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A group of protestors hold signs demanding student loan relief
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In the late 1980s, Patricia Gary borrowed $6,600 worth of federal student loans to pay her way through beauty school, a move she thought necessary as computers began to replace typewriters and her job skills didn't translate.

Over 30 years later, Gary has paid over $22,000 toward the loans, which she defaulted on in the 1990s. She still owes about $4,000.

"It's a debt that seems never to go away," says Gary, now 73.

Gary, who was born in Guyana in South America but has lived much of her life in the Bronx, New York, says being in default has affected all aspects of her life. She's had to decide whether to to buy medication, and how much food she can afford, since the government has taken some of her Social Security payments through collections.

Unfortunately, she isn't alone: Millions of borrowers are in default on their student loans, meaning they didn't make payments on their loans for at least 9 months. Defaulting can have long-lasting consequences, including hurting borrowers' credit scores and depleting other sources of income through government collections. Yet during the pandemic, borrowers in default had a unique opportunity to escape their predicament. The problem? They didn't know about.

A little-known provision in the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act passed in March 2020 could have helped many borrowers exit default completely. But the latest data from the Department of Education shows that of 7.7 million borrowers with federally held loans who were in default when the pandemic started, more than 92% are still in default. In addition to borrowers being unaware of the opportunity, advocates says the process is onerous for people already in extremely precarious financial situations.

"This one-by-one approach of putting it all on borrowers who are in difficult financial circumstances to figure it out themselves has demonstrably not worked," says Abby Shafroth, a staff attorney at the National Consumer Law Center.

Default has 'grave consequences'

Lindsey defaulted on her student loans in 2014 after her father's death spurred an onset of depression and drinking. (Money is only identifying Lindsey by her first name at her request, as she doesn't want her employer to know the details of her default and personal finances.) She requested forbearance, which allows a borrower to suspend payments for a set period of time, when she lost her job. But by the time she got sober, she didn't even know who held her loans or where they were — let alone how to pay them off.

"I had no idea what was going on and I wasn't in a place where I could track them down," Lindsey says. She was ashamed, too, and afraid of what she'd find out about how much she owed.

Now in her mid-thirties and working a government job, Lindsey has been out of default since 2018 after setting up a payment plan. But the consequences of her default still follow her: The background check for her current job took more than a year, and she had to provide documentation that she was making her payments on time. She still owes nearly $75,000.

"At this point, I feel like forgiveness is my only shot at getting out from under this," she says.

The consequences of default are pretty draconian for borrowers, says Persis Yu, policy director and managing counsel at the Student Borrower Protection Center. Without ever going to court, the government can seizes wages, Social Security benefits, and tax refunds and credits. And it can do this forever; there is no statute of limitations on collections during the borrower's lifetime. Getting out of default can be the difference between someone being able to pay rent or buy diapers for their kids and not being able to do any of that, Shafroth says.

"Default has really grave consequences for borrowers and their families," she adds. "It's a really severe thing to happen."

How borrowers enter default

Borrowers enter default when they miss at least 270 days of payments on their student loans. Around day 330 to 360 of missing a payment, your loan goes into collections, says Betsy Mayotte, president and founder of The Institute of Student Loan Advisors. That's when all the consequences kick in, like having your default reported to credit bureaus and having your tax refunds seized, she adds.

There are two options the federal government offers borrowers to exit default and resume paying off their loans in good standing: loan consolidation, which allows borrowers to quickly merge different loans into a single debt with lower monthly payments and a longer loan term, and loan rehabilitation, a longer process in which the borrower enters into an agreement to make nine on-time payments within a 10-month period, with the payment amounts based on the borrower's circumstances. There are eligibility requirements borrowers need to meet to do either of these, and there is also a limit in the amount of times you can do each. Rehabilitation, for example, is only available once.

