Ultimate Resource On Biden Administration’s Student-Loan Forgiveness Program
The Biden Administration Has A New Strategy For Student-Loan Forgiveness — But There Are Risks It Could Meet The Same Fate. Ultimate Resource On Biden Administration’s Student-Loan Forgiveness Program
Hours after the Supreme Court struck down his student-debt relief plan, President Joe Biden announced that he would look to cancel debt en masse via other means. But whether borrowers’ wallets feel the impact of the announcement will depend on its implementation, experts say.
The court ruled Friday that the Biden administration doesn’t have the authority to cancel student debt under the HEROES Act, a 2003 law that allows the secretary of education to waive or modify student loans during a national emergency.
Now, Biden said, his administration will take another stab at forgiving student loans for a wide swath of borrowers and rest its authority to do so in a different law, the Higher Education Act.
“I’m not going to stop fighting to deliver borrowers what they need, particularly those at the bottom end of the economic scale,” Biden said. “We need to find a new way, and we’re moving as fast as we can.”
Advocates and activists have argued for years that the executive branch has the authority to cancel student debt under the Higher Education Act. They’ve been particularly focused on a provision allowing the Department of Education to “compromise, waive, or release,” any right to collect on student loans.
Almost immediately after the court announced its decision on Friday, advocates and lawmakers urged the Biden administration to use that authority to cancel loans.
One of those advocates, Persis Yu, managing counsel and deputy executive director at the Student Borrower Protection Center, an advocacy group, said she was “really excited” to see that “President Biden agrees with us that there is an alternative pathway to deliver the relief.”
“The thing that we’re looking to now is to make sure the president delivers on this relief as fast as possible,” she said. That’s particularly crucial because student-loan payments are scheduled to resume in October after a more than three-year freeze, Yu said.
Without some kind of relief, a wave of borrowers could slide into delinquency and default, she said. The challenges borrowers may face in resuming repayment was part of the Biden administration’s legal argument for debt relief.
“It’s great that there is a plan, but what we need is we need action,” she said.
Biden Administration Started A Regulatory Process
On Friday, the Department of Education filed notice indicating it would begin a regulatory process that would flesh out an alternative pathway to debt relief.
Through the process, known as negotiated rulemaking, the department will take comments from the public on the relevant issues and convene a group of stakeholders to discuss a proposed rule related to the waiver and compromise authority under the HEA.
Ultimately, a final regulation would be developed based on the feedback. That process, which is typical of most Department of Education regulations, takes several months. The Biden administration has vowed to deliver the debt relief “as fast as possible.”
Still, any delay in canceling debt puts the Biden administration at risk of being sued again over the plan.
“If you don’t do it immediately, you tip your hand, you let the other side build its case,” said Luke Herrine, an assistant professor at the University of Alabama Law School, who has written about the authority to cancel student debt under the Higher Education Act for years. “Then it can be challenged and enjoined before it even gets enacted.”
And if a new debt-cancellation plan reaches the Supreme Court, it may face a similar fate.
One of the questions before the justices was whether the parties had standing, or the right to sue, as having been directly harmed by the Biden plan. Legal experts, even those who didn’t think the Biden administration was within its legal authority in authorizing debt relief, were skeptical that the parties bringing the cases had standing.
The court’s six-justice conservative wing ruled that the state of Missouri had the right to sue because of its relationship to the Missouri Higher Education Loan Authority. MOHELA, as it’s also known, is a state-chartered organization that services federal student loans.
Because they found MOHELA had standing, the justices were able to move on to the merits of the case and whether the executive branch had overstepped its authority in issuing debt relief.
“Our precedent — old and new — requires that Congress speak clearly before a Department Secretary can unilaterally alter large sections of the American economy,” Chief Justice John Roberts wrote in the majority opinion.
Though the decision was focused on the HEROES Act, “the court made its views clear,” more generally, on mass-scale debt relief, Herrine said.
Leaving time for opponents to sue over the plan revived criticism from last summer, when the specifics of the Biden administration’s debt-relief plan started to surface. At the time, advocates worried that a means test and an application process would make it more difficult for borrowers who could benefit the most from debt relief to receive it.
In addition, they worried that by requiring borrowers to apply instead of automatically canceling their debt, the administration had allowed time for opponents to challenge the plan.
“If they had done it automatically, it would have been done last summer,” said Thomas Gokey, an organizer with the Debt Collective, which has been pushing for more than a decade for mass student-debt cancellation. “There is a way where they really could fight and do everything they can and it still doesn’t work. But we will never know.”
