Nearly 20 million people who owe student loans are not making payments, according to the latest Department of Education data. Following a three-year timeout on payments that began in 2020 during the pandemic, the government has restarted collecting the $1.6 trillion it is owed. At the end of March, six months after the hiatus ended, nearly 20 million borrowers were making payments as scheduled. However, almost 19 million were not, leaving their accounts delinquent, in default, or still on pause.
Seven million people were at least 30 days overdue on payments at the end of 2023, marking the highest delinquency rate since 2016. Millions more had their accounts frozen through deferment or forbearance, meaning they did not have to pay their loans or did not acquire interest, while nearly six million student loans were still in default from before the pandemic. For most federal student loans, you default if you have not made a payment in more than 270 days.
“The nonpayment rate really is emblematic of a system that’s not doing its job,” Persis Yu, managing counsel for the Student Borrower Protection Center, told the New York Times.
Throughout his presidency, Biden has sought to eliminate student debt, putting forward a major proposal to cancel as much as $400 billion in loans. That proposal was struck down by the Supreme Court, which ruled that the move was unconstitutional. President Biden also created the SAVE plan last year, which includes the cancellation of up to $10,000 in federal student loan debt for borrowers earning less than $125,000 annually.
The plan includes reforms to income-driven repayment plans, reducing the percentage of discretionary income that borrowers must pay each month from 10 percent to 5 percent. Additionally, the proposal aims to protect more income from being considered in repayment calculations and to forgive loan balances after 10 years of payments for those with loan balances of $12,000 or less.
Two coalitions of Republicans filed lawsuits against SAVE, accusing the president of “unilaterally trying to impose an extraordinarily expensive and controversial policy that he could not get through Congress.” Last week, federal judges in Kansas and Missouri temporarily blocked elements of the SAVE program, ruling in favor of states that contested the president’s authority to impose such generous terms without congressional approval.
In the Kansas suit, the states called the president’s debt relief maneuvers “a rushed product to evasively do what the Supreme Court already told defendants they cannot do.” But on Sunday, the 10th Circuit Court of Appeals temporarily reversed the Kansas decision, paving the way for the Department of Education to proceed with planned payment reductions this month for millions of borrowers.
Following the ruling, Secretary of Education Miguel Cardona said the court “sided with student loan borrowers across the country who stand to benefit from the SAVE Plan – the most affordable repayment plan in history.” The White House has said that more than 20 million borrowers could benefit from the SAVE Plan. The administration in May said 8 million are already enrolled, including 4.6 million whose monthly payments have been reduced to $0.
More than one in 10 Americans hold federal student debt. After an unprecedented three-year timeout on federal student loan payments because of the pandemic, millions of borrowers began repaying their debt when billing resumed late last year. But nearly as many have not. That reality, along with court decisions that regularly upend the rules, has complicated the government’s efforts to restart its system for collecting the $1.6 trillion it is owed.
At the end of March, six months after the hiatus ended, nearly 20 million borrowers were making their payments as scheduled. But almost 19 million were not, leaving their accounts delinquent, in default, or still on pause, according to the latest Education Department data.
“The nonpayment rate really is emblematic of a system that’s not doing its job,” said Persis Yu, the managing counsel for the Student Borrower Protection Center, an advocacy group. Some 7 million borrowers with federally managed loans were at least 30 days overdue on their payments at the end of 2023. That’s the highest delinquency rate since 2016, as far back as the department’s public records go. Because of a policy adopted by the Biden administration, those borrowers will face no penalties for their nonpayment until October at the earliest.
Millions more had their accounts frozen through deferment or forbearance (which allows borrowers to temporarily stop making payments), and nearly 6 million borrowers remain mired in defaults that began before the pandemic. The reasons borrowers aren’t paying are varied. Some say they can’t afford it, while others are tangled in bureaucratic snafus. Many people are taking advantage of an “on-ramp” period that lasts through September, during which late payments will not be reported to credit bureaus and borrowers will not be placed into default, though interest will continue to accrue.
When President Joe Biden ended the moratorium that began in March 2020 under President Donald Trump, he pledged to fix key parts of the long-troubled federal loan program. While the Supreme Court overturned Biden’s most far-reaching policy — forgiving at least $10,000 in debt for each of millions of borrowers — his administration resurrected other pathways for eliminating debt.
