Enrichment Education

How the latest student loan pause could help borrowers — even without forgiveness

“The current default system is like quicksand: It charges a host of confusing fees and offers limited pathways to exit, some of which can only be used once, meaning that borrowers can easily get stuck or cycle in and out,” said Sarah Sattelmeyer, project director for education and opportunity at New America.
President Joe Biden speaks as he signs an executive order after speaking about the Affordable Care Act in the East Room of the White House in Washington, Tuesday, April 5, 2022. Carolyn Kaster/ AP

Story at a glance

  • In his fourth extension of the student loan moratorium, President Biden also pledged to give borrowers in default a “fresh start.”

  • Borrowers who fell behind on their loan payments will have their balances made current. 

  • Debt collection agencies will no longer hold defaulted loans or be able to charge collection fees. 

All student loan borrowers currently in default will be given a fresh start once the federal moratorium on student loan payments expires — a move experts say could help millions unburden themselves from crippling debt.  

While the “fresh start” offered by the Biden administration’s new plan would not actually forgive debt — the step demanded by advocates and one the president promised during his campaign — it would cut off penalties imposed on borrowers that could help them pay their bills and lift their credit scores. 

Before the pandemic, millions of borrowers were in default or delinquent on their student loan payments, which triggers collections fees, negatively impacts credit scores and can even lead to wages being garnished in order to pay back the loan.  

“The current default system is like quicksand: It charges a host of confusing fees and offers limited pathways to exit, some of which can only be used once, meaning that borrowers can easily get stuck or cycle in and out,” Sarah Sattelmeyer, project director for education, opportunity, and mobility in the Higher Education initiative at New America, told Changing America. 

“And the consequences of default — including collection fees; wage garnishment; withholding federal benefits and tax refunds, including the Earned Income Tax Credit and Child Tax Credit; and credit score damage — are overly punitive and felt more acutely by vulnerable communities,” she added.   


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Sattelmeyer wrote in a previous analysis for the Brookings Institution that borrowers of color, those with low incomes and first-generation students, among others, experience particularly high rates of default.  

At the same time, these groups were more likely to have struggled during the coronavirus pandemic. 

Education Department data shows about 20 percent of borrowers are in default, which is defined as having gone at least 270 days without a payment. Once that happens, the department reassigns a loan to a private agency to collect the debt, with collection fees and as much as 25 percent of principal and interest tacked on.  

All the while, interest continues to accrue on the loan.  

The Federal Reserve Bank of St. Louis even predicted that as the economy continues to be disrupted by COVID-19, “serious delinquency rates for student debt could snap back from historic lows to their previous highs in which 10 percent or more of debt was past due.” 

The administration’s “fresh start” pledge would make all loan balances current for borrowers in default, meaning their loans would no longer be held by a debt collection agency, no fees could be charged, and borrowers would become eligible for critical programs like income-driven repayment plans and new loans if they want or need to return to school.  

A clean slate could also help borrowers in default mend their credit scores, an important financial benchmark to secure a mortgage, a car loan and rental housing. 

Though Biden’s action does not address student debt erasure, Sattelmeyer told Changing America the administration’s latest effort to reform the repayment system is an important step, adding that moving it through a federal bureaucracy is “no small feat.” 

“But there are many details to work out to make sure borrowers are protected and served well by this transition, and there is much more to do to reform the system moving forward,” she said.  

Student Debt Crisis Center, an advocacy group, also applauded the president’s “fresh start” pledge for borrowers in default but said there is only one real solution to the student debt crisis.  

“Fresh start is a step in the right direction, but permanent debt cancellation is the only enduring relief that gives families the financial freedom needed to thrive long into the future,” the organization said in a statement.  


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