Alex Brandon/AP Photo
Graduates walk in a procession as they arrive before Howard University’s commencement in Washington, May 13, 2023.
By the end of this month, the Supreme Court will decide whether or not 43 million student loan borrowers will see between $10,000 and $20,000 taken off their debt load. But regardless of the Court’s opinion, by the fall, anyone with a remaining loan balance will need to make monthly payments again, for the first time in three and a half years.
At the onset of the pandemic, student loan payments were paused, a maneuver that has been extended eight times. But the debt ceiling deal passed last week requires the Biden administration to restart payments on August 30. The Biden administration says they were planning to do so anyway, but the statutory resumption robs them of any flexibility in advance of the Court’s ruling.
That leaves the administration in the dicey position of managing a consequential rollout (affecting more than three times as many Americans as the Obamacare exchanges) with an enormous potential downside. Millions of young people who have voted for Democrats in record numbers in the past two elections will endure what will feel like a new financial obligation of hundreds of dollars per month. And if the history of the student loan program is any guide, the process will overflow with errors, mistakes, and frustration.
The Office of Federal Student Aid (FSA), which is tasked with managing this impending chaos, has no additional funding to do it, and its budget was already inadequate. But some advocates argue that resources are just a tiny part of the problem. “I’m not aware of any instance where a creditor restarted a 40-million-account portfolio. That’s at a scale that finance doesn’t operate in, let alone government,” said Mike Pierce, executive director of the Student Borrower Protection Center (SBPC).
In a statement, an Education Department spokesperson said, “We recognize that the return to repayment would result in significant financial hardship for many borrowers. That is why this Administration also put forward a plan to provide up to $20,000 in debt relief.” But even if the Court allows that debt relief to go forward, 20 million borrowers will have to navigate repayment, with fuzzy hopes of success.
“Even if we dumped all of the money in the world on them, they couldn’t get this right,” added Thomas Gokey, an organizer with the borrower advocacy group Debt Collective. “Only good things happen when the payments are kept off, and only bad things result from turning them back on.”
EDUCATION SECRETARY MIGUEL CARDONA has promised a “smooth return to repayment process,” and a department spokesperson said, “We will also be in direct touch with borrowers and ramping up our communications with servicers well before repayment resumes to ensure borrowers and their families are receiving accurate and timely information about the return to repayment.”
But no borrower has yet been officially informed about repayment. Specifics of the department’s plans were not made public until this week, when the Justice Department sought to dismiss a case from private student lender SoFi seeking to end the payment pause. In a one-page order, DOJ wrote that, because of the debt ceiling deal, “interest will begin to accrue and the obligation to make payments will resume for federal student loans.” That leaves several questions: whether debt collection will begin on defaulted payments, whether other tools to garnish wages or extract money will be instituted, and how the restart will actually work.
The Biden administration is in its third year of trying to reform a student loan system that was broken well before it arrived.
While the Department has promised direct communications with borrowers about repayment, per internal documents from last year, notices would not come from the government but from private student loan servicers, contractors that manage day-to-day operations on the loans. Adding to the confusion, several servicers have left the business since 2020—including the two largest, Navient and the Pennsylvania Higher Education Assistance Agency (PHEAA), with new servicers taking their place. Gokey estimates that over half of all student loan accounts have been transferred at least once since the payment pause; Pierce puts it at “north of ten million.”
So millions of borrowers will get a notice from a private company they’ve never interacted with, telling them to resume payments on a loan that’s been dormant for years. If every borrower used StudentAid.gov to keep up with their account, and these companies were perfectly diligent, this might go smoothly. But student loan servicers have a terrible track record; Navient was described by the Consumer Financial Protection Bureau in 2017 as having “systematically and illegally failed borrowers at every stage of repayment.” The former CFPB director who said that, Rich Cordray, now runs FSA.
“There is nothing in the history of the student loan servicing system that suggests this will go well,” said Persis Yu, deputy executive director at SBPC.
CFPB’s 2015 student loan servicing report, also while Cordray was director, looked at one large servicing transfer affecting 2.5 million borrowers, and found that 1 in every 5 accounts experienced problems that included incorrect balances, missing payments, improper claims of delinquency, revised amortization schedules that resulted in higher monthly payments, and much more.
The number of accounts transferred since 2020 is many multiples higher. “Millions of people will have bills coming due with the wrong amount,” Gokey said. Advocates relayed stories to the Prospect of recalculated balances that were higher by thousands of dollars.
If borrowers want to fix these problems, or just confirm the details of their payments, they should get ready to live on hold. Because of a funding shortfall last year, FSA had to cut servicing fees, which they compensated for by saying that servicers do not have to provide as many call center personnel. Nelnet, one of the largest remaining servicers, has had two rounds of layoffs since January.
When borrowers had to contact servicers last fall to meet an eligibility deadline for the Public Service Loan Forgiveness (PSLF) program, they reported wait times of up to nine hours in one instance. Getting through to servicers during this 90-day sprint before payments resume will likely be a similar nightmare. No new money was granted to FSA in the debt ceiling deal to manage this surge, and the budget freeze in that deal means that underfunding will persist for the foreseeable future.
Making things even worse, servicers’ interests can and do diverge from their borrowers’. The companies are paid a flat fee, and their profit margins therefore increase based on how little they can spend to service the loans. Federal lawsuits and enforcement actions have found repeatedly that servicers steer people to higher-cost payment options, improperly deny access to certain repayment plans, fail to process updated paperwork on accounts, and so on. Getting through to servicers might be bad, but the information borrowers get might be worse.
