The federal student loan payment pause has been in effect for more than three years, but will soon come to an end as the U.S. Supreme Court ruled against the enactment of the Biden administration’s loan forgiveness plan in a 6-3 verdict delivered June 30. When payments resume, you can expect plenty of complications — and delinquencies.
The complication part has to do with how many borrowers will resume payments with a new student loan servicer, according to a new report from the Consumer Finance Protection Bureau (CFPB).
The CFPB analyzed the credit histories of a sampling of consumers expected to return to repayment by the end of the summer. The payment pause is set to expire 60 days after June 30.
One thing the analysis found is that more four-in-10 borrowers in the CFPB’s sample will return to repayment with a new student loan servicer. Several large servicers exited their contracts with the U.S. Department of Education over the last three years, resulting in large numbers of loan transfers.
“This change could complicate the transition to repayment for the 44% (or more than 14 million) of borrowers in our sample who will have to work with at least one new servicer after more than three years of suspended payments,” the CFPB report read.
As of early June, over 17 million accounts for federal student loans have been transferred. More transfers are expected in the coming months, either to different servicers or different servicing technology platforms. The CFPB estimated that the number of transfers will eventually total more than 30 million accounts.
“For some borrowers, this process may be smooth with few changes,” the report indicated. “But other borrowers may need to create new logins with their new servicer, re-enroll in autopay, or update their payment information.”
Lack of Federal Funding Could Be an Issue
Part of the problem can be traced to a lack of congressional funding for the office of Federal Student Aid (FSA), Business Insider reported. The budget approved by Congress late last year didn’t allocate any increased funds for the agency — something the Education Department said could limit the resources and programs it can effectively carry out.
President Joe Biden’s latest budget requested $2.7 billion for the FSA office, which represents a $620 million increase from the prior fiscal year.
In an April 2023 press release, the Education Department said the additional money would allow the FSA office to “continue to operate the student aid programs, implement critical improvements to student loan servicing, continue to modernize its digital infrastructure, and ensure successful administration of the financial aid programs through a simplified and streamlined application process for students and borrowers.”
Another potential problem as the payment pause ends is that many borrowers are not financially ready to return to monthly student loan payments. Among the CFPB findings:
- More than one in 13 student loan borrowers are currently behind on their other payment obligations. These delinquencies are higher than they were before the pandemic, despite a small seasonal decrease in the most recent data.
- About one-in-five student loan borrowers have risk factors that suggest they could struggle when scheduled payments resume.
- Median scheduled payments on other debt obligations have increased by 24% percent for student loan borrowers likely returning to repayment. In percentage terms, these increases are especially large for younger borrowers, who have seen their obligations more than triple to $229 from $65.
As of March 2023, about 2.5 million student loan borrowers had a delinquency on a non-student loan, the CFPB found. That represents an increase of around 200,000 borrowers since September 2022. Delinquencies on non-student loans rose across all borrower groups, with “particularly large increases” for borrowers ages 30 to 49, borrowers who live in higher-income areas, and borrowers with student loan balances above $35,000.
“Student loan borrowers who are already having difficulty with their other payment obligations are especially likely to struggle with their student loan payments if they don’t get some sort of payment relief like enrolling in an IDR (Income-Driven Repayment) plan.”
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This story has been updated with additional information.