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The Office of Federal Student Aid faces a “colossal undertaking” as it prepares to resume student loan payments after an unprecedented three-year pause, and funding constraints could hamper that effort, student loan experts say.
Experts and advocates are worried that the agency, without adequate funding, won’t be able to provide the necessary support to ensure that millions of borrowers don’t end up in default once payments resume. Congress didn’t give the agency more money this year, leading to department budget cuts that have student loan servicers cutting call center hours and laying off staff. Those reductions come at a time when experts say more staff are needed.
“Without sufficient resources, we know that the students and the borrowers who struggle most bear the brunt of the trade-offs that have to be made,” said Sarah Sattelmeyer, project director for education, opportunity and mobility in the higher education initiative at New America, a think tank.
Sattelmeyer was one of several experts who spoke on a Pew Charitable Trust panel last week about default and how to fix the student loan system.
In addition to restarting student loan payments, Federal Student Aid is overhauling the federal student aid system at Congress’s direction, modernizing student loan servicing and revamping a number of debt-relief programs, among other projects.
Further complicating plans is a potential Supreme Court decision this summer that could allow the Biden administration to forgive up to $20,000 in student loans for eligible Americans, cutting the student loan portfolio in half. The administration has said that the debt-cancellation plan would help prevent high rates of default and delinquency when payments resume. Restarting payments without canceling student loans first would be “catastrophic,” advocates for cancellation say.
“The department is facing a number of really important initiatives and is very financially constrained,” Brian Denten, an officer for Pew’s student borrower success project, said during the panel discussion. “I think it’s important to recognize how much the department is doing with so little … It’s important to get the department the resources it needs to be able to cross the finish line on all these things and make sure they’re available to borrowers as quickly as possible for the resumption of repayment as they can feasibly do it.”
The pause is set to end 60 days after litigation challenging the student loan forgiveness plan is resolved or after June 1, whichever comes first.
Turning the massive $1.6 trillion student loan system back on was never going to be easy, said Persis Yu, deputy executive director of the Student Borrower Protection Center. But, with the flat funding for the Office of Federal Student Aid, now it’s “a train wreck waiting to happen.”
“This is an incredibly monumental event that FSA is not prepared for and that those servicers are not prepared for and don’t have the resources to do,” Yu said.
She expects to see more errors from servicers and longer wait times for borrowers trying to get ahold of their loan servicer.
“This always falls on the most vulnerable borrowers,” she said. “The folks who need help the most are not going to be able to reach a call center staff person to help them walk through the various different options.”
Yu said if the administration can’t ensure that borrowers’ rights will be protected when payments resume, it shouldn’t end the pause.
“It’s irrational to turn on a system that’s clearly broken and that you haven’t been able to fix,” she said.
Politico and The Washington Post have reported in recent weeks that the administration is considering a grace period to allow borrowers to start payments next year, in addition to other ways to ease the transition. The Education Department has told congressional staff that it expects to shift money around to support student loan servicing, according to news reports.
Congress’s decision to keep the Office of Federal Student Aid’s funding flat at about $2 billion for this fiscal year “poses significant risks” for a smooth return to repayment, according to department budget documents. The Biden administration wants an additional $620 million for the coming fiscal year for Federal Student Aid. The agency did not receive additional funding in the current budget, in part because of Republicans’ objections to Biden’s student loan forgiveness plan.
“The department remains focused on doing everything in its power to better serve students and borrowers, and we are fully committed to supporting student loan borrowers as they successfully navigate returning to repayment,” a department spokesperson said in a statement. “The department is deeply concerned about the lack of adequate annual funding made available to Federal Student Aid this year. As the department has repeatedly made clear, restarting repayment requires significant resources to avoid unnecessary harm to borrowers, such as cuts to servicing.
The spokesman noted that restarting payments is an “an unprecedented and herculean task” and that the department has several efforts underway to accomplish that task. That includes the one-time debt-relief plan, offering borrowers in default a way out, a new income-driven repayment program and discharging the loans of borrowers who qualify through public service, disability or college wrongdoing. The department also is working to proactively engage borrowers at high risk of delinquency.
Federal Student Aid changed its contracts with servicers last month to reduce payments per borrower—a move that led the companies to reduce call center hours and lay off staff. Nelnet, a publicly traded servicer, said it is laying off 550 employees. Earlier this year, the company laid off more than 500 employees.