Trump’s Education Department stymied relief programs for government and nonprofit workers, permanently disabled borrowers, and people defrauded by for-profit schools. Under Biden, the agency revamped and expanded those and other initiatives and used them to cancel $167 billion owed by nearly 5 million people. Biden also created a new repayment program, SAVE, which slashed many borrowers’ payments or reduced them to zero for millions of low-wage workers. Consumer advocates praised those moves as vital to ensuring that borrowers’ bills are manageable.
But the plethora of changes to repayment rules, and a barrage of lawsuits from Republican-led states attacking them, have worsened the already challenging task of getting more than 40 million people back on a payment track. The Education Department and its five loan servicers are struggling to adapt 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, ruling in favor of states that contested the president’s authority to impose such generous terms without congressional approval. In the Kansas suit, the states called the president’s debt relief maneuvers “a rushed product to evasively do what the Supreme Court already told defendants they cannot do.” But on Sunday, the 10th U.S. Circuit Court of Appeals temporarily reversed the Kansas decision, clearing the way for the department to proceed with planned payment reductions this month for millions of borrowers.
Travis Wattles, 39, has had his account in forbearance since the payment pause ended in the fall because his servicer, Aidvantage, has not been able to determine what his monthly bill should be. (Aidvantage declined to comment and referred questions to the Education Department.) Wattles, who works in automotive product marketing, spent several years overseas. During that time, his earnings were below the limit for the foreign income exclusion (a tax break that shelters some income), so he had no taxable income and owed nothing for his student loan debt.
But Wattles, who moved near Nashville, Tennessee, in early 2020, now makes a six-figure salary. He enrolled in the SAVE plan in August and has twice sent paperwork to Aidvantage to have his payment recalculated based on his current earnings. “They keep putting me back into forbearance because they can’t figure it out,” he said. “I don’t want that. I don’t mind making a payment; I understand 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 of the obligation to pay her federal loans, she got married, bought a house in Atlanta, and had a baby. The costs of caring for her family consume most of her paycheck and “feel much more present and dire” than her loan, she said.
A deluge of emails from Aidvantage has spurred her efforts to figure out which payment plan is best for her. But the choices confuse her: Should she try to keep her monthly bill as low as possible or prioritize paying more to reduce what she owes in interest? The shifting legal landscape has amplified her uncertainty. The SAVE plan, for example, waives unpaid interest for those who keep up with their monthly payments and forgives any debt remaining after 20 years. But those benefits may vanish if legal challenges to the plan succeed. And the IRS typically treats forgiven debts as income. Granger fears making a decision that might eventually stick her with an enormous tax bill.
“I’m just kind of in analysis paralysis, where I don’t do anything,” she said. The Education Department anticipated that millions of borrowers would need extra time, help, and nudging. There’s no historical parallel for pausing the entire loan system for years. But when natural disasters have occurred — which affected borrowers can use as grounds to temporarily suspend their payments — “roughly a third of borrowers missed their payments in the first months after payments resumed,” two senior officials wrote in an April blog post. “Their rates of payment recovered gradually over a two- to three-year period.”
For loan servicers, alarm bells start going off when a borrower is more than 90 days overdue, said Scott Buchanan, the executive director of the Student Loan Servicing Alliance. That’s the point at which they normally file a negative credit report. But through September, the servicers have instead been instructed to place those borrowers into forbearance. That complicates the data. With so many borrowers being automatically routed into forbearance, it’s hard to separate those who can afford to pay but are choosing not to from those who are genuinely struggling.
“For some time, we’re going to have this group of borrowers who will see, ‘I went delinquent and nothing happened,’ so they think, ‘Why am I making a payment?’” Buchanan said. “That was always the risk of the on-ramp. You want to encourage people to make payments. If you self-cure for them, that doesn’t encourage payments.”
Biden frequently casts his approach to student debt as a signature accomplishment. “My administration has taken the most significant action to provide student debt relief ever in the history of this country,” he said in April. “This relief can be life-changing.” And for millions of people, it has been, despite the rockiness 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 allowed Biden’s mass-debt cancellation program to stand, nearly half the $21,000 that Lundgren owes would have vanished. But because of the SAVE program, which exempts income of up to 225% of the federal poverty line, Lundgren owes nothing on his monthly loan bill. That helps him afford his rent and other living expenses. “It gives some breathing room,” he said. And because SAVE prevents interest from accruing, Lundgren’s balance isn’t growing.
Source: New York Times, BBC News