The CARES Act paused general payments toward student loans and suspended interest and collections. But — and this is the little-known provision many borrowers didn't know about — it also said that defaulted borrowers on most federal student loans could count their "monthly payments" of $0 toward rehabilitation. (Previously, there was a minimum payment of $5.)

"An opportunity like this has never been available to borrowers in default," Ben Kaufman, head of investigations and senior policy advisor at the Student Borrower Protection Center, wrote in a blog post last year. Once a borrower rehabilitates their loans, the default can be removed from their credit report and they once again have access to income-driven repayment plans, which are intended to help keep borrowers from falling behind on their loans.

Since the suspension has now gone on for nearly two years — significantly longer than nine months — any borrower who wanted and was eligible could have raised their hand and essentially gotten their loans rehabilitated without having paid anything, Yu says.

But that just didn't happen.

What advocates say went wrong

The Education Department's approach to the suspension relied on borrowers to individually apply for rehabilitation. Experts say the process would not only require a ton of paperwork, but also for borrowers to find out about the program and understand the benefit.

"The failure to get borrowers into these programs that are designed to benefit them is really emblematic of many of the problems that we see in the student loan system," Yu says. Borrowers often don't access rights that are available to them because they don't know those rights exist.

A recent report from the Government Accountability Office said that many defaulted borrowers did not respond to early outreach attempts from their loan servicer regarding the payment suspension, but also that the servicer managing borrowers’ defaulted loans initially didn't have valid email addresses for about half of defaulted borrowers.

Even when messages do get through, they need to be crafted in such a way for borrowers to understand that this isn't just more debt collection, but something that could really help them, Shafroth says.

What advocates are asking for

Advocates are pushing for automation, so that borrowers — who may also be bogged down trying to navigate other government programs, like unemployment benefits or the Supplemental Nutrition Assistance Program (SNAP) — can avoid the many roadblocks mentioned above. The Education Department has all the information it needs to identify the borrowers eligible for rehabilitation, as well as to work with borrowers to make sure they get into a payment plan they can afford going forward, Shafroth says.

Mayotte is more in a favor of an opt-in or opt-out solution, as not all borrowers' situations are the same. For example, a borrower who has had their loans in default since the 1970s may be better off staying where they are if their income is so low it's not being collecting on anyways, she says.

"It has to be done very thoughtfully, and it can't be done under the assumption that it's a good thing for everybody," Mayotte adds.

In April 2021, Sens. Elizabeth Warren, D-Ma., and Raphael Warnock, D-Ga., led a group of lawmakers in asking the Biden administration to automatically remove from default all the borrowers who have federally held student loans.

Then late last year, Politico reported that officials at the Education Department were weighing a plan to automatically pull more than 7 million borrowers out of default on their federal student loans when the government resumes monthly payments — an effort Politico said was internally being referred to as “Operation Fresh Start."

But while the Department of Education's website says collections on certain government payments, like refunds from the 2022 tax season, will stay paused for six months after the COVID-19 payment pause ends in May, there has been no official word on automatically pulling borrowers out of default.

"The Biden-Harris Administration is committed to improving outcomes for all student loan borrowers, including those in default," a department spokesperson told Money via email. "It is critical that borrowers in default get the support they need to transition out of the COVID-19 payment, interest, and collections pause."

The spokesperson also said the department continues to evaluate policies that will help borrowers in default make this transition and resolve their debts in the long term, and noted that in the short term it has has expanded the student loan payment pause to include borrowers with defaulted Federal Family Education Loan Program (FFEL) loans.

One thing the Education Department could do to help is allow the nine-month pause to be retroactive, Mayotte says. That way, borrowers could opt in now and still benefit from the pause, even though the suspension ends sooner than nine months from now.

Gary's attorney, Johnson Tyler of Brooklyn Legal Servicrees, agrees a retroactive application of the CARES Act could help borrowers in similar situations to Gary, who says she feels as though she cannot escape the consequences of falling behind on her student loans.

"I feel as though I never recovered from that debt."

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