Scott Buchanan, executive director of the Student Loan Servicing Alliance, said that other servicers have made similar staffing reductions.
“We’re like any other business—you pay for the service levels you get, and the government has announced that they’re cutting payments to servicers going into resumption,” he said. “The amount of compensation we have is being cut, and that means less people on the phones. We have to let people go because we’re getting paid less, so there’s no money to pay for those people. Consequently, hold times will probably be increased.”
The latest contract changes add to a chaotic three years for servicers and borrowers, during which the federal government has repeatedly said payments would resume, only to reverse its position. The Biden administration also made several changes to fix the student loan system, including the one-time debt-relief plan that’s pending before the Supreme Court. Additionally, several servicers have left the federal student loan system, and the department has moved borrowers’ accounts to different loan companies.
The administration also wants to roll out a more generous income-driven repayment plan that should make payments more affordable and help borrowers avoid default.
Denten said it would help if the plan was finalized before repayment begins rather than trying to train servicer staff and inform borrowers after the fact.
“We know those early months are really crucial for eventually preventing borrowers from defaulting,” he said. It’s important to be “very strategic about how we’re rolling out this plan to borrowers and servicers to make sure that borrowers are able to connect with it in a way that makes sense for them.”
Buchanan emphasized that resuming payments after a three-year pause has never been done before. When payments finally resume, he said, the process should be relatively smooth for borrowers who were making payments before the pause and who know who their servicer is.
Other groups of borrowers will need more assistance, which will be more difficult to access given the staff layoffs.
“There’s probably seven to eight million people who have graduated or separated from school during the pandemic itself,” he said. “They’ve never been in a repayment status, so they don’t really know that process. Those people are going to need a lot more hand-holding.”
Those individuals also might not even know who their servicer is, complicating the process.
He said that the servicers need more certainty about whether payments will restart and when in order to prepare. They need to hire and train staff and reach out to borrowers sooner rather than later.
“The individuals have to be trained for many weeks, and it was not an easy training,” he said. “It’s challenging to staff around last-minute decisions.”
Buchanan said the department is planning to give the servicers flexibility in terms of processing income-driven repayment applications and move some borrowers into forbearance.
“We’re going to have a large group of borrowers who, when payments resume in September, will ignore that communication,” he said.
More funding also would help the servicers prepare for repayment.
“We’re going to have millions of phone calls,” he said. “We’ve got to have enough people on the phones and in processing centers to handle that. An appropriate level of funding is something that we have been arguing for some time. Regrettably, we’re going in the other direction.”
Buchanan added that servicers want to start reaching out to borrowers now about restarting payments and getting on an income-driven repayment plan to prevent a bottleneck at the call centers in the fall.
“We’d like to be doing that work today rather than waiting until much closer in, and I think that’s been a frustration, as the department has told us we’re not allowed to communicate about resumption until they tell us so,” he said.
Institutions Can Help
Justin Draeger, president of the National Association of Student Financial Aid Administrators, said colleges and universities can play a big role in helping borrowers during the restart.
The association recently released a tool kit highlighting how institutions can prepare for the resumption of student loan payments. That includes understanding the role of servicers and communicating with students.
Draeger said this effort isn’t just a financial aid responsibility but one that should involve communications, outreach, alumni, career services and other departments.
“The reason for that is after a lot of starts and stops, not to mention confusion about debt forgiveness, servicers that borrowers have never heard of or recognize—it’s going to be very perplexing in terms of onboarding for borrowers,” he said. “The one source of trusted information for borrowers may very well be from the institution.”
Assisting borrowers also could help institutions avoid a large spike in their cohort-default rates, a federal accountability tool that measures the percentage of borrowers at an institution who have defaulted over a three-year period and that can lead to institutions losing access to federal financial aid.
The cohort is based on when students enter repayment, so the pause means that several years’ worth of students will likely be lumped into one cohort, he said.
“From a default-management standpoint, that is going to be a lot for an institution to manage,” Draeger said. “Schools will want to be thinking now about how you take three years’ worth of borrowers and try to manage that in some sort of default-management plan in basically one year.”
What would help institutions, he said, is establishing stronger connections between the department and colleges and universities so that institutions are notified when borrowers are notified.
“It would be colossal even if FSA was fully funded, and I think their funding concerns are real and legitimate,” Draeger said. “The good news is that schools want to be good partners in this, and that’s really what this tool kit is meant to do is provide a comprehensive way for schools to get involved.”