Yu said there are faster ways than negotiated rulemaking that the Biden administration could use to take on student debt. She added that there are steps that could be taken to speed up the negotiated rulemaking process. Announcing the slower process doesn’t necessarily take those off the table, she said.
“We still are urging them to move with the urgency that this moment requires,” she said.
The debt-relief plan the court struck down Friday would have wiped away up to $20,000 in debt for a wide swath of borrowers.
The Biden administration said its new plan would provide debt relief for “as many borrowers as possible, as fast as possible,” but didn’t provide detail on the scope of the new effort to cancel student debt under the Higher Education Act.
“They haven’t been specific on any sort of confines of what the authority could be in terms of how many people could be affected,” said Aaron Ament, the president of the National Student Legal Defense Network, which represents student-loan borrowers in litigation.
“What we’re waiting to see now is whether the administration is going to put forward a plan that is going to still help millions of Americans, particularly those in need, and still move forward with addressing the student-debt crisis and ensuring that future students aren’t taking out piles of debt that they can’t afford to repay.”
Student Borrowers, After Three-Year Reprieve, Must Now Pay
Changes in loan system may complicate repayment efforts following Supreme Court ruling.
WASHINGTON—The Supreme Court’s decision to strike down President Biden’s mass student-debt cancellation plan thrusts borrowers back into a repayment system that millions had hoped they would never see again.
Payments and interest accrual on federal student loans have been paused for more than three years, since the pandemic prompted the Trump administration and Congress to freeze them in March 2020. During that time, the Biden administration has sought to completely overhaul how borrowers pay off their debts.
There have been other changes that could make repayment more complicated for some borrowers. Millions of student loan holders have graduated from schools (or left without a degree) since 2020, and have never made a payment or been assigned to a loan servicing company.
Millions of others have had their accounts moved between servicers as firms such as Navient, formerly Sallie Mae, left the federal student loan business altogether in recent years. According to a June report by the Consumer Financial Protection Bureau, more than four in 10 borrowers will return to repayment with a new student loan servicer.
“I’m really worried about this group,” said Aaron Ament, president of the National Student Legal Defense Network. “We’re still waiting on a plan to help students who are really at risk when payments are restarted.”
Biden on Friday said he would launch a new effort to forgive student loans on a large scale using a different legal authority than the one that the Supreme Court blocked. The details of that program, including when it will be finalized and how many people it will cover, are still unclear, adding fresh uncertainty for borrowers.
Meanwhile, the Biden administration has undertaken an overhaul of how borrowers pay off their loans, revamping income-based repayment programs and rewriting accountability regulations for for-profit schools.
First Months Of Payments ‘Really Crucial’
Expanding income-driven repayment plans is the administration’s main strategy for preventing loan balances from ballooning in the future, and while their new terms got less attention than mass debt cancellation, they could cost far more over time than a one-time cancellation plan would, according to estimates by the Penn Wharton Budget Model.
IDR plans were designed to help lower earners borrow for college, but in their current form, few have been able to use them effectively because of technical problems and onerous amounts of income-verification paperwork.
The administration’s proposed changes would provide qualifying borrowers with more-generous options that could leave them debt-free sooner, while paying off only a fraction of their balances.
The plan, which the Education Department finalized on Friday, will cut payments to zero for borrowers making $32,800 or less a year. The department estimated it will save all other borrowers at least $1,000 a year.
The Education Department has just a few months to implement the new plan and communicate it to borrowers before payments restart in October.
“We know that those first few months can be really crucial in making sure that folks get on track and stay on track early,” said Brian Denten, a student debt expert at Pew Charitable Trusts, at a recent panel focused on borrower defaults. “A big part of that is getting the department’s revised repayment plan available to borrowers as quickly as possible.”
Missed Payments Won’t Be Sent To Collections
The Biden administration is taking steps to help borrowers with the transition. For one year, beginning on Oct. 1, borrowers who miss payments won’t be referred to collections agencies, reported to credit bureaus or put in default, according to the White House.
Typically, a borrower defaults on their student loans if they fail to make payments for 270 days, so a possible jump won’t be visible in the first months after bills restart. But servicers are devoting extra resources to the borrowers who are most at risk.
The problem is that they lack visibility into the borrower pools that will be most in need of extra counseling and assistance. It likely won’t just be new graduates who left school in the past six months who need the assistance.
Servicers will be working with fewer resources than they sought. Congress held funding flat for the Office of Federal Student Aid for the current fiscal year at $2 billion, despite the administration’s request of an additional $620 million. As a result, servicers will likely need to cut customer service staffing and wait times could swell.
