Student Loan Repayment: 3 New Ways the Government Is Looking To Protect Struggling Borrowers
Written by
Yaël Bizouati-Kennedy
Edited by
Daria Uhlig
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Student loan payments resumed on Oct. 1 after a three-year hiatus and are impacting many Americans’ wallets. With the average monthly student loan payment at $503, according to the Education Data Initiative, a staggering 37% of federal student loan borrowers said they have not saved money in anticipation of resuming their payments, a Credit Karma survey found.
And now, Sen. Elizabeth Warren (D-Mass.), along with three other senators, are urging the Department of Education to protect borrowers.
In a Dec. 1 letter to Education Secretary Miguel Cardona, the senators raised concerns about the way the resumption is unfolding and the detrimental consequences it could have on millions of borrowers.
“The chaotic resumption of federal student loan payments has raised questions about the extent of errors and the measures being taken by the Department to address these concerns and provide assistance to affected borrowers,” the senators wrote. They requested that the department provide specific information regarding those errors and measure before Dec. 15.
“Sen. Warren’s letter to the Department of Education provides valuable questions. Information regarding student loans has been nothing short of confusing for many borrowers,” said Bri Conn, investment advisor representative, Childfree Wealth, and co-host of the “Childfree Wealth” podcast. “I’ve heard from multiple people that getting help from their student loan services has been a long and frustrating process. While we still have a long road to go when it comes to student loans, Sen. Warren’s letter is a step in the right direction.”
Protect Borrowers’ Credit Scores
First, the senators said that they are concerned that the department’s credit reporting processes may expose borrowers’ credit scores to unanticipated consequences.
A slew of measures the Biden administration announced hours after the Supreme Court’s June 30 rebuke of the program included a 12-month “on-ramp” to repayment.
This will run from Oct. 1, 2023 to Sept. 30, 2024, “so that financially vulnerable borrowers who miss monthly payments during this period are not considered delinquent, reported to credit bureaus, placed in default, or referred to debt collection agencies,” according an Education Department fact sheet.
Yet, as the senators noted, the Federal Student Aid website says that while it won’t report borrowers as delinquent, it does “not control how credit scoring companies factor in missed or delayed payments.”
The senators argued that borrowers may interpret this “on-ramp” protection to mean that their credit scores will not be impacted by missed payments during this period.
“ED could align its practices with borrowers’ expectations by simply not reporting information about delinquent loans to credit bureaus during the on-ramp period and allow[ing] consumer reporting agencies to treat any missed payments as if they were regular scheduled payments made by borrowers (as was the case during the COVID-19 payment pause),” they wrote.
Simplify Forbearance Policy
The senators noted that during this on-ramp period, the department is automatically placing loans with missed payments in forbearance 90 days after the missed payment.
Yet, they argued in the letter that this retroactive approach could increase the risk of error as retroactivity can be confusing for borrowers, difficult to administer and prone to errors.
“ED should explore whether placing accounts in forbearance on the 30th or 60th day after a missed payment — rather than the 90th day — could still accomplish its goals while minimizing the risk of administrative errors or adverse impacts on credit scores,” they wrote.
Address Errors Made by Loan Servicers
They also noted that student loan servicers are a key source of other possible errors that could impact borrowers during return to repayment.
These potential errors include charging borrowers more than they actually owe, improper claims of delinquency, improper handling of paperwork, incorrectly tracking a borrower’s payment history and mistakenly communicating when debts were forgiven, they wrote.
Indeed, the Consumer Financial Protection Bureau said in an October report based on student loan consumer complaints that failures on the part of industry participants are excluding some borrowers from protections and benefits intended for them under law.
In turn, this resulted in a whopping 400,000 borrowers discovering their monthly student loan payments had been miscalculated, often for higher amounts than they owed, as payments resumed, according to the senators.
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