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Restarting student loan payments could be a chaotic disaster

The fallout will hit the borrowers who can least afford it.

Protesters standing outdoors near the White House hold signs that read, “Cancel student debt,” and, “President Biden, don’t resume student loan payments.”
Activists and artists call on President Biden not to resume student loan payments and to cancel student debt on December 15, 2021. The White House is determined to resume payments in February, but there’s still time to improve the process for borrowers.
Paul Morigi/Getty Images for We, The 45 Million

In February, the Department of Education plans to turn on the nation’s student debt collection machinery for the first time in nearly two years. There’s a real danger it will not go well.

Many student debtors were rocked by unemployment, dislocation, and trauma during the pandemic. Even before the crisis, more than 1 million people defaulted on student debt every year. Bad loans can be a catastrophe, ruining credit and clouding financial futures. And recent history suggests the student loan restart could trigger a default crisis of unprecedented proportions.

In 2017, student borrowers living in areas affected by wildfires and hurricanes were automatically qualified for “forbearance,” which is student-loan jargon for “you don’t have to make monthly payments.”

The forbearance periods ended the following year. Federal officials who monitor the loan program soon began to notice a troubling pattern.

The loan system is like Dante’s Inferno. If you miss a payment, you descend into a kind of limbo called “delinquency,” where you can stay for up to nine months. If you continue to miss payments, you fall down another level into hell: default, where your wages, tax refunds, and even Social Security checks can be garnished.

When the borrowers in forbearance were required to start making payments again in 2018, the number of delinquencies began to rise. This continued for nine months and was immediately followed by an increase in the number of defaults. Some people may have fallen out of contact with the loan system and didn’t know they owed money again. Or they remained unemployed and couldn’t afford it, or they had lost the habit of making monthly payments.

The risk is that these fire-and-rain defaults will happen again on a much larger scale. This time, the disaster area is the entire country. The task is gargantuan and unprecedented: helping over 40 million people start repaying their loans all at once. Some of the people hardest hit by the pandemic will be the most vulnerable to a dormant student loan machine returning to life.

How people who owe student loans could fall between the cracks

A small group of for-profit and nonprofit organizations called “servicers” manages the day-to-day work of the loan system: contacting borrowers once they leave college, setting up repayment plans, and answering phone calls. Servicers like Nelnet and Great Lakes are typically paid $2.85 per month for every repaying borrower they manage who is current on their loan, and less for those in delinquency.

Many of the decisions the department and servicers face as payments restart boil down to choosing between different kinds of problems. For example, many borrowers repay their loans by setting up automatic payments from their bank accounts. Should these payments simply restart after nearly two years and risk triggering overdraft charges or withdrawing from defunct accounts? Or should they require borrowers to take action to pay, and risk people falling behind inadvertently because they assumed their prior arrangement would simply resume? For now, the department has chosen the latter.

But the biggest challenge may be whether the government and servicers can find borrowers before their loans are due, and whether the servicers will have the capacity to help them if they run into trouble making payments.

Millions of people moved to find new jobs after pandemic unemployment shock or to be closer to family members who could care for children whose schools had closed. The federal eviction ban expired in August, displacing households that are also financially vulnerable to default. The more time goes by, the more email addresses and phone numbers change, and the harder it is for servicers to reach borrowers.

There are also millions of people in the system who have never made a loan payment before. About 70 percent of 18- to 29-year-olds borrowed for their bachelor’s degree; the class of 2020 walked across the (virtual, in most cases) graduation stage a year and a half ago. They may have given loan servicers university email addresses that have since been deactivated. Housing instability, unemployment, and student loan struggles can collapse on people all at once. Those most in need of high-quality loan servicing may also be those who are hardest to reach.

The servicers charged with tracking them down, meanwhile, may not have the staffing to do so. Call center jobs require background checks and training on the intricacies of different loan plans. In normal times, servicers vary their staffing levels in response to demand, bringing on more workers at the end of the calendar year, when people who graduate from college in May typically start loan payments. February 2022 will be the most abnormal time in the history of student loans, and servicers will be hiring in a labor market choked with “help wanted” signs. If even a fraction of borrowers calls at once, the system will be overwhelmed.

This would be difficult enough if the servicing industry were stable. But since the beginning of the pandemic, four servicers that collectively manage 15 million accounts have announced plans to quit the business. Most had been criticized for poor performance. In April, after one servicer’s CEO testified at a congressional hearing, Sen. Elizabeth Warren told him to his face that he should be fired, then grilled another CEO about multiple lawsuits against his firm. Both servicers subsequently decided to drop out of the federal system, and the accounts they handled are being migrated to other servicers — creating additional logistical work and confusion for borrowers and increasing the workload for servicers still in the system.

In October, the Biden administration added another complication, expanding eligibility for the troubled Public Service Loan Forgiveness program. It was the right move to help teachers, nurses, and others who deserve forgiveness. But it also adds even more complexity and strain to a servicing system that faces a challenge — especially since the servicer charged with handling the forgiveness program is among those that will be leaving the system.

Federal officials understand the scope of the problem. The Department of Education’s chief operating officer, Richard Cordray, told Congress at a recent hearing that restarting the loan system is a “major, major challenge.” But as the Obama administration learned to its regret during the failed debut of Healthcare.gov, knowing in advance that it would be terrible to botch the rollout of a vital government service on a hard deadline is no guarantee of success. A recent Government Accountability Office report found that the department’s student loan office has approximately 700 fewer workers than it needs to manage a program that has greatly increased in size and complexity over the last 10 years.

The government could give servicers more money to hire and train a surge of employees to track down borrowers and handle the inevitable spike in the need for guidance. It is already making it easier to enroll in income-based repayment plans, temporarily accepting a verbal declaration of income rather than the standard requirements for documentation like tax forms and W-2s.

The Department of Education is also considering creating a one-time grace period in early 2022 that would give borrowers more leeway to begin repaying their loans. But this only delays the crisis for people in deep financial trouble. The department could make a more permanent dent in the problem by automatically putting people who were in default before the pandemic back in good standing and enrolling them in affordable income-based repayment plans.

The department faces a ticking clock. The administration has repeatedly said there will be no more repayment delays, and President Biden seems unlikely to implement the kind of broad, unilateral loan forgiveness that some advocates have called for. There’s no doubt that federal officials charged with managing the restart have the best of intentions. But without immediate and aggressive action, that may still lead them, along with millions of former students, down the road to the hell of default.

Kevin Carey writes about education and other issues. He is a vice president at New America, a think tank in Washington, DC.