“Talk to your servicer today, because we don’t know what our resources are going to look like in September,” said Scott Buchanan, executive director of the Student Loan Servicing Alliance, the main loan servicer industry group.
Americans Prepare For Tighter Budgets As Student Loan Payments Resume
Borrowers cutting discretionary spending will hit consumption, crimping growth.
The restart of federal student loan payments this fall will be a renewed burden for millions of borrowers and another headwind for a US economy that’s losing momentum.
The Biden administration agreed not to extend the three-year moratorium on payments as part of the debt ceiling deal it cut with Republicans, so the almost 27 million borrowers who have a total of $1.1 trillion in student loans in forbearance will need to resume servicing them starting on Oct. 1.
The US Supreme Court threw out the president’s plan to forgive up to $20,000 per borrower on June 30, closing down another potential avenue for relief for those who qualified.
Analysts at Wall Street banks project the restart will further crimp consumer spending, which is already showing signs of stalling—but not enough to tip the economy into recession.
A March report from Jefferies drew a comparison with the 2013 fiscal cliff, when the end of a holiday on federal payroll taxes reduced US households’ buying power. The topic has also surfaced during some company earnings calls.
“We are closely watching emerging challenges to consumer spending and sentiment, such as the end of fiscal stimulus and the resumption of student loan payments,” Walgreens Boots Alliance Inc. Chief Executive Officer Rosalind Brewer told investors on June 27.
The restart of payments—which average about $400 a month—will force many borrowers to make tough choices on how to allocate their spending. Analysts expect to see more households falling behind on credit card and auto loan payments in the final quarter of 2023.
“People have not had to prioritize student loan payments for the last three years,” says Sarah Wolfe, a senior economist at Morgan Stanley. Now they “are going to have to rethink, ‘OK, do I pay my phone bill first, or my credit card bill first, or my student loan bill, or my mortgage?’”
Shanna Schultz of Albuquerque owns a home and a car and has what she describes as a good job as an urban planner with the city government, but debt is an unending source of stress for her.
Her monthly payment will soon be about $700 on the $60,000 in federal loans she took out in the course of earning her undergraduate and two graduate degrees.
During the pause, she was able to pay off some of her credit card debt and part of her car loan—and even put away some savings. Now she’s worried that she’ll fall behind again.
“I’m supposedly living the American dream over here,” says Schultz, 33. “But it certainly doesn’t feel that way.”
Economists at Bank of America Corp. expect student loan delinquencies to return to pre-pandemic levels once the pause expires—11.1% of borrowers were more than 90 days past due in the fourth quarter of 2019—which would amount to $167 billion worth of new seriously delinquent balances.
Borrowers who are more than three months past due are considered at high risk of defaulting.
Many borrowers have already begun adjusting their spending. Morgan Stanley expects most of the money for student loan bills will come from a reduction in discretionary spending rather than savings. Its economists see personal consumption expenditures and overall gross domestic product ending the year about 0.1% lower than if payments remained frozen.
“There’s already this kind of backdrop in which we had the consumer losing momentum in the fourth quarter and turning negative in the first part of next year,” says Tim Quinlan, senior economist at Wells Fargo & Co.
“Student loan resumption isn’t the sole catalyst for that, but to an extent, it can be seen as kind of the straw that broke the camel’s back. It’s just one more thing straining households when they’re already stretched pretty far.”
John McCullough, who works in IT in Alexandria, Virginia, recently moved into a cheaper apartment and got a roommate to free up money for his upcoming $400 monthly student loan payment.
The 31-year-old graduated from Longwood University in Virginia in 2015 with about $31,000 in federal loans.
He was making progress on paying down the balance until he lost his job in September 2020. Although he’s now employed, he also plans to cut back on social activities with friends and more carefully budget his grocery shopping.
“There’s a huge swath of the population that is just shackled to the economic floor because they have to make these payments each month,” he says.
Megan McCarthy, 35, of Oneonta, New York, who works in her county’s social services department, used to take a trip to Hershey Park in Pennsylvania with her daughter every year. With the resumption of student loan payments in mind, she skipped it this year.
Her $80,000 in federal loans are “scary” when she thinks about the future, especially in regard to sending her daughter, now age 9, to college.
“We used to take staycations at the hotel in our town just to swim at the pool, but we haven’t been able to do little things like that,” McCarthy says. “I don’t have the talent, time or energy for a side hustle to make more money. I’m exhausted by the time I get home, and then I have to help with homework and do dinner.”
Borrowers whose relatives count on them for financial support are worried not just for themselves but also for their families. As the oldest child, Julian Galette in Philadelphia helps his parents buy groceries and makes sure their bills are paid on time. When his little sister needs gas for her car, she comes to him.
