More than three years after the federal student loan pause on interest accumulation, payments, and collection helped vulnerable families weather an economic catastrophe, payments on federal student loans are resuming. Many borrowers are approaching return to repayment with fear, trepidation, and a healthy amount of skepticism. Most have poor information at best about their options, and the risk of a federal government shutdown before Thanksgiving, their certainty about the little they do know has likely been badly shaken. What can borrowers expect during this stressful and confusing period, and how can the federal government maintain their confidence and equip them with the information they need?
Borrowers are right to worry: the U.S. Department of Education is in dire straits financially and needs increased funding and budget flexibility to ensure it can carry out necessary operations, loan servicing included. On top of overseeing the return to repayment, the Biden administration is working to bring borrowers new forms of relief after the Supreme Court struck down student loan forgiveness this summer. The new disarray is unfortunate not least because over the last year, the U.S. Department of Education (ED) has unveiled a series of measures aimed at protecting borrowers’ income and overall financial well-being. In addition to the newly launched income driven repayment (IDR) plan, ED has made good on its promise to process applications faster and offer debt relief to those who have qualified for forgiveness through various programs, including Public Service Loan Forgiveness (PSLF), borrower defense to repayment, and the one-time income driven repayment adjustment.
Despite these robust efforts to address the student debt crisis, countless borrowers are still unsure what they should do as they receive bills for loans that they do not have the means to pay. While there are a number of repayment and forgiveness programs available, borrowers are confused about which plan is “right” for them and which considerations—lowest monthly payment, shortest time to repayment, lowest overall repayment, etc.—should go into making that decision. Borrowers who may in fact be best served through the new and existing debt relief programs can be paralyzed by indecision when selecting from options that are difficult to compare. As a result, some may opt not to enroll in a loan relief program or make their monthly payment at all. Unfortunately, borrowers’ confusion can cause psychological harm in the short term, and if they make a decision of repayment plan that doesn’t suit their needs, it can cause economic harm in the long term as well.
There are a number of factors that will complicate the return to repayment for many borrowers. During the federal student loan forbearance, several loan servicers ended their contracts with ED, which resulted in transfers of student loans to new borrowers. Some borrowers saw their loans change servicers more than once, complicating an already challenging return to repayment. Those who graduated or withdrew during the same period are now engaging with the repayment system for the very first time, and will likely have questions about their accounts.
There are also several practical challenges that will impede a borrower’s ability to easily enter repayment. Borrowers who saw their servicer change may need to create new accounts with their new servicers and re-enroll in automatic payments, borrowers who moved during the pandemic will need to update their contact information, and borrowers who switched jobs may need to recertify their eligibility for some programs. Add to this growing list of issues an extreme budget shortfall at the Department of Education itself, and understaffed servicers, and it’s clear how ripe the student loan repayment system is for error. If the Department of Education is to be successful in supporting return to repayment, it must ensure all borrowers have the information they need to make informed decisions for themselves and their families.
SAVE Has Large Benefits for Some Groups
Immediately following the Supreme Court decision on debt cancellation, the Biden administration finalized the Saving on a Valuable Education (SAVE) plan. SAVE replaces the Revised Pay As You Earn (REPAYE) plan as the most affordable IDR option for low-income borrowers. Income-driven repayment (IDR) plans utilize information about a borrower’s earnings and family size to set monthly repayment at an “affordable” percentage of a borrower’s discretionary income. IDR plans have maximum repayment terms, meaning a borrower’s remaining debt is forgiven after they make a predetermined number of full, on-time payments. In general, IDR plans have maximum repayment periods of twenty or twenty-five years; when coupled with PSLF, borrowers can get forgiveness in as little as ten years. IDR protects economically disadvantaged borrowers by ensuring that they do not need to divert money for basic necessities like food and housing to student loan repayment.
