Student Loan Borrowers Could Be Thrown Into 'Chaos' If Payment Requirements Resume in October

Update: The Education Department announced Friday that it would extend the pause on payments, waive student loan interest and suspend collections until Jan. 31, 2022.

Tens of millions of borrowers are supposed to resume paying their student loans in less than two months. But communication from the government and its loan servicers has been spotty, and advocates worry that many borrowers don't even know that the pandemic relief is coming to an end.

Despite the looming Oct. 1 resumption, there’s little concrete information available to borrowers about what to expect.

"A lot of borrowers are facing a cliff that they don't even know about," says Kyra Taylor, an attorney with the National Consumer Law Center. "(It's) setting us up for chaos."

Loan servicers, in turn, say they’ve received limited information from the Department of Education about what steps they need to follow to turn payments back on.

Most federal student loan borrowers have been in an interest-free payment pause since March of 2020. If payments and interest are resuming on Oct. 1, servicers ideally would have already started contacting borrowers, experts say, warning them that payments are coming back and giving them the opportunity to select a new repayment plan.

But the companies can’t begin that communication until they have more guidance from the department, says Scott Buchanan, executive director of the Student Loan Servicing Alliance, which represents the companies the government hires to manage loan repayment.

“It’s very frustrating,” he says. “It’s not like this is something that creeped up on us. This has been a known challenge for months.”

The Department of Education did not respond by press time to Money's questions about whether payments would still resume Oct. 1 given all the uncertainty. But in comments to a reporter Thursday, Secretary of Education Miguel Cardona said the department would share more information “very soon.”

Advocates fear widespread confusion

Borrowers who do know the payment pause is scheduled to end are stressed and confused, says Tobin Van Ostern, co-founder of Savi, a startup that helps borrowers navigate student loan repayment.

Surveys have shown that many borrowers don't feel prepared to make payments again. Some, Van Ostern says, have redirected money they used to spend on their students loans into necessary expenses like rent, childcare and food.

“People need to know how much money they’re going to have to come up with, and how quickly,” he says.

Pandemic-related student debt relief also included the suspension of involuntary collections from borrowers who have defaulted on their loans. Those protections are set to expire as well, which means some borrowers may see their wages garnished or tax refunds offset again.

In recent weeks, consumer advocate groups and some politicians have lobbied for the forbearance period to be extended, arguing that it's too soon for borrowers to start repaying. They've stressed that the most vulnerable borrowers, those who are more likely to default on their loans, are disproportionately Black and Hispanic — the same populations that have borne the brunt of the COVID-19 pandemic.

But aside from the debate over whether the economy is strong enough to support the return of student loan payments, there are complicated logistics that still need to be sorted out before payments resume.

Loan servicers are still waiting for government guidance

Could loan servicers actually turn on some 40 million accounts by Oct. 1? Sure, Buchanan says. But not with the kind of customer service or careful attention people want.

“We’re talking about borrowers who haven't been making payments for a year and half,” Buchanan says. “That's not a payment pause. This is an eternity in terms of customer and borrower behaviors.”

If, for example, the department wanted to give borrowers an extra grace period or allow borrowers to opt-in to payments that are automatically withdrawn from their bank accounts, that requires large system coding changes, he says.

Or if the department wants to extend customer service hours to prepare for an influx of calls from confused borrowers, then the servicers will need to hire more staff, he says. But as government contractors, the companies have to go through a specific clearing process to hire people, a process that takes more than a month.

Sarah Sattelmeyer, who works on student loan issues as a project director at think tank New America, has been warning of the need for more staffing at the servicers since last fall. Not only do new hires have to go through security clearance, she says, but they also need weeks of training.

"You don’t want untrained representatives answering the phone during what’s essentially a crisis period," she says.

She'd also like to see a robust outreach campaign that involves loan servicers, the Education Department and community groups, as well as a careful plan for helping the borrowers who do fall through the cracks. All of that is a process that takes months, she says — not weeks.

Each fall, servicers send out bills for a couple million recent graduates who are entering loan repayment for the first time. That annual start is preceded by at least a couple notifications several weeks ahead of the first due date. But there has never been a resumption of payments at this scale.

Still, there are some past examples that worry experts. After natural disasters, for example, borrowers are sometimes placed in similar periods of forbearance. Even after these smaller scale payment pauses, defaults spiked when bills came due again. And in 2020, some borrowers saw their credit scores drop, after their accounts were mistakenly reported as delinquent, even though they were covered by the payment pause.

If you're worried about affording your payments whenever they do resume, you can — and should — reach out to your servicer now to start the paperwork for enrolling in an income-driven repayment plan. Those plans tie your monthly payments to how much you're earning. (The same advice goes for borrowers who are already in one of these plans and need to update their income or family size.)

But beyond that, Buchanan says, don't expect much specific information from your servicer about when or how payments will resume. Just like you, they aren't sure.

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