The 33-year-old freelance writer has about $75,000 in loans from his undergrad degree and graduate degree in theology and expects to pay about $325 a month when payments resume.
He’s already planning to cut out vacations, meals at restaurants and Uber rides, but he’s still concerned about being able to help his younger siblings and aging parents.
“I’d rather set aside an extra $300 to help my family than for student loans,” Galette says. “I just plan on making the most minimal payments I can make. Everything costs almost twice what it did last year.”
Jon Paul, a 37-year-old freelancer in entertainment media in Los Angeles, has accumulated about $204,000 in federal loans from undergraduate, master’s and doctorate degrees and is enrolled in an income-driven repayment plan.
With another $200 monthly bill set to return, Paul, who uses the pronoun they, is planning to take on additional gigs to supplement their budget. But Paul’s biggest concern is no longer being able to help relatives with bills: “I was looking at my bank account this morning and thinking I need to tighten stuff up. If my mom or brother needs help, it may take me a minute.”
Biden Administration To Wipe Out $39 Billion In Student Loans For 800,000 Borrowers
Decision comes after the Supreme Court blocked a plan to forgive $430 billion in debt.
More than 800,000 older borrowers will see their federal student debt disappear.
Student loan borrowers on income-driven repayment plans who have made 20 or 25 years of payments will get their remaining balances wiped out in coming weeks, the Education Department said. Eligible borrowers will be notified starting Friday.
A total of $39 billion will be forgiven as part of a one-time adjustment to loan repayment plans the Biden administration announced last year.
Separate from the higher-profile $430 billion program the Supreme Court struck down in late June, this one-time adjustment will give borrowers credit retroactively for months that previously hadn’t been counted.
Income-driven plans for federal student debt tie monthly payments to a borrower’s family size and income and forgive any remaining balances after 20 or 25 years of payments. The Education Department said that inaccurate payment counts in the past resulted in borrowers losing progress toward loan forgiveness.
“For far too long, borrowers fell through the cracks of a broken system that failed to keep accurate track of their progress towards forgiveness,” Education Secretary Miguel Cardona said of the adjustment Friday.
In this one-time adjustment, some borrowers will move closer to forgiveness and others will see their loans discharged. Some might receive a refund for previous payments, should the adjustment result in a borrower having exceeded the number of months required.
Income-driven repayment plans were designed to help low-earning borrowers repay their student loans, but few have been able to use them effectively because of technical problems and onerous paperwork, officials said.
Borrowers whose loans were in forbearance or deferred due to economic hardships for a time will have those months credited toward their repayment histories.
This applies to those with Direct Loans or Federal Family Education Loans and who are currently participating in income-driven repayment plans or were previously enrolled in one.
The Education Department previously made a similar adjustment to those in the Public Service Loan Forgiveness program.
Once these payments are accounted for, borrowers will see their loan balances automatically discharged or reduced in the coming weeks. The adjustment will mainly benefit those who have struggled to make progress on eliminating their debt despite nearly two decades of payments.
“This is not a fix to anything going forward,” said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a nonprofit trade association for student loan servicers. “This is a one-time fix where they’re counting statuses that were not permitted to be counted in the past.”
Those currently enrolled in income-driven repayment plans or the public-service plan will be able to get credit for partial or late payments. Those who enroll in a new income-driven repayment plan called Saving on Valuable Education, or SAVE, will be able to make much smaller payments and still see that payment count toward forgiveness.
Borrowers making under $32,800 a year, or $67,500 for a family, won’t owe loan payments. In such cases, those months will still count toward their path to forgiveness.
For the millions of borrowers not on income-driven repayment plans and still hoping for forgiveness, the Education Department said the secretary is considering other ways to provide debt relief.
After the Supreme Court struck down the previous plan proposed by the Biden administration, President Biden said he would try using a different authority, the Higher Education Act of 1965, to launch a new program.
“I’m not going to stop fighting to deliver borrowers what they need,” the president said following the Supreme Court’s decision last month.
Borrowers who have federal student debt must again begin making payments as of October 2023, but the Biden administration announced a 12-month temporary “on-ramp” period that will prevent those who miss payments from defaulting on their loans or seeing their credit negatively affected.
Paying Student Loans Again Could Feel Like A 5% Pay Cut
People facing student-debt repayment dial back spending on everyday purchases.
Tens of millions of federal student-loan borrowers will soon owe monthly payments for the first time in more than three years. Some of them aren’t ready for it.
The payment and interest pause put extra cash into people’s pockets, but they tended to spend it rather than save it, according to recent research.
