Student loans: FOIA data reveals tons of 'underwater borrowers' ahead of repayment cliff
Federal data reveals that despite the interest-free payment pause allowing borrowers to find some breathing room during the pandemic, two-thirds of nearly 430,000 student loan borrowers were still "underwater" — meaning that they still haven't been able to make a dent on their original balance.
The data, obtained from the Education Department (ED) by the Center for Responsible Lending and the National Consumer Law Center (NCLC) through a freedom of information request (FOIA) and provided to Yahoo Finance, looked specifically at data of borrowers with federally-backed debt serviced by Navient who had decided to make at least one payment during this pause.
"There's often been a lot of talk about student debt, and assuming that the problem is simply that college is too expensive," Abby Shafroth, an attorney at the NCLC, told Yahoo Finance.
And while "that's certainly a problem," she added, "this data reflects that while borrowers are in repayment, even though they are making payments, they are experiencing a debt burden that goes beyond the original cost of college. They are finding themselves underwater."
Leaving borrowers stuck attacking interest for years while not making a single dent on their principal loan, Shafroth stressed, is "both the department's interest accrual and capitalization policies and likely servicer issues."
Federal actions amid the pandemic will lead to roughly $100 billion in total student loan forgiveness between March 2020 and September 2021, according to Education Department (ED) data and analysis from experts, providing a financial lifeline to the roughly 45 million student loan borrowers owing more than $1.7 trillion in outstanding federally-backed debt. The pause is scheduled to end after January 2022.
'They're paying interest on interest'
The new data revealed that 428,268 borrowers who owe almost $28 billion in federally-backed student loan debt were being serviced by Navient at the time, though the exact data of when the data was pulled is unclear. In any case, that would be is roughly 1% of the overall number of federal loan borrowers.
Among this representative sample, 63% were underwater.
"By underwater, we meant that the borrowers more [in debt] now than they originally borrowed, even though these are borrowers who even during the payment pause were making at least some payments," Shafroth explained.
The "interest balance" on these loans were approximately $1.7 billion, and about 90,000 borrowers in this group serviced by Navient owe more than 125% of their original balance.
Especially when a borrower goes into forbearance or defers a loan payment, unpaid interest stars piling up on top of the principal balance — or capitalizing — pushing them further underwater.
"For borrowers who experienced financial distress and take on forbearances or certain types of deferments, many of those are interest-accruing," Shafroth said.
So when they come out of distress, are ready to repay their debt, "all of that unpaid interest from the period of forbearance capitalizes on their principal balance," said Shafroth. "They're paying interest on interest."
Furthermore, there have been cases in the past of servicers steering borrowers into forbearance plans.
“Our battle cry remains ‘forbear them, forbear them, make them relinquish the ball,’” a Navient executive stated in a 2010 memo. “Said another way, we are very liberal with the use of forbearance once it is determined that a borrower cannot pay cash or utilize other entitlement programs.”
While arguing for broad cancellation, prominent Democrats are also calling on the ED to undertake major reforms related to how federal loan servicers operate.
Massachusetts Senator Elizabeth Warren (D), who has been highly vocal on both issues, also reportedly eked out several commitments from ED this week.
Politico reported Warren, by holding up confirmation of a senior ED official, had gotten the department to work on how it works with loan servicers and debt collectors, how it plans to reform debt relief programs, and improve oversight over schools and accrediting agencies.
A source familiar with the agreement between ED and Warren also said that the agency was going to "make changes" to how it went after debtors in bankruptcy proceedings, Politico added, and as well as how it will treat borrowers who default.
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Aarthi is a reporter for Yahoo Finance. She can be reached at aarthi@yahoofinance.com. Follow her on Twitter @aarthiswami.
Read more:
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