As many as one in five student loan borrowers have risk factors that indicate they will struggle in repayment, and it is these borrowers who may derive the greatest benefit from SAVE. ED rolled out a comprehensive communications strategy about SAVE, in which it has leveraged its relationship with trusted messengers to help deliver information about the benefits of the plan, which include dramatically reducing monthly and lifetime payments for many borrowers. However, this feature of the plan, along with many of the other most generous benefits, will not take effect until Summer 2024.
At present, SAVE increases the amount of protected borrower income from 150 percent to 225 percent of the federal poverty guidelines, stops charging monthly loan interest not covered by monthly payments under the plan, and prevents married borrowers who file their taxes separately from having to include their spouse’s income in their payment calculation. While the ED website clearly lists which benefits of SAVE took effect immediately and which will be fully implemented next year, public messaging and press about the program has focused on the many benefits borrowers cannot presently unlock, like the decrease in discretionary income borrowers who only have undergraduate debt will have to pay from 10 percent to 5 percent.
ED’s decision to leverage relationships with trusted messengers to deliver information on loan repayment will be integral to the success of return to payment at large. Partnering with individuals and organizations that community members consider credible can be the key to a successful outreach campaign. While the campaign’s focus on SAVE makes sense because the program offers needed relief to low-income borrowers, ED should consider taking a more holistic approach and include information on other options. In addition, ED should incorporate more robust and hyperlocal community engagement in its outreach campaign to borrowers, including by partnering with racial justice organizations, mutual aid societies, and consumer assistance programs. Vulnerable borrowers, including unhoused and transient borrowers, borrowers without reliable broadband internet access, and borrowers without phones, need more high-touch outreach that meets them where they are, whether that’s at local libraries, their children’s schools and daycares, or government assistance offices.
Vulnerable borrowers, including unhoused and transient borrowers, borrowers without reliable broadband internet access, and borrowers without phones, need more high-touch outreach that meets them where they are, whether that’s at local libraries, their children’s schools and daycares, or government assistance offices.
It is these vulnerable, low-income borrowers who may be best served by enrollment in the new and generous SAVE plan. While some upwardly mobile middle- and higher-income earners have reported increased monthly repayment amounts under the SAVE plan, SAVE will extend $0 monthly payments to more financially precarious borrowers than other IDR plans.
Additionally, while SAVE is incredibly beneficial for those concerned about the financial burden of their student loan payments, SAVE, like other IDR plans, is not without drawbacks. Workforce discrimination and wealth inequities means many low-income Black borrowers have no choice but to turn to IDR plans for relief. Unfortunately, even though IDR plans have fixed repayment terms, struggling borrowers can still spend decades languishing in repayment. Some borrowers continue to have trouble accessing or maintaining participation in IDR plans due to barriers like complicated application processes and annual income recertification requirements. The SAVE plan and the FUTURE Act have attempted to solve some of these problems, too, but borrowers still have to know about the plan to access its benefits.
In addition to these administrative issues, there have been repeated allegations of servicing misconduct, including servicers’ failure to inform borrowers that IDR is an option for them or servicers’ misrepresenting eligibility requirements, costing borrowers thousands over the lifetime of their loan. As a result, many borrowers who could benefit from IDR do not because they are unaware the plans exist. Perhaps equally troubling is that many borrowers in need of assistance are excluded from SAVE: Parent PLUS borrowers, who collectively owe upward of $104 billion in loans, and borrowers in default cannot enroll in the plan.
Struggling Parent PLUS Borrowers Need Debt Relief
The federal COVID-19 emergency may be over, but many borrowers are still in the same or worse financial straits as economic disruption continues. Among those borrowers facing extraordinary financial hardship are Parent PLUS borrowers, who are ineligible for the generous SAVE plan. Parent PLUS loans are federal unsubsidized loans made to parents of dependent undergraduate students. Parent PLUS borrowers may opt to consolidate their Parent PLUS loan in an attempt to manage and decrease their monthly payments. Parent PLUS borrowers who consolidate their loans and enroll in income-contingent repayment (ICR), the only income-driven repayment plan PLUS borrowers can participate in, can pay the lesser of two options: 20 percent of their discretionary income for up to twenty-five years before discharge; or a fixed payment over twelve years, adjusted according to income. While discretionary income is based on 225 percent of the federal poverty guidelines for SAVE, it is just 100 percent for ICR.
