Six Million Student Loan Borrowers Face Payment Resumption in October After Years of Forbearance
Federal efforts to forestall student loan debt repayments by six million borrowers will expire at the end of September. The Pew Charitable Trust, in an Op-Ed in The Hill, proposed changes that could help borrowers under forbearance enter a repayment program more favorable to them than the harsh fiscal cliff they will face in October.
Millions of Borrowers to Resume Loan Payments
Six million student loan borrowers, roughly the size of Colorado, will soon be asked to resume payments on their loans after a several-year reprieve.
The data provided on these six million borrowers reveals that they are, on average, between 45 and 49 years old, did not graduate with a degree despite borrowing from the federal government for their education, and have an annual household income below $25,000. They often experience volatile or unreliable employment patterns.
Prioritization of Essential Expenses Over Loan Repayments
Many in this population state that they are not paying off their loans because they prioritize other more pressing bills, such as rent and grocery costs. Other reasons cited include a feeling of hopelessness and overwhelm due to the debt balance and an unaffordable monthly payment.
Biden Administration’s Efforts to Ease Borrower Burdens
The Biden Administration has initiated various efforts to make borrowers’ payments more feasible, including efforts to discharge the debts in total.
All of the initiatives have been met with significant legal challenges, complicating and confusing the situation and borrowers who have been following along with the Administrative roller coaster of promises and letdowns over the past several years as the debt forgiveness was dangled in front of borrowers before being halted by the courts.
Development of Income-Driven Repayment Plans
One of the more successful initiatives the Department of Education developed created reasonable repayment plans based on income. Despite efforts to change how the system works for borrowers unable to pay their balances, the debt collection system will reactivate in October after several years’ lapse.
A few changes to the old system have held borrowers to the legal agreements in their underlying student loan contracts. These enforcement mechanisms include garnishing wages, withholding tax returns and Social Security benefits, and layering fees and penalties on top of the principal and interest.
Issues with Reinstated Enforcement Mechanisms
Some of the issues with the reinstated enforcement mechanism, as detailed by a new Op-Ed penned by analysts at the Pew Charitable Trust, are that the fees and penalties can often top the amount borrowers are required to pay under the income-driven repayment plans.
These plans were designed to cap the monthly payment based on income and family size for lower-income borrowers.
Consequences of Defaulting on Student Loans
Significantly, borrowers can lose access to the specialized provisions of the income-driven plan if they default on their loan payments. If borrowers default on their loans and lose access to their individualized repayment plans, the only options available to borrowers are either rehabilitation or consolidation of loans.
Rehabilitation and Consolidation Options
Rehabilitation involves borrowers making nine payments in ten consecutive months. Consolidation allows borrowers to roll their loans into a new loan. Both actions can be undertaken only once during a loan.
Critique of Current Default Recovery Options
In their Op-Ed, Pew Research analysts argue that each of these paths often leads to failure, as the processes for each option are onerous and lengthy. This leads to additional defaults and consigns borrowers to a permanent state of default.
Proposed Reforms for a More Productive Collection System
As an alternative to the perpetuating cycle of debt under the current system, Ilan Levine and Brian Denten of Pew Charitable Trust’s student loan initiative offer a new proposal in their Op-Ed published in The Hill Tuesday.
Suggested Improvements to the Default Recovery Process
They suggest reforms that would lead to a “more productive collections system” as an alternative to the resumption of the current enforcement regime in October.
Recommendations for Streamlining the Default Recovery Pathway
Denten and Levin propose that the Department of Education create a more efficient and effective pathway out of default for borrowers. They cite the current pathways as “difficult to navigate and have contributed to high redefault rates.”
Limiting Borrower Liabilities in Default Repayment Plans
Secondly, Denten and Levin suggest a limit on how much a borrower would owe on a defaulted repayment plan. For example, they claim it is counterproductive to seize important sources of income for borrowers in default, such as the earned income tax credit, or garnish wages above the amount set by an income-based repayment plan.
Improving Access to Debt Management Tools
Finally, Denten and Levin propose that the Department of Education audit its websites and apps to ensure that borrowers can access and understand all of their options to meet their debt obligations.
They cite an option available through the department to automatically report income, which, if borrowers use it, could reduce the noncompliance rate by those who forget or neglect to manually enter income information.
Juliet Potrykus
Juliet Potrykus is a distinguished writer with expertise in political news, public policy, and legislation, boasting a decade of Capitol Hill experience in Washington, D.C. She holds a Master's Degree in International Relations and American Politics from George Washington University. Now based in Washington state with her family, Juliet continues her advocacy on critical issues like immigration, education, and constitutional matters.