“The economics of the servicing business is not to provide good service,” said Pierce. “It’s about figuring out how to deliver as little touch as possible. And we’re about to enter an era where everyone is going to be a high-touch customer.”
ONE OFTEN-REPEATED HOPE is that the Education Department will save the day by updating its main income-driven repayment (IDR) program, which bases loan payments on a percentage of income. The proposed rule makes IDR much more generous; anyone making $30,000 a year or less will actually owe nothing and those who do owe would owe less. But that rule change is still sidelined at the Office of Management and Budget, and even after it’s finalized (which is expected after the Supreme Court ruling), terms need to be negotiated with the servicers on implementation. Yu said that there was no way the new plan would be ready by the payment restart.
Even after that, borrowers must actively select IDR. “Borrowers need to understand what it means to enter into that plan, they need to provide information,” Yu said. “All of that takes time and expertise.” Time and expertise is exactly what servicers don’t have or want; consequently, the history is that borrowers are routinely denied IDR.
The Biden administration is in its third year of trying to reform a student loan system that was broken well before they arrived. Significant backlogs persist for moving borrowers through PSLF (615,000 have been processed, but another half-million remain, per advocates), “borrower defense” programs for those defrauded from for-profit colleges, and older loans eligible for forgiveness. Working through those older programs will take manpower away from the new challenge of resuming payments. “The consequence is that people who should not have to pay another student loan bill, hundreds of thousands of people, who were promised to have debt canceled by Joe Biden, will get bills,” Pierce said.
It’s not clear what they’ll be able to do about that. The Education Department has floated a grace period for the first few initial payments. That could help lower the burden for servicers, whose understaffing and incentives to rush the system will make delinquencies inevitable. The Department has also vowed to engage with borrowers at high risk of delinquency with communications from FSA directly.
But the grace period hasn’t been formally announced, and in any case the possibility of communicating those terms properly to servicers, and having that filter down to borrowers, is questionable given prior practice.
Meanwhile, 7.5 million borrowers who were in default back in 2020 can return to current status through a program called Fresh Start, but while some of that will happen automatically, for the full protections borrowers have to know about Fresh Start and either contact the Education Department directly or work with their servicer to figure it out. There’s been little outreach to borrowers so far.
If everyone were counted as current for several months even if they aren’t paying, as the Fresh Start program stipulates, “the tidal wave of defaults will finally crash for real in May 2024,” Gokey said. But borrowers would still accrue interest that entire time, and many will suffer with improper servicing and inaccurate amounts.
“In spite of our opponents’ best efforts to sabotage our work to support student borrowers,” the Education Department spokesperson said, “we are fully committed to helping borrowers successfully navigate the return to repayment with the pandemic now behind us.”
IF YOU WANT TO SEE AN EXAMPLE of how this might spiral out of control, look no further than the Medicaid purge now happening across the country. The end of the pandemic-era continuous coverage requirement meant states could resume eligibility checks that can drop people from the rolls. Dozens of states are now eagerly doing so, with hundreds of thousands losing coverage—with most of the cuts happening due to procedural reasons rather than enrollees actually lacking eligibility. So if the renewal form went to the wrong address, or the state website for re-enrolling doesn’t work, or you just didn’t hear about the new termination process, you’re out of luck and kicked off your health insurance.
States like Florida have made it nearly impossible to keep up with the paperwork and stay on Medicaid, with over 250,000 losing coverage in the Sunshine State alone. Arkansas has accelerated the effort to remove people from “government dependency,” as Gov. Sarah Huckabee Sanders (R-AR) put it in February. This disastrous situation is simply inevitable given the complex eligibility requirements attached to federal benefit programs—especially when put in the hands of states that aren’t interested in paying for poor people’s health care.
Indeed, there is more than a policy analogy between the Medicaid purge and a federal student loan payment program where the entities doing the collecting are private servicers with a history of deep incompetence and operating at cross-purposes with the borrowers they serve. One of the biggest student loan servicers—Maximus, which took over the Navient portfolio—is literally the same company that manages eligibility determinations for Medicaid in 13 states.
And all of this is magnified by the impossible politics of restarting. “The White House is going to order the Education Department to send bills to 40 million people,” said Pierce. “They will tell themselves a story that borrowers will be held harmless. But people will remember that he asked for payments. And they’ll remember their experiences.”
The macroeconomic consequences of millions of people with a high propensity to spend fitting a brand-new payment into their budget could be significant. But the impact of the youth vote may be even more so. “This is not something that people are going to be angry about for a month and then get over and vote for the Democrats anyway,” Gokey said. “This will have devastating results in the next election.”
The expectation of a FUBAR restart was part of the rationale for why the administration was convinced that they needed to cancel some student debt in the first place. “We know from the data of previous pauses that turning it on is going to result in massive delinquencies and defaults,” said Yu. “Cancellation buys the servicers resources to do the job at hand.”
Cancellation is right now in the hands of the Supreme Court; if successful, it would extinguish the full debt of more than half of all borrowers. The administration employed the HEROES Act to cancel debt, under the argument that the pandemic shouldn’t put people in a worse financial situation. It’s completely uncertain whether the Court will buy it. But there’s other legal authority, under the “compromise and settlement” clause of the Higher Education Act, that could be used to cancel debt. Advocates are starting to say loudly that this option needs to be considered in a more aggressive fashion.
“The president has left himself with only one move to stave off a set of bad optics,” Pierce said. “We’ll be holding the administration accountable to that.”
