After an unprecedented three-year pause in federal student loan payments due to the pandemic, millions of borrowers began paying off their debt when settlements resumed late last year. But almost as many didn’t.
That reality and court decisions that regularly upend the rules are complicating the government’s efforts to restart its system to collect the $1.6 trillion it is owed.
At the end of March, six months after the pause ended, nearly 20 million borrowers were making payments as planned. However, according to the latest Department of Education data, nearly 19 million did not and their accounts were delinquent, delinquent or still on hold.
“The nonpayment rate is really emblematic of a system that is not doing its job,” said Persis Yu, executive counsel for the Student Borrower Protection Center, an advocacy group.
Seven million borrowers with government-administered loans were at least 30 days late on their payments at the end of 2023. That’s the highest default rate since 2016, as far back as the department’s public records go. Because of a Biden administration policy, these borrowers will not face penalties for nonpayment until October at the earliest.
Millions more have had their accounts frozen due to forbearance or forbearance (which allows borrowers to temporarily stop making payments), and nearly six million borrowers remain stuck in defaults that began before the pandemic.
There are many reasons why borrowers do not pay. Some say they can’t afford it, while others are mired in bureaucratic chaos. Many people take advantage of a “ramp-up period” that lasts until September, during which late payments are not reported to the credit bureaus and borrowers do not default, although interest continues to accrue.
When President Biden ended the moratorium that began under President Donald J. Trump in March 2020, he promised to fix key parts of the long-troubled federal loan program. While the Supreme Court struck down Mr. Biden’s most far-reaching policy — canceling debt for each of millions of borrowers of at least $10,000 — his administration has revived other ways to eliminate debt.
Mr. Trump’s Education Department blocked aid programs for government and nonprofit employees, permanently disabled borrowers and people defrauded by for-profit schools. Under Mr. Biden, the agency revised and expanded these and other initiatives, using them to forgive $167 billion in debt for nearly five million people.
Mr. Biden also launched a new repayment program, SAVE, that cut or reduced many borrowers’ payments to millions of low-wage workers. Consumer advocates praised these measures as crucial to keeping borrowers’ bills under control.
But the raft of changes to repayment rules and a flood of lawsuits from Republican-led states challenging them have made the already difficult task of getting more than 40 million people back on the repayment path even worse. The Education Department and its five loan servicers are struggling to adjust their systems and guide borrowers through repayment options that sometimes change overnight.
Last week, federal judges in Kansas and Missouri temporarily blocked elements of the SAVE program and ruled in favor of states that disputed the president’s authority to impose such generous conditions without congressional approval. In the Kansas lawsuit, the states called the president’s debt relief maneuvers “a rushed product to avoid what the Supreme Court has already told defendants not to do.”
But on Sunday, the U.S. Court of Appeals for the 10th Circuit temporarily overturned Kansas’ decision, clearing the way for the department to make planned payment cuts this month for millions of borrowers.
Travis Wattles, 39, has had his account frozen since the payment pause ended in the fall because his service provider, Aidvantage, couldn’t determine what his monthly bill should be. (Aidvantage declined to comment and referred questions to the Department of Education.)
Mr. Wattles, who works in automotive product marketing, spent several years abroad. During this time, his income was below the threshold for the foreign income exclusion (a tax break that protects a portion of income), so he had no taxable income and no student loan debt.
But Mr. Wattles, who moved near Nashville in early 2020, now earns a six-figure salary. He enrolled in the SAVE plan in August and twice sent documents to Aidvantage to have his payment recalculated based on his current income.
“They keep forcing me to be lenient because they don’t understand,” he said. “I dont want that. I don’t mind making a payment. As far as I know, I took out the loan.”
Karlyn Granger, a 36-year-old graphic designer, received her master’s degree in 2019. When the pandemic freed her from the obligation to pay her federal loans, she married, bought a home in Atlanta and had a baby. The cost of caring for her family eats up most of her salary and “feels much more present and dire” than her loan, she said.
A flood of emails from Aidvantage spurred them to figure out which payment plan would work best for them. But the decisions confuse her: Should she try to keep her monthly bill as low as possible or should she pay more to reduce her interest debt?
The changing legal landscape has increased their uncertainty. The SAVE plan, for example, forgives unpaid interest for those who meet their monthly payments and forgives any remaining debt after 20 years. But those benefits could disappear if legal challenges to the plan are successful. And the Internal Revenue Service typically treats forgiven debt as income. Ms Granger fears making a decision that could ultimately impose a huge tax burden on her.
“I just find myself in a kind of analysis paralysis where I don’t do anything,” she said.
The Department of Education estimated that millions of borrowers would need additional time, help and nudges. There is no historical parallel to pausing the entire credit system for years. However, when natural disasters occurred — which affected borrowers can use as a reason to temporarily pause their payments — “about a third of borrowers missed their payments in the first few months after payments resumed,” two senior officials wrote in a blog post in April. “Their payment rates gradually recovered over a period of two to three years.”
Alarm bells ring for loan servicers when a borrower is more than 90 days past due, said Scott Buchanan, executive director of the Student Loan Servicing Alliance. This is the point at which they typically file a negative credit report. But by September, loan servicers were instead ordered to place those borrowers in forbearance.
This complicates the data. With so many borrowers automatically entering forbearance, it’s difficult to distinguish those who can afford to pay but choose not to from those who are really struggling.
“For a while we’re going to have this group of borrowers who see, ‘I defaulted and nothing happened,’ and then they think, ‘Why am I paying?'” Mr. Buchanan said. “That was always the risk of the driveway. You want to encourage people to make payments. Healing them yourself doesn’t encourage payments.”
Mr. Biden often touts his approach to student debt as a standout achievement. “My administration has taken the most significant student debt relief measure in the history of this country,” he said in April. “This relief can be life-changing.”
And for millions of people, this has been the case, despite the bumpy and legal turmoil of the past year.
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 upheld Mr. Biden’s mass debt relief program, nearly half of the $21,000 Mr. Lundgren owes would have disappeared.
But because of the SAVE program, which exempts income up to 225 percent of the federal poverty level from taxes, Mr. Lundgren has no debt on his monthly loan bill. This helps him cover his rent and other living expenses. “There’s some breathing room,” he said.
And because SAVE prevents interest from accruing, Mr. Lundgren’s balance doesn’t grow. That’s a sea change from how federal student loans used to work: Millions of borrowers on income-driven plans used to make payments every month, only to find their bills mounting because their payments weren’t even enough to cover the interest on their debt cover.
Mr. Lundgren said he was grateful for SAVE but also felt a little overwhelmed by the volatility of the credit system.
“I’ve just come to terms with the fact that there is almost certainly no reality in which the socially just thing that happens is loan forgiveness and the creation of universally affordable public college,” he said.
Representative Virginia Foxx of North Carolina, a Republican and chairwoman of the House Education and Workforce Committee, praised the court rulings against the SAVE plan.
Mr. Biden “chose to give away taxpayer dollars and illegally rewrite loan agreements,” she said. “It is a blatant attempt to buy graduate votes on the backs of the working class.”
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2024-07-02 17:09:02
www.nytimes.com
