After an unprecedented three-year suspension of federal student loan payments due to the pandemic, millions of borrowers began paying down their debt when billing resumed late last year. But nearly as many have not.
That reality, coupled with court decisions that periodically alter the rules, has complicated the government’s efforts to reboot its system to collect the $1.6 trillion it is owed.
By the end of March, six months after the pause ended, nearly 20 million borrowers were making their payments as scheduled, but nearly 19 million were not, leaving their accounts delinquent, in default or still on pause, according to the latest data from the Department of Education.
“The default rate is really a symbol of a system that’s not doing its job,” said Persis Yu, general counsel for the Student Borrower Protection Center, an advocacy group.
By the end of 2023, seven million borrowers with federally administered loans were at least 30 days late on their payments. That’s the highest delinquency rate since 2016, according to the department’s public records. Because of a policy adopted by the Biden administration, those borrowers won’t face penalties for their nonpayment until October at the earliest.
Millions more people have had their accounts frozen through deferment or forbearance (which allows borrowers to temporarily stop making payments), and nearly six million borrowers remain mired in defaults that began before the pandemic.
The reasons borrowers are missing payments are varied. Some say they can’t afford to make the payment, while others are mired in bureaucratic hassles. Many people are taking advantage of a “graceful entry” period lasting until September, during which late payments won’t be reported to credit agencies and borrowers won’t be listed as delinquent, though interest will still accrue.
When President Biden ended the moratorium that began in March 2020 under President Donald J. Trump, he pledged to fix key parts of the long-troubled federal loan program. While the Supreme Court struck down Biden’s most far-reaching policy — forgiving at least $10,000 of debt for each of millions of borrowers — his administration resurrected other avenues for debt elimination.
Trump’s Education Department hobbled aid programs for government and nonprofit employees, borrowers with permanent disabilities and people defrauded by for-profit schools. Under Biden, the agency has revamped and expanded those and other initiatives and used them to cancel $167 billion owed by nearly five million people.
Biden also created a new repayment program, SAVE, that drastically reduced payments for many borrowers or reduced them to zero for millions of low-wage workers. Consumer advocates praised those measures as vital to ensuring borrowers’ bills are manageable.
But the plethora of changes to repayment rules and a flood of lawsuits from Republican-led states attacking them have worsened the already difficult task of getting more than 40 million people back into debt. The Education Department and its five loan servicers are scrambling to adapt their systems and guide borrowers through repayment options that sometimes change overnight.
Last week, federal judges in Kansas and Missouri temporarily blocked elements of the SAVE program, ruling in favor of states that challenged the president’s authority to impose such generous terms without congressional approval. In the Kansas lawsuit, the states called the president’s debt relief maneuvers “a rushed product to evasively do what the Supreme Court has already told defendants they cannot do.”
But on Sunday, the U.S. Court of Appeals for the 10th Circuit temporarily reversed the Kansas decision, clearing the way for the department to proceed with planned payment reductions this month for millions of borrowers.
Travis Wattles, 39, has had his account in forbearance since the payment pause ended in the fall because his servicer, Aidvantage, has been unable to determine what his monthly bill should be. (Aidvantage declined to comment and referred questions to the Department of Education.)
Wattles, who works in automotive product marketing, spent several years abroad. During that time, his income was below the foreign income exclusion limit (a tax break that shields some income), so he had no taxable income and owed nothing on his student loan debt.
But Wattles, who moved to nearby Nashville in early 2020, now earns a six-figure salary. She enrolled in the SAVE plan in August and twice submitted paperwork to Aidvantage to have her payment recalculated based on her current income.
“They keep putting me on hold because they can’t figure it out,” she said. “I don’t want that. I don’t mind making a payment; I understand that I took out the loan.”
Karlyn Granger, a 36-year-old graphic designer, earned her master’s degree in 2019. When the pandemic freed her from the obligation to repay her federal loans, she got married, bought a house in Atlanta and had a baby. The costs of caring for her family consume most of her salary and “feel much more present and serious” than her loan, she said.
A flood of emails from Aidvantage has her trying to decide which payment plan is best for her, but the options are confusing: Should she try to keep her monthly bill as low as possible or prioritize paying more to reduce what she owes in interest?
The changing legal landscape has added to her uncertainty. The SAVE plan, for example, waives interest payments for those who keep up with their monthly payments and forgives any remaining debt after 20 years. But those benefits can disappear if legal challenges to the plan succeed. And the IRS typically treats forgiven debts as income. Granger is wary of making a decision that could end up landing her with a huge tax bill.
“I’m in a kind of analysis paralysis, where I don’t do anything,” he said.
The Education Department anticipated that millions of borrowers would need more time, relief and stimulus. There is no historical parallel to the entire loan system being suspended for years. But when natural disasters have occurred (which affected borrowers can use as a reason to temporarily suspend their payments), “about one-third of borrowers missed their payments in the first few months after payments resumed,” two senior officials wrote in a blog post in April. “Their repayment rates gradually recovered over a two- to three-year period.”
For loan servicers, alarm bells start ringing when a borrower is more than 90 days behind on their debts, said Scott Buchanan, executive director of the Student Loan Servicing Alliance. That’s the point when they typically file a negative credit report. But until September, servicers have been instructed to put those borrowers into forbearance.
This complicates the data. With so many borrowers automatically thrown into forbearance, it’s hard to distinguish those who can pay but choose not to from those who are truly struggling.
“For some time, we’re going to have this group of borrowers who will see, ‘I defaulted and nothing happened,’ so they’ll think, ‘Why am I making a payment?’” Buchanan said. “That was always the risk of the on-ramp. You want to encourage people to make payments. If you give them a penalty for themselves, that doesn’t incentivize them to make payments.”
Biden often presents his strategy to alleviate student debt as a signature achievement. “My administration has taken the most significant action to alleviate student debt ever seen in the history of this country,” he said in April. “This relief can be life-changing.”
And for millions of people, it has been, despite the difficulties and legal turmoil of the past year.
Clayton Lundgren, 25, earned a master’s degree in physical engineering in 2021 and then moved to Los Angeles to work as a freelance content creator. If the Supreme Court had allowed Biden’s massive debt cancellation program to stand, nearly half of the $21,000 Lundgren owes would have disappeared.
But thanks to the SAVE program, which exempts income up to 225 percent of the federal poverty line from taxes, Lundgren doesn’t owe anything on his monthly loan bill. That helps him pay rent and other basic expenses. “It gives him some breathing room,” he said.
And because SAVE prevents interest from accruing, Lundgren’s balance doesn’t grow. This is a radical change from how federal student loans used to work: Before, millions of borrowers on income-driven plans made payments every month, but saw their bills continue to grow because their payments weren’t enough to cover the interest on their debts.
Mr. Lundgren said he was grateful for SAVE, but also felt a bit hurt by the vagaries of the lending system.
“I am simply resigned to the fact that there is almost certainly no reality in which the socially just thing, which would be loan forgiveness and the institution of universally affordable public college, would happen,” he said.
Rep. Virginia Foxx of North Carolina, a Republican and chairwoman of the House Education and Workforce Committee, praised the court rulings against the SAVE plan.
Biden “has chosen to give away taxpayers’ money and illegally rewrite loan contracts,” she said. “It’s a blatant attempt to buy votes from college graduates at the expense of the working class.”
