What Will Biden Do on Loans?

The clock is ticking for the Biden administration to let borrowers know whether it plans to extend the pause on federal student loan payments, which is currently set to expire on Aug. 31. If the pause is not extended, 45 million borrowers will have to begin making payments on their federal student loans after a break of over two years.

The department has not yet communicated to borrowers or loan servicers whether it plans to extend the Aug. 31 deadline. However, if history repeats itself, recent actions by the department in communications with student loan servicers could hint at the possibility of an seventh extension to the pause that began in March 2020.

According to Scott Buchanan, executive director of the Student Loan Servicing Alliance, which works with loan servicers who oversee 95 percent of all federal student loans, in recent communications between servicers and the Education Department, which Buchanan said happened over the phone, some loan servicers have been told to hold off on sending billing statements to borrowers.

“We’ve been told to hold off communications to borrowers about that resumption,” said Buchanan. “That makes logical sense if you’re going to push it out, but if you decide not to do that, that means we lost months of communication to build up a successful return to repayment.”

Similar communications were made by the department to loan servicers in March; the previous payment pause was set to end in May. The length of time that loan servicers wait to send communications to borrowers about an upcoming payment varies. According to Buchanan, 45 days before the payment is due is standard for some servicers, a time frame that has already been passed for the Aug. 31 deadline, but some send out billing statements 30 days in advance.

Borrowers Left in the Dark

Without clear communication from the Biden administration on their future plans, borrowers are left in a precarious situation where they must prepare for payment to resume on Sept. 1, even though it is unclear if that will even happen.

After more than two years of not being required to make payments on their federal student loans, borrowers might not be aware that the pause is even lifting, and without the ability for loan servicers to warn borrowers of the upcoming deadline, borrowers might be surprised when repayment resumes and not be financially prepared to tackle new monthly expenses.

“The further repayment requirements are in the back of someone’s mind, the harder it is to pull it forward,” said Buchanan. “It is critically important that we be able to communicate with borrowers and set them up for success now. There’s real downsides to limiting communication here.”

Additionally, with the impending promise that the Biden administration will relieve at least some student debt, and reports that an announcement on mass debt cancellation could come by the end of the summer, many borrowers are confused on what to expect next, making it difficult to plan for the future.

“Communication is absolutely key, because the pause has gone on for so long, because so many deadlines have come and gone, because so much has happened with student loans during these last two years,” said Regan Fitzgerald, project manager for the Pew Charitable Trusts’ Student Borrower Success project. “Borrowers have gotten a lot of different messages, and they need clear and really actionable communication about when the pause is going to end and when they will have to repay their student loans.”

If repayment resumes at the end of August, the department will have to inform borrowers eventually. Under the law, the department is required to contact borrowers at least six times before they enter repayment at the end of the payment pause.

Research has shown that clear communication from loan servicers and the Education Department can help keep borrowers in good standing with their loan payments, especially for borrowers who are at the highest risk of default, such as borrowers who have defaulted in the past or who are paying their student loan bill for the first time, which will be many more borrowers than ever before considering the millions of borrowers who graduated during the pandemic-related pause.

Most borrowers—60 percent, according to the Federal Reserve Board of Governors—have not made a single payment since the pause began in March 2020, and research shows that most are not prepared financially to resume payments.

A survey of over 23,000 borrowers from the Student Debt Crisis Center in February found that when payments were set to resume in May, 93 percent of borrowers were not prepared, even though one in three borrowers said they had reduced spending on necessities, such as food, rent or health care, in order to prepare to begin paying back their debts in the near future.

Most borrowers are unsure about whether they will even need to resume payments after the pause ends. A survey conducted by the Pew Charitable Trusts in July 2021, when the student loan payment pause was set to expire at the end of Sept. 2021, found that 52 percent of borrowers were unsure if they had to start payments again at the end of the pause.

When repayment resumes, the department has announced that it will put all borrowers who defaulted on their loans prior to the pandemic back in good standing. The so-called “Fresh Start” program will give formerly defaulted borrowers an opportunity to get back into good standing with their student debt payments.

Colleges are worried about the high probability for default once repayment begins. If too many borrowers default on their loans in a certain frame of time, it can have negative consequences for colleges, because their eligibility for federal student aid is determined, in part, based on the ability of graduating students to repay their loans.

“There are a number of schools who are very concerned about onboarding this many borrowers, really, because one of the accountability metrics that is in place is how many students default on their loans within three years of [entering] repayment,” said Justin Draeger, president of the National Association of Student Financial Aid Administrators.

Both student debt advocates and loan servicers are hopeful that the department will give borrowers some leeway when they enter repayment. This could include not instituting punishments for borrowers who miss their first few payments while they get back up to speed on how to address their student debt.

A Lot Can Change in Two Years

If repayment begins again, many borrowers will have to address a new monthly bill among an entirely new set of expenses. According to experts, many borrowers might have experienced changes with their loans as well, including a change in their loan servicer, which might lead to confusion on whom to contact for help.

In October last year, three major student loan servicers announced that they will no longer service student loans, and 16 million federal student loan borrowers were transferred to a new provider. Borrowers were notified of any change in service, however, Buchanan said that there is a high probability of borrowers ignoring these communications due to the pause.

Additionally, given the financial tolls from the pandemic and the recent rise in inflation, many borrowers will be in a different financial situation than they were two years ago, before the pause began.

“Over the course of two years, people change jobs, they change where they live, their family budget changes, they’re putting kids into daycare that they didn’t even have when the payment pause began. This is the time that more communication is critical, even above and beyond what it should be when they’re in normal repayment,” said Buchanan.

To ensure that borrowers are prepared, student loan servicers and the Education Department have been communicating with borrowers about the ability to enroll in repayment plans, such as income-driven repayment, to help them manage their student loan payments once the pause ends.

Political Pressure Builds

The Biden administration is facing immense pressure from congressional Democrats, student debt advocates and some voters to make a move on student debt. No matter what the administration does in the end, it will likely have political consequences moving into the midterm elections in November.

At the end of June, a group of 180 organizations, including the NAACP, the Hispanic Federation and many labor organizations, wrote a letter urging the Biden administration to extend the pause on student loan payments.

Congressional Democrats have also pressured Biden to cancel at least some student debt—one of Biden’s central campaign promises that he has yet to act on. Biden has hinted that he plans to cancel at least $10,000 of debt per borrower for anyone with an annual income under $150,000.

Democratic lawmakers such as Senators Elizabeth Warren of Massachusetts, Chuck Schumer of New York and Raphael Warnock of Georgia want the administration to cancel at least $50,000 of debt per borrower. In June, a coalition of 55 Democratic lawmakers wrote a letter to Education Secretary Miguel Cardona requesting clarification from the department on how it plans to execute any plan for mass debt relief.

At the same time, Republican lawmakers have increasingly tried to throw a wrench in the department’s plans to cancel student debt by asserting that the Biden administration cannot use executive authority to enact widespread debt cancellation. They also claim that debt cancellation would have negative impacts on inflation, which recent reports say the Biden administration is carefully considering as it pieces together a possible debt relief plan; this could be the cause of the delayed announcement.

Debt relief is popular among voters. A May survey showed that one in five voters support broad-based cancellation, and among young voters, support is even stronger, with 71 percent of voters under 34 supporting some form of loan cancellation, including 56 percent of young Republican voters.