Student loan repayment pauses will reset distressed borrowers’ accounts

The Education Department said Wednesday that more than seven million borrowers who have defaulted on their federal student loans will have their loans restored to good standing — a blessing the Biden administration included in a four-month payment deferral extension.

About one in five federal borrowers has a loan that is delinquent, which means that their payments have been at least 270 days, or about nine months, past due. Once the loan defaults, it can be nearly impossible to get back in.

“It’s like quicksand,” said Sarah Sattlemayer, director of the Higher Education Project at New America, a think-tank.

Program rules often prevent defaulting borrowers, especially those who have defaulted multiple times, from beginning to pay again under the usual payment plans of the Federal Loan Program. Giving these borrowers a fresh start is a “really big deal,” Ms Satelmayr said.

Student loans have virtually been frozen to tens of millions of borrowers since the start of the pandemic. The pause allowed borrowers to stop making payments, prevent interest accumulation, and halt collection efforts. The federal government previously said that delinquent borrowers – those whose payments were overdue a few months before the pandemic – would take effect before the moratorium ends.

Officials urged delinquent borrowers to use this as an opportunity to enter into more manageable payment plans, such as those based on their income. But due to their defaulting status, the borrowers most behind would generally not qualify without meeting the other requirements first.

Education Minister Miguel Cardona said the ministry would use the extension of the moratorium to “continue our preparations to give borrowers a fresh start and to ensure that all borrowers have access to payment plans that meet their financial situation and needs.” A representative of the Department of Education said that more details about the treatment of defaulting borrowers will be published “in the coming weeks” on StudentAid.gov.

But there are big hurdles looming. For example, loan providers, the vendors the government has hired to collect $1.6 trillion in federal student loans, have no idea how this planned clean slate will work.

Scott Buchanan, executive director of the Student Loan Service Alliance, a trade group, said the Department of Education has given its employees “zero guidance” about the process. “I can’t tell you anything about how previously defaulting borrowers were treated – or even who might qualify – because it’s not entirely clear.”

“It is unclear if they even have an actual operational plan on how to do this or what they can do under the law,” he added.

Ms Sattlemayr said the department’s new planned date for repaying student loan payments – August 31 – did not give the department or its contractors much time to make arrangements.

“There are a lot of decisions to be made over the next couple of months to make sure that borrowers are protected and that this transition supports them,” she said. “We don’t want people to re-enter a payment system that didn’t serve them well the first time.”

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