Some borrowers are now concerned about being able to cover their student-loan bills this fall. Many of those who feel financially ready have started dialing back their spending on coffee, clothing and other everyday purchases.
The typical monthly loan payment will be between $210 and $314, Wells Fargo estimated using data collected in 2019. This amount is equivalent to a pay cut of about 4% to 5% off U.S. median household income before taxes, according to the Wells Fargo analysis.
Some 37 million borrowers saved about $195 billion from the pause on payments as of April 2022, the Federal Reserve Bank of New York estimated. The return of loan payments will take more of a bite out of many borrowers’ budgets than a single year of dramatic rises in inflation did.
From December 2021 to December 2022, the income of a typical U.S. household decreased on average by 1% when adjusting for inflation, according to estimates from the economists Thomas Blanchet, Emmanuel Saez and Gabriel Zucman.
Erica Baker, a 26-year-old content strategist in Escanaba, Mich., is worried about being able to make her $300 monthly payments this fall with her current income. Baker said she sees few areas where she can meaningfully reduce her spending.
She has already started to scale back on buying coffee, but even giving it up wouldn’t make enough of a difference in her budget.
“I wish I could look at my finances and say, ‘You are spending like an idiot and you can cut back in all these places, and then you’ll be able to pay your student loans,’” she said. “But I’m not.”
Apparel, entertainment and travel are the top spending categories where student-loan borrowers are more likely than the typical American consumer to say they have postponed purchases lately, according to a March survey from UBS Investment Bank.
The spending cuts that many households make in response to the payment restart aren’t expected to significantly dent consumer spending overall. “We may see a bit of a pullback in spending from particular households, but we do not expect it to broadly break the back of today’s consumer,” Wells Fargo economists wrote in a report last month.
Stacey Banks has already started adjusting her spending in advance of resuming her loan payments, which will be $552 a month. At the grocery store, she is now opting for store-brand eggs and shying away from cereal that rose in price to $7.99.
“No more Talenti for me,” Banks, a 29-year-old who works at a financial-services company, said of a high-end gelato brand that she recently stopped buying.
During the payment pause, Banks socked away most of the money she would have put toward her loans. She and her boyfriend used those savings for a down payment on a house they bought earlier this year in Forney, Texas.
‘Like A Distant Memory’
Rarely do consumers get a yearslong reprieve from a recurring bill. Andrew Read, a 39-year-old software engineer in Oviedo, Fla., said he has lost touch with what it was like to part with the money for his student-loan payments each month.
“It’s like a whole new bill popping up,” Read said of the $171 he estimates he will start paying in the fall. “It’s one thing skipping a payment for a few months, but it’s another thing three years later. It’s like a distant memory.”
Read said he is financially ready for the payments to resume, but not all borrowers will be. One in five is at higher risk, relative to other borrowers, of struggling to make their monthly payments after the restart, according to a report from the Consumer Financial Protection Bureau.
The Biden administration has said that borrowers who miss payments in the first year after the pause ends won’t be considered delinquent or placed in default. The administration established that plan after the Supreme Court ruled against President Biden’s debt-cancellation program in late June.
Some borrowers took the payment pause as an opportunity to save the extra money or use it to pay down other debts. But the more common response was to spend it, according to a working paper from researchers at the University of Chicago.
“A lot of households, even fairly wealthy households, behave in a hand-to-mouth fashion—they just spend whatever comes in…and take on new debt to service those payments,” said Constantine Yannelis, one of the paper’s authors.
Yannelis and his co-authors found that from April 2020 to November 2022, borrowers whose payments were paused took on 3%, or $1,200, more in credit-card, mortgage and auto-loan debt than borrowers whose payments weren’t on hiatus.
The return of student-loan payments isn’t just another line item in borrowers’ budgets. It will also change how people feel about their finances and their progress through life.
Kate Vaccaro expects to pay about $200 a month on her federal loans this fall. That will revive a question she used to struggle with before the payment pause, about whether to put in more than her required payment each month to get rid of her debt more quickly.
“Anything you’re about to spend, it’s like a guilt of, ‘Should I be spending this somewhere else?’” said Vaccaro, a 28-year-old human-resources manager at a staffing and recruiting firm in New York City.
The past three years gave Vaccaro a break from wondering which strategy would be most advantageous.
“I feel like I’ve finally been able to see what I’m missing out on that other people without student loans get to enjoy,” she said.
Student Loan Bills Will Cut $100 Billion From Consumer Spending
The resumption of monthly payments in October increases the probability of a US recession as borrowers cut back on spending, according to Oxford Economics.
