Allison Bailey/NurPhoto via AP
The Biden administration had a problem. Medicare Part D premiums were set to spike right before the election, a consequence of the Inflation Reduction Act’s new cap on out-of-pocket prescription drug spending. Seniors would see the announcements of the new rates in the next couple of weeks, right before the presidential election.
So they did something about it. They used a Medicare trust fund that is available for demonstration projects to encourage the private insurers that manage Part D plans to stabilize the rate increases. Premiums on Part D plans will actually be 14 percent lower on average next year, and seniors will get that welcome news instead of hearing about a premium hike.
That patch solved a political problem that would have funneled bad news to a key constituency right before the election. The fact that the administration solved that one makes the expiration of key benefits for student loan borrowers today, also right before the election, that much more puzzling.
For the last year, since the Education Department ended the pause on student loan payments, several procedures associated with missed payments—late fees, defaults, negative items on personal credit reports, and collections actions that can include wage garnishment and the seizing of tax refunds or federal benefits—were turned off temporarily. This “on-ramp” was designed to give more than 30 million borrowers flexibility with resuming payments after a three-year forbearance period during the pandemic.
But starting today, those procedures come back. If borrowers miss payments, they can be hit with penalties, and if they miss multiple payments, they can be thrown into default and face extreme efforts to collect the debt. While the worst impacts would happen after several missed payments, and therefore after the election, an unknown number of borrowers who were in default prior to the pandemic pause and didn’t cure that default in the interim could see immediate consequences.
The administration, which obviously knows the political calendar and worked to prevent bad headlines for seniors on Medicare Part D, let this happen entirely on its own. It’s a self-imposed October surprise, invoking chaos for a key constituency on the eve of voting.
It is unclear how many people are currently seen by the student loan system as being in default, and how many might face this kind of a collections effort. But a Government Accountability Office report from July found that nearly 30 percent of borrowers in the student loan system—close to ten million borrowers—were past due on their payments as of January 2024.
“I think we’re going to look back on the decisions in the spring and early summer of 2023 as obvious and predictable unforced errors,” said Mike Pierce of the Student Borrower Protection Center. “[Education Department officials] chose a 12-month timeline, they chose it to end before the election. And people are going to pay the price.”
FOR ALL STUDENT LOAN BORROWERS, missed payments in October will lead to late fees, and with multiple missed payments they tend to compound along with interest. Any missed payment will be reported to the national credit reporting bureaus (Experian, TransUnion, and Equifax), leading to a reduced credit score and higher borrowing costs for other loans.
“The policy for this transition is quite clear: No one should have negative information on their credit report until someone is 90 days past due,” said Pierce. But private loan servicers can technically choose to report after one missed payment. And given everything we’ve seen from loan servicers, there’s simply no guarantee that they will act in the best interest of the borrowers, or that they will get the reporting to credit bureaus correct.
Indeed, as part of a lawsuit filed by Pierce’s organization and the American Federation of Teachers, the Missouri Higher Education Loan Authority (MOHELA), one of the nation’s biggest private loan servicers, audaciously claimed recently that it was immune from prosecution because it is “an arm of the state of Missouri and thus enjoys sovereign immunity.” With this posture, MOHELA may not take the kind of care you’d want from an entity that holds the financial futures of millions of borrowers in its hands.
“There are always mistakes; whether they are intentional or not is kind of beside the point,” Pierce said of the loan servicers. He added that loan servicers could be sued under California law for providing incorrect information to credit reporting bureaus.
“I think we’re going to look back on the decisions in the spring and early summer of 2023 as obvious and predictable unforced errors.”
Collections actions also should not typically take effect until a borrower is more than 120 days past due. And a full default doesn’t happen until there are 270 days of missed payments. But for borrowers who were already in default prior to the pandemic and never fixed it, collections could conceivably start up right away. That could include garnishment of wages, as well as the interception of federal tax refunds or parts of federal benefits, potentially including Social Security payments for those who receive them. None of these actions require a court order, and additional collections fees can be incorporated as well.
Borrowers currently in default could get themselves into good standing before the penalties get turned on again; it’s known as the “Fresh Start” program. But the main vehicle for moving from default into Fresh Start is to enroll in the Biden administration’s income-driven repayment program known as Saving on a Valuable Education (SAVE). And SAVE is under a federal court injunction in the conservative Eighth Circuit. Eight million borrowers who had signed up for SAVE now cannot access it. Those borrowers were put into forbearance while the legal process plays out, but those who aren’t enrolled now are having trouble getting in. Applications for SAVE and other income-driven repayment plans have been taken offline, and only paper applications subject to long processing delays are available.
Moreover, the website for Fresh Start failed over the weekend, likely because of all the student borrowers scrambling to get out of default before collections can restart. The Education Department extended the deadline for Fresh Start, which was also set to expire on September 30. Now it will last until October 2 at 3:00 a.m. Eastern time, basically giving one additional day for borrowers to find their way out of default, but only if they can afford monthly payments, which will be difficult if SAVE is not available.
Aggressive collections on student loans are at the discretion of the Federal Student Aid Office, the division of the Department of Treasury that runs the Treasury Offset Program for interception of federal benefits, and a private contractor called Maximus that administers wage garnishment.
Borrowers could try to get into forbearance to avoid default, but interest would continue to accrue, expanding the debt burden even more. And any missed payments in forbearance would not be counted toward loan forgiveness programs, as they were during the pandemic forbearance period.
A student debt forgiveness program that was set to lower balances this fall also remains preemptively blocked in the courts.
Obviously, the Education Department has been attempting to get the student loan system back to normal. But amid ongoing legal uncertainty and continued problems with loan servicers, the result for millions of borrowers is chaos, with protections being removed precisely at the point when cheaper repayment options are in legal limbo. This will only add to borrower anxieties 35 days before the presidential election, under a timeline that the Education Department made last year all by themselves.
Two weeks ago, a coalition of 112 organizations urged Education Secretary Miguel Cardona to extend the on-ramp period. “No borrower should be forced into delinquency, default, or collections while they are unable to access the full suite of affordable repayment options they are entitled to under the law,” the groups wrote.
There’s another possible response. After Hurricane Helene devastated a swath of the Southeast, the Biden administration declared a major disaster in 17 counties in Florida and 25 in North Carolina. There are emergency declarations in those two states and five others affected by the storm. The HEROES Act of 2003 has specific language to give borrowers in areas under emergency conditions relief from federal student loan repayment, interest accrual, and involuntary collections during the disaster period. At the very least, North Carolina and Florida borrowers in the major disaster zone could be granted this.
