There’s a fair and humane way to restart student loan repayments

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In less than 100 days, the administration will turn repayment back on for all federal student loans. Borrowers who defaulted on their loans or were struggling to pay their monthly bills before the pandemic are going to be hammered when repayment restarts. But according to a recent report by Politico, the Department of Education is considering a plan to automatically pull more than 7 million borrowers out of default on their federal student loans and back into repayment. Student loan borrowers in default desperately need this relief.

As more than two dozen legal services organizations that represent low-income student loan borrowers wrote to the Department of Education, current federal student loan practices and policies unreasonably punish borrowers who fall behind on their loan payments. Throwing borrowers back into default — where they will lose access to their wages, Social Security benefits and vital tax credits like the Child Tax Credit and Earned Income Tax Credit — will devastate the financial stability of borrowers and their families. Pulling borrowers out of default would not only stop those harmful practices but also allow borrowers to access affordable repayment plans and make real progress on their loans.

The concerns raised by advocates echo what we have heard from borrowers. Their lives are made infinitely more difficult if they are treated as being in default on their student loans. A struggling single parent, for example, anxiously awaiting a tax refund or earned income tax credit to make vehicle repairs and address past due bills, can unexpectedly lose thousands of dollars in household resources to garnishment by the Department of Education. 

Borrowers bear an incredible amount of risk when their educational investments do not pay the dividend of stable employment or decent wages. The debt is extremely difficult to discharge in bankruptcy, and for many, this debt will follow them to the grave. Many borrowers who attend college do so at the urging of our society and on the promise of a solid foundation for life and steady employment. Unfortunately, for too many, a high-priced education fails to provide such opportunities and borrowers are left struggling long after graduation.

Through its coercive collection powers, the federal government can and does siphon thousands of dollars from these borrowers — even though they are already experiencing financial distress. Roughly 90 percent of federal student loan borrowers in default have received a Pell grant based on their family’s low income, and 40 percent are in the lowest income quartile. Default disproportionately affects people of color, with African Americans facing the highest default rate, and its impact reaches across generations, with more than 37 percent of borrowers over age 65 in default on a student loan that they took out for themselves or their child.

Ironically, many of these borrowers would owe far less than the amounts seized from them if they were instead on a federal income-driven repayment (IDR) plan. More than half of low-income borrowers making less than $20,000 per year fall behind without accessing an IDR plan, even though they would have been entitled to a $0 monthly payment.

Draconian debt collection and default policies prevent individuals from getting a fresh start. These policies impede economic productivity by preventing students whose education was interrupted from returning to complete their degree — even though the lack of a credential prevents them from securing higher-skilled, higher-paying jobs that would provide the income to support ongoing loan repayment and benefit society more broadly. These punitive collection activities can push low-income households to or over the financial brink.

By pulling borrowers out of default, the government would properly balance its responsibility to collect on outstanding obligations with its responsibility to help student loan borrowers manage their debts.

Borrowers need to get back on track and succeed. Secretary Cardona has an important opportunity to ensure that low-income student loan borrowers are not trapped in poverty as a result of their student loan debt.

Persis Yu is an attorney at the National Consumer Law Center and the director of NCLC’s Student Loan Borrower Assistance Project

Tags Debt economy Federal Direct Student Loan Program Finance Student debt Student loan Student loans in the United States

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