The return of student loans payments in October will reduce consumer spending in the US by as much as $9 billion each month, or more than $100 billion a year, according to a new report by Oxford Economics.
As monthly debt payments resume, gross domestic product growth could drop by an estimated 0.1% in 2023 and 0.3% in 2024, increasing the likelihood of a recession, the research firm said.
Borrowers are preparing to make payments on their student loans after a three-year pause that began in March 2020. With the average monthly bill at about $400, many Americans will struggle to cover their bills at a time when housing costs have surged and inflation has driven up everyday expenses.
The Supreme Court’s recent decision to strike down President Joe Biden’s student loan forgiveness plan could also negatively affect consumer spending, since some borrowers built into their financial plans the expectation that at least some of their loans would be forgiven, the report said.
About 20 million borrowers transitioned to forbearance status when the pandemic began, saving about $7.5 billion each month in student loan payments. The total savings now amounts to $9 billion each month, because millions of new graduates have yet to make any payments. Researchers at Oxford Economics expect consumer spending to drop by that full amount starting in the fourth quarter.
However, an excess of household savings could mitigate the damage. Student loan forbearance helped borrowers save a collective $87 billion through the second quarter of 2022, according to the Federal Reserve, and at that pace, Oxford Economics estimates another $44 billion was added through the first half of this year.
Chaos Looms as $1.5 Trillion Student-Loan Pause Abruptly Ends
* About 28 Million Borrowers Will Soon Need To Start Payments
* Student-Loan Payment Restart ‘Marks An Unprecedented Event’
Some 28 million US borrowers will soon need to start payments on federal student debt after a three-year pause. Loan servicers, consumer advocates and lawmakers are warning that the system is ill equipped to handle the deluge.
Some companies that administer the loans have slashed staff this year, even as they work to shore up computer systems and train workers before the deadline to resume payments in October for the first time since the early days of the Covid-19 pandemic.
About 6.4 million borrowers, including some who left school during the pause, still lack a repayment plan, according to the Education Department.
The logistics are daunting. Many borrowers were assigned new loan servicers after some of the biggest companies, such as Navient Corp., quit the federal program.
The Biden administration’s failed attempt to forgive some of the debt has left some folks confused about whether they need to pay at all.
Then there’s bewilderment over income-driven repayment plans and the legions of scammers sure to be looking for easy marks amid the upheaval. It could be a mess.
Courtney Young, 28, will be working with the third federal loan servicer assigned to her in four years. She has about $54,000 in government loans for studying at Winston-Salem State University in North Carolina, and she’s been making payments on separate private loans.
Young logged into her new federal servicer over the weekend about repayment and is unsure why it shows that she isn’t required to pay until April.
“This is one of the most confusing things I’ve been through,” said Young, who in 2019 began working at BMW Financial Services in Columbus, Ohio. She also works at J. Crew on the weekends to earn money to repay her loans and save to finish an MBA program. “I know I’m probably not the only one who’s logged in and said ‘Hey, what’s going on?’”
The Education Department is one of the largest financial institutions in the country, with $1.64 trillion in outstanding loans.
More than 90% of borrowers saw their payments paused, worth about $1.5 trillion, according to Mark Kantrowitz, author of How to Appeal for More College Financial Aid.
If the Education Department was a bank, it would rank fifth by size of assets in the US. It’s now in an unprecedented situation by any metric, including the sheer number of borrowers all beginning payments in the same month in October.
“It would be a mess regardless of when it’s restarted,” said Kantrowitz. “It’s been out of sight and out of the minds of borrowers for 42 months.”
Six Democratic senators, led by Elizabeth Warren, have also raised alarms, issuing a statement warning that the system is unprepared to deal with the situation.
“The restart of tens of millions of borrowers’ student loan payments marks an unprecedented event with a heightened risk of borrower harm,” the senators wrote in letters to servicers.
That said, the biggest risk to borrowers — assuming they can avoid outright scams — might be time wasted on the administrative hassle related to setting up their accounts and choosing a repayment plan.
While interest will begin accruing Sept. 1, borrowers that don’t make full payments won’t see any demerits on their credit report for the first 12 months.
Loan servicers want to go full-speed ahead, but they’re concerned there isn’t enough time to communicate with borrowers. Servicers process payments and help struggling borrowers figure out repayment plans.
“The complication is really challenging,” said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group. Some borrowers will no doubt need “a lot of hand holding.”
The Education Department has already been directly in touch with 43 million borrowers — including those who loans weren’t paused — and will ramp up communications in the coming days to provide specific steps that borrowers should consider before the payment pause ends, according to a spokesperson.
