Ending Student Loan Repayment Pause Won’t Cause Crisis Among Borrowers
After nearly two years of a payment hiatus and interest relief, more than 20 million borrowers will need to start repaying their federal student loans in February.
Some Democrats have urged the Biden administration to further extend the payment break and the interest waiver, amid concerns about the Delta and Omicron variants and the economy. They call the restart of reimbursement a “reimbursement cliff”.
These fears are exaggerated. Most borrowers will start repaying again without any problem. There will be no massive collapse of the student loan system. The return to reimbursement will not be the start of the zombie apocalypse.
The US Department of Education identified the current extension as “final extension” in August. Administration officials recently confirmed that there would be no further delay in restarting reimbursement. The US Department of Education has already started sending emails to borrowers regarding the restart of repayment in February and is planning targeted outreach to at-risk borrowers.
There will undoubtedly be some start-up pains with the reboot of the repayment. Call centers can be clogged despite extended hours and additional staff. But it will be a problem in the short term, and borrowers can send secure email messages through the loan service’s online portal.
A handful of surveys of borrowers have called the restart of the repayment a doomsday scenario. Investigation reported that 89% of borrowers say they are not financially secure enough to resume payments in February. This survey seems to suffer from a selection bias. A different survey, which is based on a random sample of student loan borrowers, reports that only 29% of borrowers are unwilling to repay.
Of course, what people say and do are two totally different things.
Some borrowers may indeed find it difficult to repay their student loans, just as they did before the pandemic. Excluding borrowers in education or in grace period, 28% of borrowers in the direct loan program were in deferral, forbearance or default and 9% were in serious default as of December 31, 2019 , based on an analysis of government data.
Meanwhile, unemployment rates for college graduates have normalized, from a peak of 8.2% in April 2020 to 2.1% in November 2021, according to the data of the Bureau of Labor Statistics. Most of the new jobs created in 2021 went to college graduates.
Deferral and forbearance rates on federal student loans that were not eligible for the payment break and interest waiver also returned to pre-pandemic standards. As of June 30, 2021, based on the most recent government data, 75.5% of loans held by Federal Family Study Loan Program are in the process of being repaid, compared to 73.5% as of December 31, 2019 and 1.2% of borrowers eligible for the payment break and the interest exemption. Only 6.5% of borrowers are in abstention and 2.4% in deferment, against 6.5% in abstention and 3.7% in deferment before the pandemic.
There are similar results for private student loans, which were also not eligible for the payment break and interest waiver. Based on Sallie Mae’s SEC 10-Q and 10-K files, 2.26% of Sallie Mae’s private student loans were in forbearance and 2.42% were in arrears, as of September 30, 2021, up from 3.62% in abstention and 2.77% in delinquency. as of September 30, 2019.
Thus, there is no need to further extend the payment break and the interest waiver.
To ensure that they are aware of the new payment due date, all borrowers should ensure that their loan officers have up-to-date contact information. They should also update their contact details at StudentAid.gov. Borrowers will receive at least half a dozen notices before repayments restart.
Monthly loan payments and interest rates will be the same in February as before the pandemic, although payment due dates may change. The payment break and the interest relief put loans into hibernation. (Although the Federal Reserve plans to raise interest rates in 2022, 2023, and 2024, this will not affect existing federal student loans, most of which have fixed interest rates.)
Borrowers who use AutoPay to automatically transfer payments from their bank account to the loan manager may need to confirm that their bank account information has not changed. Do not assume that the payments will automatically transfer when the refund is restarted.
Other borrowers may wish to enroll in AutoPay. Those who do are much less likely to be late on their payments, thus avoiding late fees and collection costs. Most lenders offer a small reduction in interest rates, typically 0.25 or 0.50 percentage points, as an incentive.
If a borrower’s spending increased during the pandemic, they should revisit their budgets to free up money to start paying off their student loans. Reduce discretionary spending. Borrowers can also increase their income by asking for a raise, working part-time evenings and weekends, or opting for a higher paying job.
More than a third of borrowers in the direct lending program experience a change of loan manager, due to the departure of four student loan officers from the student loan program. A change in student loan manager can be confusing as the payment address and service portal will change. Loans and payment history are sometimes lost and payments can be misdirected. This disruption would have occurred regardless of the restart of reimbursement. Borrowers whose loan manager changes should save or print a copy of their loan information now, before the transition, and confirm that their loans were transferred correctly afterwards. They may need to re-register for AutoPay with the new loan manager.
For borrowers who are still struggling financially, there are other options for financial relief. One is postponements and tolerances. Borrowers can use deferral of unemployment, deferral of economic hardship, or blanket abstentions to suspend payments on their federal student loans. Each of them has a 3-year limit. Another is the income-based repayment. If a borrower’s income is below 150% of the poverty line, their monthly student loan payment is zero under income-based repayment, pay-as-you-go, and pay-as-you-go repayment. revised distribution. Interest can continue to accrue under these options, unlike pausing payment and interest relief. If the borrower’s income has decreased, they can ask the loan manager to recertify their income earlier to qualify for a lower monthly loan payment.
One prediction: Deferment, abstention and delinquency rates will be lower than they were before the pandemic, due to higher wages and lower unemployment.
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