While taking out a Parent PLUS loan opens doors for one’s children, it can close doors for the parents who face considerable challenges in repayment. PLUS loans come with high interest rates and loan origination fees. Under-resourced parents have come to rely on Parent PLUS as a way to fill the gap between their child’s cost of attendance and the actual aid they receive. In 2015 alone, 40,000 disabled or retired Parent PLUS borrowers saw portions of their Social Security benefits withheld after defaulting on their loans. And estimates suggest that nearly 20 percent of parents of Black students receiving Parent PLUS loans could default. The financial fallout of the pandemic likely exacerbated the risk of delinquency and default among PLUS borrowers, and may explain why the Biden administration was deliberate in including PLUS borrowers among those eligible for relief under their debt cancellation plan. With the Supreme Court’s decision to reject the administration’s debt cancellation plan and the exclusion of Parent PLUS borrowers from SAVE, Parent PLUS borrowers cannot access most forms of debt relief.
While consolidation can lower Parent PLUS borrowers’ monthly payments by giving them access to ICR, there are potential risks to consolidation of which many borrowers may be unaware. For example, if the parent borrower had underlying loans for their own education that they were working to have forgiven under a loan forgiveness plan, consolidation can reset their PSLF and IDR forgiveness qualifying payment count back to zero. Parent PLUS borrowers are, however, able to take advantage of a one-time PSLF and IDR account adjustment. ED will forgive parent PLUS loans whether they were consolidated or not, that have been in repayment for twenty-five years or more. ED will also provide parent PLUS borrowers with credit toward loan forgiveness for periods that would not have previously counted. Parent PLUS borrowers who have not spent twenty-five years’ worth of time in repayment for IDR, or made ten years of qualifying PSLF payment, must consolidate their Parent PLUS loan before December 31, 2023 to benefit from the adjustment. They must also continue making payments under an ICR Plan after consolidating to make progress toward forgiveness. Unfortunately, support for Parent PLUS borrowers requires coordinated action between both the Department of Education and Congress to address the shortcomings in the income contingent repayment (ICR) plan.
Parent PLUS borrowers who defaulted on their loans do have access to some benefits during return to repayment, including a form of loan redemption that could put them back on the path to financial freedom. However, Parent PLUS borrowers, like all student loan borrowers, can only take advantage of programs when ED or its partners adequately communicates with clear and concise information about eligibility and program benefits.
The Department of Education Must Improve Outreach to Inform Borrowers About Fresh Start
One program that hasn’t benefited from the press coverage dedicated to return to repayment is Fresh Start. The program provides defaulted borrowers with short-term benefits for a year after the payment pause ends and enables borrowers to take advantage of these benefits permanently if they take steps to remove their loans from default through the program. Traditionally, defaulted borrowers have very few options for exiting default: they can either consolidate their loans, pay off their loans in full (which few struggling borrowers can afford to do), or enter loan rehabilitation, which can take several months to process.
Fresh Start stops collection efforts for all defaulted borrowers and gives the borrower renewed access to federal student aid. Defaulted borrowers can automatically access the short-term benefits provided by Fresh Start. However, if a borrower doesn’t take action to remove their loans from default by contacting their loan holder and enrolling in the Fresh Start program, they will lose all benefits once the program ends in one year. Borrowers that use Fresh Start to get out of default are returned to in-repayment status, will see their student loan accounts move to a federal servicer, and have the record of default removed from their credit report. Once a borrower’s account is listed as in ”repayment,” they can access programs like PSLF and IDR. Fresh Start also gives defaulted borrowers access to relief like deferment or forbearance, which provides a much needed financial cushion.