In a deal reached in May to raise the national debt ceiling, lawmakers mandated the resumption of student loan payments but failed to allocate more funds for the transition, including extended call-center operations.
The department also cut payments to servicers, which may lead to prolonged wait times for borrowers seeking answers from the Education Department or servicers.
Since the moratorium went into effect in March 2020, at least four companies have stopped servicing federal student loans while others scaled up. In addition to Navient, the Pennsylvania Higher Education Assistance Agency and Granite State Management & Resources left the program.
Great Lakes Higher Education Corp. transferred the loans it had been administrating to Nelnet Inc., which recently fired 550 workers amid a slump in business. The Consumer Financial Protection Bureau has warned against deceptive and unfair practices by some servicers.
Joseph Matt, who works as a shift supervisor at a Starbucks, says he’s apprehensive about starting payments and confused about the process. He has about $22,000 in loans, serviced by Edfinancial, stemming from a 2021 fine arts degree at the University of Louisiana at Lafayette.
“It just seems very difficult to navigate and there’s not enough guidance,” Matt said. “You’d think for a government-officiated service it would be a lot more clear.”
You Can Ignore Those Student Loans. Leniency Is Guaranteed For Now
A one-year program put in place recently means people won’t be penalized for missed payments beyond accrued interest.
Ignoring federal student loan bills could be a good option for some when payments come due this fall.
A One-Year Leniency Program
from the Biden administration will remove the harshest penalties for missed payments after billing resumes in October. That means prioritizing other higher-interest debt might make sense, experts say.
Although bills will be sent out and interest will accrue, borrowers who miss payments will not be considered delinquent, reported to credit bureaus or placed in default.
They also won’t be referred to debt collection agencies, and the interest accrued during the on-ramp period won’t capitalize, meaning it doesn’t get added to the loan’s principal.
The program, announced after the Supreme Court struck down the president’s one-time loan forgiveness plan, will essentially function like a general forbearance program, which allows borrowers experiencing hardship to request up to 12 months of reprieve from making payments, said Travis Hornsby, the founder of the personal finance resource site Student Loan Planner.
Technically, almost 27 million borrowers with a total of $1.1 trillion in federal student loan debt will need to start repayments after the expiration of a pandemic-era stimulus measure on Oct. 1.
But with the average payment at $400 a month before the pandemic, many Americans will be faced with more bills than they can afford, putting them at risk of becoming delinquent on other debt products including credit cards and auto loans.
Here’s What You Should Do If You’re Struggling To Make Ends Meet:
Prioritize Higher Interest Debt
When thinking about repaying debt, it’s all about the interest rates. Although making minimum payments on all your obligations is always the best move, you should prioritize those with the most expensive borrowing costs, said Francisco Ayala, financial life planner at the Coleridge Group in Phoenix.
For instance, credit cards almost always have a higher interest rate than student loans. The average rate for a credit card is now 24.24%, the highest since 2019, according to LendingTree.
Jake Courtney, founder of MillennialFP in Ohio, said this is a good time to take stock of all your bills and decide which ones are the most important. In most cases, that will be credit card debt, due to the interest rate. Then comes personal loans and student loans usually.
“If borrowers have an above-average credit score, they could refinance the credit card debt into a personal loan at a much lower interest rate, or open a balance transfer credit card with a 0% intro period,” Courtney said.
Several repayment programs can help lower your monthly bill. The newest is the Saving on a Valuable Education (SAVE) plan, which will raise the threshold for people who qualify for as little as zero-dollar-a-month payment plans where the Department of Education won’t charge any monthly interest not covered by a borrower’s payment.
It replaces the old Revised Pay As You Earn (REPAYE) plan — and borrowers enrolled in REPAYE will be automatically rolled into SAVE, department officials said.
“There are very few scenarios where their student loan payment would not decrease substantially by switching to the new SAVE plan,” Courtney said. “That’s where I would start first.”
For example, a borrower with no dependents who makes $38,000 a year would pay $43 a month under the new SAVE plan, down from $134 a month under REPAYE, according to the Department of Education.
Income-driven repayment plans may also make sense for some borrowers who want to play a longer game of debt forgiveness.
Monthly payments are based on 10% of a borrower’s income, and the debt may be eligible for forgiveness after 20 or 25 years of making payments, depending on if it’s a undergraduate or graduate loan.
Similarly, borrowers employed by the government or certain nonprofits may qualify for a Public Service Loan Forgiveness plan that is also income based and extinguishes qualified debt after 120 payments.
Make A Plan For Next Year
Borrowers reliant on Biden’s new leniency measures will still need to make a plan for the future — especially with the program slated to end Sept. 30, 2024 — said Betsy Mayotte, the president of the Institute of Student Loan Advisors.
