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Chaos Looms as $1.5T Student-Loan Pause Abruptly Ends

About 6.4 million borrowers, including some who left school during the pause, still lack a repayment plan.

(Bloomberg) -- Some 28 million US borrowers will soon need to start payments on federal student debt after a three-year pause. Loan servicers, consumer advocates and lawmakers are warning that the system is ill equipped to handle the deluge.

Some companies that administer the loans have slashed staff this year, even as they work to shore up computer systems and train workers before the deadline to resume payments in October for the first time since the early days of the Covid-19 pandemic. About 6.4 million borrowers, including some who left school during the pause, still lack a repayment plan, according to the Education Department.

Read More: Biden Administration to Forgive $39 Billion in Student Debt

The logistics are daunting. Many borrowers were assigned new loan servicers after some of the biggest companies, such as Navient Corp., quit the federal program. The Biden administration’s failed attempt to forgive some of the debt has left some folks confused about whether they need to pay at all. Then there’s bewilderment over income-driven repayment plans and the legions of scammers sure to be looking for easy marks amid the upheaval. It could be a mess.

Courtney Young, 28, will be working with the third federal loan servicer assigned to her in four years. She has about $54,000 in government loans for studying at Winston-Salem State University in North Carolina, and she’s been making payments on separate private loans. Young logged into her new federal servicer over the weekend about repayment and is unsure why it shows that she isn’t required to pay until April.

Read More: How Biden Lost the Fight for Student Loan Forgiveness: QuickTake

“This is one of the most confusing things I’ve been through,” said Young, who in 2019 began working at BMW Financial Services in Columbus, Ohio. She also works at J. Crew on the weekends to earn money to repay her loans and save to finish an MBA program. “I know I’m probably not the only one who’s logged in and said ‘Hey, what’s going on?’”

The Education Department is one of the largest financial institutions in the country, with $1.64 trillion in outstanding loans. More than 90% of borrowers saw their payments paused, worth about $1.5 trillion, according to Mark Kantrowitz, author of How to Appeal for More College Financial Aid. 

If the Education Department was a bank, it would rank fifth by size of assets in the US. It’s now in an unprecedented situation by any metric, including the sheer number of borrowers all beginning payments in the same month in October.

“It would be a mess regardless of when it’s restarted,” said Kantrowitz. “It’s been out of sight and out of the minds of borrowers for 42 months.”

Six Democratic senators, led by Elizabeth Warren, have also raised alarms, issuing a statement warning that the system is unprepared to deal with the situation.

“The restart of tens of millions of borrowers’ student loan payments marks an unprecedented event with a heightened risk of borrower harm,” the senators wrote in letters to servicers.

That said, the biggest risk to borrowers — assuming they can avoid outright scams — might be time wasted on the administrative hassle related to setting up their accounts and choosing a repayment plan. While interest will begin accruing Sept. 1, borrowers that don’t make full payments won’t see any demerits on their credit report for the first 12 months.

Loan servicers want to go full-speed ahead, but they’re concerned there isn’t enough time to communicate with borrowers. Servicers process payments and help struggling borrowers figure out repayment plans.

“The complication is really challenging,” said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group. Some borrowers will no doubt need “a lot of hand holding.”

The Education Department has already been directly in touch with 43 million borrowers — including those who loans weren’t paused — and will ramp up communications in the coming days to provide specific steps that borrowers should consider before the payment pause ends, according to a spokesperson.

In a deal reached in May to raise the national debt ceiling, lawmakers mandated the resumption of student loan payments but failed to allocate more funds for the transition, including extended call-center operations. The department also cut payments to servicers, which may lead to prolonged wait times for borrowers seeking answers from the Education Department or servicers.

Read More: Restart of Student Loan Payments Included in Debt-Ceiling Deal

Since the moratorium went into effect in March 2020, at least four companies have stopped servicing federal student loans while others scaled up. In addition to Navient, the Pennsylvania Higher Education Assistance Agency and Granite State Management & Resources left the program. Great Lakes Higher Education Corp. transferred the loans it had been administrating to Nelnet Inc., which recently fired 550 workers amid a slump in business. The Consumer Financial Protection Bureau has warned against deceptive and unfair practices by some servicers.

Joseph Matt, who works as a shift supervisor at a Starbucks, says he’s apprehensive about starting payments and confused about the process. He has about $22,000 in loans, serviced by Edfinancial, stemming from a 2021 fine arts degree at the University of Louisiana at Lafayette.

“It just seems very difficult to navigate and there’s not enough guidance,” Matt said. “You’d think for a government-officiated service it would be a lot more clear.”

--With assistance from Claire Ballentine.

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