Next February, 42 million U.S. households will need to make a student loan payment for the first time in 22 months. Or so the White House has been warning.
In March 2020, the federal government froze student loan payments through an emergency action, so as to mitigate borrowers’ financial difficulties amid the pandemic recession. The freeze has been extended several times since then. But when the Biden administration announced the most recent extension last August, it insisted that this would be the last reprieve: By the end of January 2022, everyone’s student loans would turn back on.
Their position has much to recommend it. The Omicron variant is threatening to birth a winter wave of unprecedented proportions, with unpredictable consequences for the labor market (and thus, borrowers’ capacity to make loan payments). Meanwhile, resuming student loan payments will reduce the disposable incomes of 13 percent of Americans at a time when rising prices are already straining household budgets. According to an estimate from the Roosevelt Institute, the administration’s current plan will cost indebted households $85 billion next year. As is, the U.S. economy is already poised to suffer from “fiscal drag” in 2022; in other words, since the federal government will not be injecting as much money into the economy next year as it did in 2021 (through the $1.9 trillion American Rescue Plan), a dropoff in stimulus is poised to depress economic growth. And since Uncle Sam owes the vast majority of U.S. student loans, resuming repayment will add to this fiscal drag.
On a more practical level, resuming student loan repayment is liable to be a logistical nightmare for the administration. During the nearly two-year moratorium on repayment, many loan servicing companies withdrew from the department’s system. Over the same period, some borrowers’ circumstances have changed in ways that impact their monthly obligations; for example, those in income-based repayment programs may have enjoyed pay increases or job losses.
“We’re still assessing the impact of the Omicron variant,” White House press secretary Jen Psaki told reporters last week. “But a smooth transition back into repayment is a high priority for the administration. The Department of Education is already communicating with borrowers to help them to prepare for return to repayment on February 1 and has secured contract extensions with loan servicers.”
The White House has already taken a few measures to ease the pain of repayment. Among them:
Extending a 90-day “grace period” to borrowers. According to internal documents obtained by Politico, the Education Department has instructed loan servicers to provide borrowers with a “safety net” during the first three months after the repayment moratorium expires. During that period, borrowers who miss a payment will be placed automatically in a forbearance and spared any hit to their credit reports.
Postponing documentation requirements for income-based repayment programs. Borrowers enrolled in income-based repayment programs typically need to provide tax documents verifying their earnings and family size in order to secure lower monthly payment obligations. In February, however, borrowers will be able to simply self-certify their incomes and family size over the phone with a loan servicer, and will not need to provide supporting documentation until August 2022.
Providing borrowers with a unified repayment portal. Borrowers of direct federal student loans will now be able to “apply for, manage, and repay their loans without having to visit multiple websites and manage multiple sets of credentials.”
The administration is also preparing direct outreach efforts to “at-risk” borrowers, such as the roughly 40 percent who never secured a degree, or those who were delinquent before the pandemic’s onset.
There is still much more that the Biden administration could do to make the resumption of repayment less onerous for borrowers and harmful for the economy. Three proposals have garnered considerable attention in recent days, and two of them actually have a real chance of happening:
1) Provide a “fresh start” to the more than 8 million student borrowers who are currently in default. Under the Higher Education Act of 1965, student loan borrowers who make nine consecutive, timely payments can exit default status and have the record of their default expunged from their credit history. Thanks to the nationwide payment freeze — during which time every debtor’s requisite monthly payment was $0 — every borrower who defaulted on their loans is now technically eligible for rehabilitation. At present, however, borrowers need to actively apply for rehabilitation in order to secure this “fresh start”; as of November, more than 90 percent of eligible borrowers had not done so. As a result, when repayment restarts, these borrowers are liable to have their wages garnished and tax refunds withheld. Meanwhile, they will be ineligible for income-based repayment plans and suffer the myriad disadvantages of depressed credit scores.
The Education Department has the data and authority to automatically rehabilitate all of these borrowers. Congressional Democrats have implored it to use that authority. The administration has not committed to the measure, but reports suggest that it is under serious consideration.
2) Waive interest payments on student loans for (at least) the duration of the pandemic. Earlier this month, a group of Senate Democrats led by Raphael Warnock of Georgia asked the administration to waive interest on student loan repayments until the public health emergency is over, in order to ease burdens on borrowers as they navigate the repayment process (i.e. do the number-crunching and paperwork-gathering necessary to determine their optimal repayment plan). The administration has not explicitly ruled this option out.
3) Cancel $10,000 of every borrower’s debt. On the campaign trail, Joe Biden endorsed $10,000 worth of loan forgiveness for every student borrower. America’s most distressed borrowers tend to be those who took on debt but never secured a college degree. And, according to some estimates, a supermajority of such borrowers have less than $10,000 of student debt to their name. Thus, although Biden’s campaign pledge fell short of advocates’ demands for a full jubilee, it would erase the debt burdens of millions who desperately need financial relief, while making all borrowers a bit better off.
Unfortunately, the president has insisted that he lacks the authority to forgive student loan debt unilaterally. And there is not enough support for debt forgiveness in Congress to pass Biden’s proposal legislatively. The Education Department is officially reviewing the legality of forgiving student debt en masse through executive action. But that review started in April. The fact that it remains ongoing eight months later likely reflects the White House’s political concerns about unilateral debt forgiveness, more than any legal ambiguities.
The Higher Education Act of 1965 empowers the Department of Education to “compromise, waive, or release any right, title, claim, lien, or demand, however acquired, including any equity or any right of redemption.” And thanks to a reform passed under Barack Obama in 2010, the federal government now owns roughly 92 percent of all student debt. Which is to say, more than $1.5 trillion of Americans’ student debt is owed to the Department of Education — which has the explicit authority to waive “any claim” it possesses and can therefore unilaterally make all that debt disappear.
The Biden administration has leveraged similar legal reasoning to unilaterally issue targeted debt forgiveness. Since the president’s inauguration, the Education Department has forgiven billions in loans held by defrauded or disabled borrowers. It’s not obvious why moving from targeted debt forgiveness to a broader jubilee would cross a legal rubicon.
Nevertheless, Biden has been adamant in his refusal to cancel debt through executive authority. And at a time when Joe Manchin’s concerns about inflation have jeopardized the passage of the president’s core agenda, it is extremely unlikely that the president would suddenly decide that he is comfortable giving up to $10,000 to tens of millions of Americans without Congress’s seal of approval.
In sum, it’s possible that student loan repayment will be less financially and logistically burdensome when the reprieve ends next February. But unless you qualify for relief under an existing forgiveness program, you should not count on Biden taking a bite out of your loan balance.