best for her. But the choices leave her confused: Should she try to keep her monthly bill as low as possible, or prioritize paying more to reduce the amount she owes in interest?
The changing legal landscape has added to her uncertainty. A SAVE plan, for example, waives unpaid interest for those who continue their monthly payments and forgives any outstanding debt after 20 years. But those benefits could disappear if legal challenges to the plan succeed. And the Internal Revenue Service generally treats forgiven debt as income. Mrs. Granger fears making a decision that could ultimately leave her with an enormous tax bill.
“I’m just kind of in analysis paralysis, where I don’t do anything,” she said.
The Education Department estimated that millions of borrowers would need extra time, help and nudging. There is no historical parallel for pausing the entire loan system for years. But when there have been natural calamities — which affected borrowers can use as a basis for temporarily suspending their payments — “borrowers missed their payments in about a third of the month after payments resumed,” two senior officials wrote. A blog post from April. “Their payment rates gradually recovered over a period of two to three years.”
Scott Buchanan, executive director of the Student Loan Servicing Alliance, said that for loan servicers, alarm bells start ringing when borrowers are more than 90 days past due. This is the point at which they usually file a negative credit report. But as of September, servicers have been instructed to put those borrowers into forbearance instead.
It complicates the data. Many borrowers are automatically driven into forbearance, making it difficult to separate those who can afford to pay but are choosing not to from those who are truly struggling.
“For a while, we’re going to have this group of borrowers who see ‘I was delinquent and nothing happened’, so they think, ‘Why am I paying?'” Mr Buchanan said. “It was always an on-ramp risk. You want to incentivize people to pay. If you self-treat for them, that doesn’t incentivize payment.
Mr. Biden frequently touts his approach to student debt as a signature achievement. “My administration has taken the most significant steps toward student debt relief in the history of this country,” he said in April. “This relief can be life-changing.”
And for millions, despite the turmoil and legal turmoil of the past year, it has been.
Clayton Lundgren, 25, earned a master’s degree in engineering physics in 2021 — then moved to Los Angeles to work as a self-employed content creator. Had the Supreme Court allowed Mr. Biden’s collective-debt cancellation program to stand, nearly half of the $21,000 owed to Mr. Lundgren would have disappeared.
But thanks to the SAVE program, which exempts income up to 225 percent of the federal poverty line, Mr. Lundgren owes nothing on his monthly loan bill. It helps him to afford his rent and other living expenses. “It gives breathing space,” he said.
And because SAVE prevents interest from accruing, Mr. Lundgren’s balance is not increasing. That’s a big change from how federal student loans used to be: Previously, millions of borrowers on income-based plans made payments each month but saw their tab grow because their payments weren’t enough to even cover the interest on their debt. was
Mr. Lundgren said he was grateful for the save, but also felt a bit of whiplash through the gyrations of the loan system.
“I’m just resigned to the fact that there is almost certainly no reality where the socially just thing happens, which would be loan forgiveness and the institution of universally affordable public college,” he said.
Representative Virginia Foxx of North Carolina, a Republican and chairwoman of the House Committee on Education and the Workforce, praised the court’s rulings against the Save Plan.
Mr. Biden “has chosen to give taxpayer money and illegally rewrite loan agreements,” she said. “It’s a blatant attempt to buy votes from college graduates on the backs of the working class.”