Loan default is a racial equity issue. Student loan debt disproportionately impacts low-income borrowers and borrowers of color, who are also the most likely to face challenges in repayment. Black borrowers do not generally reap the economic and labor market returns college is intended to provide. Even post-graduation, Black students still face barriers to economic mobility, including high rates of both unemployment and underemployment. This may explain in part why Black bachelor’s degree recipients are unable to repay their student loan balances at a rate five times higher than white bachelor’s degree graduates. And it’s not just completers who face these challenges: students who drop out also face high debt burdens and risk of default.
Loan default is a racial equity issue. Student loan debt disproportionately impacts low-income borrowers and borrowers of color, who are also the most likely to face challenges in repayment.
Per the Department of Education, more than 7.5 million borrowers can have their accounts placed back to in repayment status through Fresh Start. Because the consequences of default can include wage garnishment and tax refund offsets, which are detrimental for all borrowers, one would expect significant outreach from ED about the benefits of this program. But Fresh Start seems to have taken a backseat to SAVE, even though defaulted borrowers are ineligible for SAVE. Outreach is especially important because the Fresh Start program is time-limited: borrowers looking to participate must do so before September 30, 2024. Enrolling in Fresh Start or other programs could become even more difficult if outside forces interfere with ED’s operation.
ED has also touted the one year “on-ramp,” a grace period during which borrowers won’t be reported for non-payment to credit rating agencies, as a win for worried borrowers transitioning back into repayment. While ED has said that delinquencies will not be reported to credit reporting agencies during the on-ramp (which ends on September 30, 2024), ED has also warned that it cannot control how credit scoring companies factor in missed payments. How credit scoring companies factor in nonpayment could have devastating impacts on a borrower’s future: poor credit can affect your ability to get future loans like a mortgage or car loan, limit housing options for renters, or result in the revocation of a professional license. In addition to these harmful impacts, a bad credit rating can create significant barriers to wealth accumulation, especially among those from traditionally under-resourced communities.
Insufficient Funding Could Disrupt Support for Borrowers during the Return to Repayment
Following the release of information about the SAVE plan, ED announced its intent to hold a negotiated rulemaking on student debt relief beginning in Fall 2023. At best, this rulemaking would result in a regulation to utilize the authority set out in the Higher Education Act to offer relief—whether widespread or targeted—to Federal Direct Loan borrowers. Though the rulemaking is scheduled to begin early October, it could take at least a year for the final rule to be released. And like SAVE, any new cancellation plan would have to withstand legal and political challenges, which could further delay relief to struggling borrowers. ED will need funding and budget flexibility to enact any new regulations as they relate to student loan servicing.
While a recently passed stopgap funding bill helped to avert a government shutdown, it did not include additional budgeting flexibility for ED. Federal Student Aid, which oversees the federal student loan portfolio and the country’s largest student financial aid provider, has already been operating on a shoestring budget thanks to flat funding in the previous fiscal year. ED previously advised servicers to scale back their operations, something perhaps made easier by the fact that several servicers reduced their call center staff during each of the payment pause extensions. Borrowers were already facing hours-long wait times and difficulty getting information about whether applications for programs like PSLF were in process or approved before the October 1 return to repayment. The Education Department’s lack of budget flexibility, which prevents the Department from spending student loan servicing funding at a faster rate when required, will only exacerbate borrowers’ suffering. Affected borrowers include borrowers who were previously told they would receive relief, but instead of $0 balances, their accounts show thousands due in repayment.
It remains to be seen whether the threat of a mid-November shutdown will complicate the kind of creative outreach strategy and focused messaging borrowers need in the initial weeks and months after return to repayment. While no amount of outreach about these debt relief, loan redemption, and forgiveness programs can replace widespread debt cancellation, especially for the most low-income borrowers, the U.S. Department of Education should improve its communications strategy about return to payment, and especially Fresh Start, to ensure that eligible borrowers benefit from the programs.