After 3 years, student loan payments are back

Student loan payments officially resume Sunday after borrowers were let off the hook for more than three years by a pause initiated during the economic turmoil of the coronavirus pandemic.

Despite continued pushback from advocates and concerns about a government shutdown, the Biden administration is reactivating all student loan accounts, and more than 28 million borrowers now have to deal with repayments.

“It’s a sad day for student loan borrowers and for the country that student loans have to come back on, especially with the threat of a looming government shutdown, potentially on the same day. It’s just wild,” Natalia Abrams, president and founder of the Student Debt Crisis Center, said earlier this week.

Back in July, a Life and My Finances survey found half of borrowers say they don’t make enough to afford their student loan payments, while only 22 percent at the time had a plan on how to make their payments.

Some borrowers are going on a “student debt strike” and refusing to make payments as a way to show their discontent with the system.

Meanwhile, President Biden, who had made relief a key pledge of his 2020 campaign, has released an “on-ramp” repayment plan that allows borrowers to miss their monthly payments for the next year with fewer consequences than before. The Department of Education will not put borrowers in delinquent status if they miss payments, garnish their wages or send them to debt collectors.

But borrowers will still see interest accrue on their loans, and their credit score could be affected, despite the department saying they won’t report the missed payments to credit card companies.

“There could be situations where potentially because you’re not making your payments, the value of your loan is increasing because it’s collecting interest, so you will owe more money. The credit bureau takes that into account, and maybe your credit score gets dinged a little bit,” said Jacob Channel, senior economist and student loan repayment expert at Lending Tree.

Before the pandemic pause began, it was already known that student loans were dragging down the finances of millions of Americans and affecting major life decisions.

Almost half of student loan borrowers in 2019 delayed investing in a home because of school debt, according to the real estate site Clever.

“In typical pre-COVID times, when people are paying their student loans, they’re not buying their children’s medication, they’re not able to save for a house or retirement. We know from polling borrowers for so many years that they were using their COVID pandemic money to pay for basic needs, and so the worry is that now they won’t be able to,” Abrams said.

The Biden administration has taken some steps to ease the burden of borrowers ahead of the repayment restart, including forgiving $117 billion in student loans for more than 3.4 million borrowers, mostly stemming from the borrower defense program, a program used to forgive the debt of those defrauded by their schools.

Biden did attempt to forgive at least $10,000 in student loans for all 45 million borrowers, but that plan got struck down by the Supreme Court in June.

The administration was, however, able to create a new income-driven repayment (IDR) program called the Saving on Valuable Education (SAVE) plan, which is rolling out in two phases.

The first phase, which will begin this year, raises the income exemption from 150 percent to 225 percent above the federal poverty guidelines. This means an individual borrower making as much as $32,800 a year would have $0 monthly payments on their student loans. A family of four making less than $67,500 would also have monthly payments of $0.

Another big change this year is the ending of growth on unpaid interest for borrowers.

Next year, changes will be enacted including monthly payments getting cut in half from 10 percent of discretionary income to 5 percent.

“The SAVE plan is a lifeline if you’re able to get on a $0 payment, and we have worked with some borrowers, especially older borrowers on Social Security” to get on that plan, Abrams said.

“But the folks that we’re seeing it harm or not be helpful for is our folks that may have seen an increase in their income during the pandemic. And then when they go to apply, the people who were on a previous IDR plan … they realize they have to pay a much higher payment,” Abrams added.

While there are 45 million student loan borrowers, only 28 million will have to start repaying in October. The rest still have their accounts paused for reasons such as they are still in school, in default or waiting for their debt to get discharged.

The resumption of payments is welcomed by Republicans, who say the delays and promises from the Biden administration have left borrowers in a worse position.

“This conversation distracts us from the core problem, which is making student loan money too easy, which causes tuition to rise and does not address what’s needed, which is that colleges need tough love to end their addiction to tuition,” said Adam Kissel, a visiting fellow in the Heritage Foundation’s Center for Education Policy.

Republicans have long argued that federal student debt relief is unfair to those who never went to school or paid off their student loans on their own and have put out their own proposals to make the cost of college more transparent.

“Republicans have brought forth a solution that holds colleges accountable for rising costs and empowers students and families to make the best decisions for their college careers and beyond. But if Congress fails to act, students will continue to drown in debt without a path to success,” said Sen. Bill Cassidy (R-La.), ranking member of the Health, Education, Labor and Pensions Committee.

The restart of payments also coincides with Congress’s current struggles to keep the government open. Even before the shutdown fight, it was known that student loan servicers were struggling in the customer service area due to lack of funding, which could affect wait times for borrowers needing assistance.

But a shutdown, especially a prolonged one, could exacerbate the problem, according to the White House.

“So, you know, if this happens, if Republicans in Congress, you know, go down this road of shutting down the government, we anticipate that key activities at Federal Student Aid will continue for a couple of weeks,” Biden press secretary Karine Jean-Pierre said. “But, however, if it is a prolonged shutdown lasting more than a few weeks, [it] could substantially disrupt the return to repayment effort and long-term servicing support for borrowers.”

“So, the Department of Education will do its best to support borrowers as they return to repayment, as we have been saying for the past several months. But an extreme Republican shutdown, if this occurs, could be disruptive,” she added.

Repayments also come a year before the 2024 presidential election, a dangerous time to make student loan advocates unhappy.

Biden is also bound to hear more from progressive Democrats who have been calling for even more student debt relief than he has so far been willing to give.

Even before the Supreme Court ruling, top Democrats including Senate Majority Leader Chuck Schumer (N.Y.) and Sen. Elizabeth Warren (Mass.) were calling for $50,000 in student loan relief for all borrowers.

“It’s the right number, it’s where a lot of people intersect that we could transform an entire generation,” Warren previously said.

The Department of Education is trying to plot a new route to some relief by using the negotiated rulemaking process though the Higher Education Act.

The department announced Friday its initial policy considerations for the new plan, which appear to be significantly more tailored than the widespread relief that was previously promised. The policy considerations show the administration wants to do targeted relief for certain groups of borrowers, but nothing is set in stone, and the first meeting regarding the future proposal isn’t until Oct. 10 and 11.

Finalization of any plan could take well into 2024, and any relief would take even longer as whatever path forward the administration takes will likely be challenged in court again.

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