Student loan repayments start again next year. It could go very badly.
In February, the education ministry plans to activate the country’s student debt collection mechanism for the first time in nearly two years. There is a real danger that things will not go well.
Many student debtors have been rocked by unemployment, dislocation and trauma during the pandemic. Even before the crisis, over a million people default on their student debt each year. Bad debt can be a disaster, ruining credit and darkening the financial future. And recent history suggests that the reboot in student loans could trigger a default crisis of unprecedented proportions.
In 2017, student borrowers living in areas affected by forest fires and hurricanes automatically qualified for “forbearance,” which is student loan parlance for “you don’t have to make monthly payments”.
The abstention periods ended the following year. Federal officials overseeing the loan program quickly began to notice a disturbing trend.
The loan system is like Dante’s Hell. If you miss a payment, you fall into a kind of vacuum called “delinquency,” where you can stay for up to nine months. If you keep missing payments, you fall to another level in hell: Default, where your wages, tax refunds, and even Social Security checks can be seized.
When forborne borrowers had to start making payments again in 2018, the number of defaults began to increase. This lasted for nine months and was immediately followed by an increase in the number of defaults. Some people may have lost touch with the loan system and were unaware that they owed money again. Either 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 faults will reproduce on a much larger scale. This time, the disaster area is the whole country. The task is gigantic and unprecedented: to help over 40 million people start paying off their loans in one go. Some of the people hardest hit by the pandemic will be the most vulnerable when a dormant student loan machine comes back to life.
How people who owe student loans could fall through the cracks
A small group of for-profit and non-profit organizations called “maintenance workers”Handles the day-to-day work of the loan system: contacting borrowers after they leave college, setting up repayment plans and answering phone calls. Services like Nelnet and Great Lakes are typically paid $ 2.85 per month for each borrower who repays they manage and is up to date on their loan, and less for those who default.
Most of the decisions the department and service agents face when restarting payments boil down to choosing between different types of issues. For example, many borrowers repay their loans by setting up automatic payments from their bank accounts. Should those payments just restart after almost two years and risk triggering overdraft fees or delinquent account withdrawals? Or should they require borrowers to take action to pay, and risk inadvertently falling behind because they thought their previous arrangement would simply resume? For now, the ministry has chosen the latter.
But the biggest challenge may be whether the government and agents can find borrowers before their loans are due, and whether agents will have the capacity to help them if they have difficulty making their payments.
Millions of people have moved to find new jobs after the shock of the unemployment pandemic 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 passes, the more email addresses and phone numbers change, and the harder it is for providers to reach borrowers.
There are also millions of people in the system who have never made a loan repayment before. On 70 percent of 18-29 year olds borrowed for their baccalaureate; the class of 2020 passed the (virtual, in most cases) stage of graduation a year and a half ago. They may have given loan services college email addresses that have since been disabled. Unstable housing, unemployment, and hardship with student loans can crumble on people at the same time. Those who need a high-quality loan service the most may also be the hardest to reach.
The officers responsible for locating them may not have the staff to do so. Call center jobs require background checks and training on the intricacies of different loan plans. Normally, duty officers vary their workforce in response to demand, hiring more workers at the end of the calendar year, when those who graduated from college in May typically start repaying their loans. February 2022 will be the most abnormal period in student loan history, with service agents hiring in a labor market stifled by signs of “help wanted”. If even a fraction of borrowers call at once, the system will be overwhelmed.
It would be tough enough if the maintenance industry was stable. But since the start of the pandemic, four servers that collectively manage 15 million accounts have announced their intention to leave the company. Most had been criticized for their poor performance. In April, after a server CEO testified at a congressional hearing, Senator Elizabeth Warren told him to his face that he should be fired, then grilled another CEO over several lawsuits against his company. The two agents thereafter decided to withdraw from the federal system, and the accounts they managed are being migrated to other departments, creating additional logistical work and confusion for borrowers and increasing the workload of departments still present in the system.
In October, the Biden administration added another complication, expanding eligibility for those in difficulty Public service loan forgiveness program. It was the right decision to help teachers, nurses and others who deserve forgiveness. But that adds even more complexity and strain to a challenged maintenance system, especially since the maintenance worker responsible for managing the forgiveness program is one of those who will be leaving the system.
Federal officials understand the magnitude of the problem. Department of Education Director of Operations Richard Cordray told Congress in a recent hearing, restarting the loan system is a “major, major challenge”. But as the Obama administration learned to its regret during the failed launch of Healthcare.gov, knowing in advance that it would be terrible to botch the deployment of a vital government service in a very short period of time. is no guarantee of success. A recent Government Accountability Office report found that the ministry’s student loans office has about 700 fewer staff than it takes to run a program that has grown significantly in size and complexity over the past 10 years.
The government could give repairers more money to hire and train a wave of employees to hunt down borrowers and deal with the inevitable increase in the need for counseling. This already makes it easier to enroll in income-based repayment plans, temporarily accepting an oral statement of income rather than standard documentation requirements like tax forms and W-2s.
The Education Department is also considering creating a single grace period in early 2022 that would give borrowers more leeway to start repaying their loans. But that only delays the crisis for people in serious financial difficulty. The ministry could make a more permanent dent in the problem by automatically putting the people who were at fault before the pandemic back into good standing and enrolling them in affordable income-based repayment plans.
The department faces a countdown. The administration has repeatedly stated that there will be no more repayment delays, and President Biden seems unlikely to implement the kind of broad, one-sided loan cancellation some advocates have called for. There is no doubt that the federal officials responsible for handling the restart have the best of intentions. But without immediate and aggressive action, it can still lead them, along with millions of former students, down the road to defaulting hell.
Kevin Carey writes on education and other issues. He is vice president of New America, a Washington, DC think tank.