Continuing Relief for Borrowers?

Calls are continuing to grow for the Biden administration to extend the student loan repayment "pause" that expires at the end of September, as recent survey data show that borrowers aren’t prepared for payments to resume, while the Department of Education has yet to communicate a decision with the deadline fast approaching.

An analysis by the Pew Charitable Trusts found that two-thirds of respondents to a survey conducted this past spring said it would be difficult for them to afford payments if they resumed a month from the date they took the survey. The majority of the borrowers have used the money they’ve saved from not making loan payments to cover needed expenses or pay down other debt, according to the results.

In another survey, conducted by Student Debt Crisis, 90 percent of the nearly 24,000 borrowers surveyed said they were not ready to resume payments in October. The COVID-19 pandemic isn’t over, and borrowers are still in need of continued relief, said executive director Natalia Abrams and program director Cody Hounanian.

“The economic recovery is just starting, and many borrowers really haven't seen that recovery yet,” Hounanian told Inside Higher Ed.

The student loan repayment pause has been in effect since March 2020, enacted by the Coronavirus Aid, Relief, and Economic Security Act. It has been extended three times via executive order -- twice under former president Trump and once under President Biden, until Sept. 30. Under the pause, all loan payments were suspended, and every borrower had their interest rate set to zero percent. Collections on defaulted loans were also paused.

During that time, borrowers have taken advantage of the relief. At the beginning of 2020, about 46 percent of borrowers were in repayment, according to an analysis by the American Action Forum. Now, fewer than 1 percent of borrowers are regularly making payments.

With only a little over two months before the pause is scheduled to end, policy makers, advocates and experts are concerned about the lack of information coming from the administration and the potential for chaos to ensue if it decides that payments should resume. Many of the borrowers who struggle the most -- very young or very old borrowers and borrowers of color -- are the ones who are the least aware of the changing policies.

“Borrowers need as much time as possible to get prepared to resume payments,” Abrams said. “By Aug. 1, we'll be only two months out, and either way, borrowers need to know.”

More than 125 organizations -- including Student Debt Crisis, the Student Borrower Protection Center, the Education Trust and the National Consumer Law Center -- sent a letter to Biden urging him to extend the pause, stating that rushing to resume loan payments would be “a recipe for disaster.”

“Before resuming payments on student loans, the Department of Education must undertake significant structural reforms, provide real, immediate relief, and cancel a significant amount of federal student debt,” the groups wrote. “This will ensure that millions of borrowers don’t remain trapped in a broken system just as the economy begins to recover.”

That system has been further disrupted by the announcement that two federal loan servicers, FedLoan Servicing and Granite State Management & Resources, will not extend their servicing contracts with the department when they expire at the end of the year, meaning nearly 10 million borrowers will have to have their accounts reassigned. That’s all the more reason for the pause to continue, said Hounanian.

If the administration plans to resume payments, a lot of work will have to be done to avoid catastrophe, said Beth Akers, senior fellow at the American Enterprise Institute. She said that bringing borrowers back into a student loan system that doesn’t work well is bound to create problems for both borrowers and administrators. Still, Akers wasn’t entirely supportive of a continued repayment pause.

“As we allow borrowers, regardless of their financial circumstances, to make no payments without penalty or even interest accumulation, we continue to deliver more and more taxpayer-funded subsidies to those who are already amongst the most well-off in our economy,” Akers said.

Sixty-four Democratic lawmakers -- including Senate Majority Leader Chuck Schumer, a Democrat from New York, and Senator Elizabeth Warren, a Democrat from Massachusetts who has been vocal about her displeasure with the student loan system -- argued that resuming payments on Oct. 1 could create “a significant drag on our economic recovery” in a letter to Biden asking him to extend the repayment pause to March 31, 2022, or until the economy reaches pre-pandemic employment levels, whichever is longer.

“Following past emergency suspensions of student loans during natural disasters, an increased number of borrowers became delinquent or defaulted on their loans,” the lawmakers wrote. “A wave of student loan defaults would cause long-term damage to borrowers’ credit and financial stability and could put a sudden and unnecessary drag on the recovering economy.”

In a separate letter to Secretary of Education Miguel Cardona, a group of Democratic lawmakers requested information from the department about how it plans to support those with loans in default to avoid “long-term financial harm to borrowers.” They asked for a response from Cardona by July 28.

So far, the administration hasn’t explicitly signaled what its final decision will be, though Akers said the lack of preparation for the freeze to end suggests that an end won’t yet be coming.

The last 16 months have given borrowers a sliver of hope and optimism of what their lives could look like without student loan payments, allowing them to thrive and giving them a better chance of accessing the “American dream,” said Hounanian.

“We heard from one borrower who needed to support her disabled husband and her son who lost his job during the pandemic,” Hounanian said. “Relieving these payments has given these people the financial stability they never had, and that is an important lesson for when we go into the discussion around debt cancellation.”