“If your issue is that your rent or mortgage payment is high, that’s still going to be the case next year,” she said. “I wouldn’t wait. I would buckle down and figure out how to fit it all in.”
Hornsby with Student Loan Planner recommends using online apps to track your spending and figure out areas where you can cut back, like subscription services and eating out.
And although retirement contributions are very important, cutting back on those to better afford student loan payments might make sense.
“If you’re still struggling, try to carve out some money in the budget for a financial planner that can also help you get your finances organized,” he said.
These Student Loan Borrowers Are Refusing To Pay Their Bills
For some, ignoring the return of payments after a three-year pause is a matter of survival — and principle.
Federal student loan bills return in October. But a growing chorus of borrowers say they simply can’t, or won’t pay.
That includes Amanda Acevedo, 37, who is raising three kids on a radiographer’s salary and has $40,000 in student debt. For the past three years, she and millions of other Americans didn’t need to worry about student loans after payments were paused at the start of the pandemic. The forbearance allowed her to pay off credit card debt and save for a down payment on a house in Orlando.
Now, with inflation driving up the cost of everything, from utilities and food to gas and car payments, Acevedo says she can’t pay the extra $412-a-month bill she’ll owe on her student loans. She doesn’t think she should have to either.
“Millennials like me have gone through so many economic crises and watched these corporations and banks get bailed out — meanwhile, we can’t pay the student loans we were told we needed for success,” Acevedo said. “We’re telling our elected representatives we’re struggling, but they’re not doing anything to help.”
To prepare for the restart of payments on Oct. 1, the Biden administration has instituted a one-year leniency program to protect borrowers’ credit. Those with loans have been encouraged to apply for various repayment plans based on income.
Still, frustrations expressed on social media have been growing louder after the Supreme Court’s decision to strike down President Joe Biden’s one-time loan forgiveness plan.
In a TikTok with over 230,000 views, Shahem Mclaurin, a 29-year-old social worker in New York City, said he was disappointed in the country’s political leaders and argued borrowers should ignore their payments as a form of protest.
Mclaurin, who attended undergrad on a full-ride scholarship and took out $150,000 in federal student loans for his master’s in social work at New York University, said he was taught that education was one of the only ways to get out of poverty.
Now, he’s saddled with debt and says he doesn’t qualify for federal public service loan forgiveness, adding to his frustration and financial woes.
“This is the American dream — I did everything right,” said Mclaurin, whose standard monthly payment would be about $1,700. “Now, I’m going to stay in the same income bracket, because I’ll have a looming debt hanging over me for the rest of my life.”
@5hahemthere wikl be more rights stripped, we have to hit pockets. what we doing? #fyp♬ original sound – 5hahem
To be sure, the decision not to pay student debt comes with risks. Unpaid interest could make it more expensive in the long run. And those who ultimately default could see their wages garnished or professional certificates and licenses revoked in some states.
However, leniency measures in the year ahead should shield many borrowers from the harshest consequences. Borrowers who don’t make payments from Oct. 1, 2023, to Sept. 30, 2024, won’t be considered delinquent, reported to credit bureaus or placed in default.
They also won’t be referred to debt collection agencies. That means skipping a payment to prioritize other debt and expenses might make sense, financial advisors say.
Many student borrowers took on new kinds of debt — such as bank cards, auto loans and mortgages — during the height of the pandemic, according to a report by TransUnion, a credit bureau.
Much of that debt is likely at a higher interest rate, and roughly 10% of student loan borrowers, or 2.7 million consumers, have at least one other debt in delinquency, meaning it’s 30 days or more overdue, TransUnion said.
When looking at all their debts, savvy consumers will likely prioritize other payments, said Liz Pagel, head of TransUnion’s consumer lending business.
“Late auto and credit card payments will hit their credit reports today, but student loans won’t, thanks to the on-ramp program,” Pagel said.
That’s precisely why, Dallas-based entrepreneur Taylor Powell, 27, is focused on paying down other loans. She took out $30,000 in student debt for a psychology degree from Augusta University and struggled to land even a $12-an-hour job after graduating in 2018. To her, the degree hasn’t provided an obvious return on investment, while her other loans have.
A business loan helped her start a haircare business in 2020 called EbonieEssentials, and an auto loan gave her a car to deliver goods and expand her customer base. To her, not paying those debts carries a bigger risk than ignoring the student loans at the moment.
“At 18, I was told a college education would guarantee a good job. Did I get my money’s worth from my degree?” she said. “I just can’t say that.”
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