Student loan borrowers are in trouble as payments resume
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Before the pandemic, the federal student loan system caused borrowers to suffer Frustration and confusion. With the Biden administration resuming payments for some 40 million Americans this month after more than three years of delays, the situation is particularly difficult.
Borrowers report receiving incorrect bills and spending hours on the phone trying to reach their service providers. One woman told CNBC that the estimated wait time to speak to someone with her service representative was 542 minutes.
“It’s a challenging environment,” said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group for federal student loan servicers. “Sometimes call wait times are very different from what we would like.”
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The many recent government announcements related to student loans appear to be increasing borrower confusion, Buchanan said. While many of these developments are positive for borrowers, including the recent $9 billion in student debt forgiveness, they also raise many questions about who is eligible and how quickly this relief might come.
Other problems may be due to a change in service providers and incorrect calculations of borrowers’ bills under a new income-based payment plan.
Official warned of possible ‘ongoing confusion’
The Supreme Court struck down President Joe Biden’s ruling in June Comprehensive plan to forgive up to $20,000 in student debt for tens of millions of Americans, launched in August 2022.
Before the Supreme Court’s decision, a senior U.S. Department official had predicted some of the problems now emerging.
“These student loan borrowers had a reasonable expectation and belief that they would not have to make additional payments on their federal student loans,” said Department of Education Undersecretary James Kvaal a court file last year.
“Unless the department is permitted to provide one-time student loan debt relief,” Kvaal continued, “we expect this group of borrowers will experience higher loan default rates due to ongoing confusion about what they owe.”
Former President Donald Trump first announced the suspension of federal student loan bills and the accrual of interest in March 2020, as the coronavirus pandemic hit the U.S. and crippled the economy. The break was extended eight times.
Nearly everyone who was eligible for the relief took advantage of it, with fewer than 1% of eligible borrowers continuing to make payments. Outstanding education debt in the US exceeds 1.5 trillion dollarswhich burdens Americans more than credit card or car debt.
New SAVE payment plan results in billing errors
To ease the transition for borrowers, the Biden administration has worked quickly to introduce a new payment plan option it calls “cheapest repayment plan ever.”
Still, many borrowers enrolled in the Saving on a Valuable Education (SAVE) plan complain that they received incorrect bills.
Higher education expert Mark Kantrowitz said that while he has heard from several borrowers who have encountered this problem, he estimates that “hundreds of thousands of borrowers could be affected.”
According to Kantrowitz, in some cases student loan servicers appear to be using the 2022 poverty level to calculate borrowers’ payments, rather than the current 2023 value. (The SAVE plan is intended to use the poverty data to exclude a portion of borrowers’ income from their payment calculation.)
Due to the spread of misinformation, borrowers are likely to overpay or underpay and get derailed.
Ella Azoulay
Policy Analyst, Student Borrower Protection Center
Incorrect communication between service providers may also have contributed to the errors.
Several of the largest companies offering federal student loans announced during the Covid-19 pandemic that they would no longer do so, including Navient and FedLoan. As a result, around 16 million borrowers had to service another company that month.
“Every time you change loan servicer, there can be problems transferring borrower data,” said Kantrowitz.
Meanwhile, Buchanan said some of the data provided by the U.S. Department of Education is incorrect. Borrowers can enroll in the SAVE plan with their servicer or with the department.
“We have data integrity issues coming from within the department,” Buchanan said. “It means a lot of questions.”
A spokesperson for the U.S. Department of Education said they worked quickly to resolve these issues.
It directed servicers to notify affected borrowers and place them in administrative forbearance until they are able to calculate the correct payment amount, the spokesman said. Some borrowers may also get their money back.
“Our top priority remains supporting borrowers to successfully return to repayment,” they said.
Still, consumer advocates warn that the new problems will only reduce borrowers’ trust in the credit system.
“Due to the spread of misinformation, borrowers are likely to overpay or underpay and go off track,” said Ella Azoulay, policy analyst at the Student Borrower Protection Center.
“In addition, the need to make incorrect monthly payments places additional strain on borrowers’ monthly finances and leaves some unable to afford essentials such as medication.”
