The Coming Student-Loan-Repayment Fiasco

By Preston Cooper

Saturday, September 02, 2023

 

Payments on federal student loans are finally set to resume at the beginning of October, thanks to a clause in the debt-limit agreement struck earlier this year that barred the Biden administration from extending the moratorium for a ninth time. Now the Department of Education must figure out how to transition tens of millions of borrowers back into repayment after a three-and-a-half-year hiatus — a task made more difficult by the Biden administration’s own actions.

 

The payment pause has been a policy disaster. Since interest was not charged during the pause, it has effectively canceled $240 billion worth of student debt. That’s more than half the amount that would have been canceled through President Biden’s one-time loan-forgiveness scheme, had the Supreme Court not intervened. Wealthier households, which have more debt and hence received more interest forgiveness, benefited the most. And though boosters hoped the pause would help borrowers get on sounder financial footing, research shows it instead induced borrowers to take on more debt rather than pay it down.

 

It’s good the pause is finally ending. But turning payments back on is not as simple as flipping a light switch. After three years without collecting payments, student-loan servicers must track down millions of borrowers (who may have switched jobs or addresses) and enroll them in the appropriate repayment plan. Several servicers opted not to renew their contracts with the government, meaning more than 15 million borrowers must coordinate with an entirely new servicer. Remaining servicers have cut their customer-service hours, meaning borrowers will be put on hold when they reach out for help managing their loans — and may hang up the phone in frustration.

 

On top of all this, Biden-administration actions have made the transition back into repayment more difficult and have even given borrowers incentives to avoid paying back their loans.

 

The repeated extensions of the payment pause (two under Trump, six under Biden) have complicated matters. Borrowers have received conflicting information: Time and again, they have been told that payments are about to resume only to hear the pause has been extended at the last minute. Most are not political junkies and may not know that this time, payments must resume for real. Servicers have diminished capacity to explain all this to them.

 

Then there’s the Biden administration’s ill-fated loan-cancellation crusade. Even after losing his case at the Supreme Court, President Biden will try again to cancel loans using a different legal route. The process will take a while (potentially through the 2024 elections), but it will be subject to the same legal challenges and yield the same result. However, the false hope of future loan forgiveness may dissuade borrowers from making payments. Irresponsible activist groups are already encouraging them not to. Since the Department of Education won’t report delinquencies to credit bureaus for at least another year, borrowers who refuse to pay will face few immediate consequences.

 

Finally, this effort to use the Education Department to enact a controversial loan-cancellation plan without congressional assent has poisoned the relationship between the administration and lawmakers. Earlier this year, the White House requested a $620 million funding increase for student-aid administration to prepare for the return to repayment. Congressional Republicans — justifiably — feared that money would go toward administering loan-cancellation schemes rather than helping borrowers back into repayment. The funding increase did not pass, forcing cuts to the reimbursement of servicers and reductions in call-center hours.

 

Extra administrative funding for the transition back to repayment is probably necessary. If the extra money helps servicers collect more loan payments, it could even pay for itself. However, the clock is ticking. Congress and the administration should strike a deal to increase funding for student-aid administration in exchange for statutory language barring the department from canceling student loans without explicit legislative approval.

 

In the longer run, policy-makers should recognize that this mess is downstream of the federal government’s easy-money approach to student lending. Over the last several decades, the Department of Education disbursed trillions of dollars in loans with little consideration for borrowers’ ability to repay or whether the degrees that debt financed were a good investment. The result: millions of borrowers behind on their loans, and millions of others using safety-net programs that reduce payments but are complex to administer. The capacity of the department and servicers is strained because so many borrowers need help managing their loans.

 

Lawmakers should see this as an opportunity to fix the problems that got the federal student-loan program into its current state. Start by making colleges financially responsible for unpaid student loans, as a disincentive to loading students up with debt they can’t repay. In addition, Congress should cap or eliminate currently unlimited loans to graduate students and parents of undergraduates, which are most responsible for rises in total outstanding debt.

 

The transition back into repayment will be rocky, thanks in no small part to the Biden administration’s politicization of the student-loan program. But the mess should be the impetus Congress needs to fix federal student lending for good.