After an unprecedented three years of pause in federal student loan repayment due to the pandemic, millions of borrowers began paying down their debt when payments resumed late last year. But nearly as many have not.
That reality, along with court rulings that regularly upend the rules, has complicated the government’s efforts to restart its system for collecting the $1.6 trillion it is owed.
By the end of March, six months after the pause ended, nearly 20 million borrowers were making their payments as scheduled. But nearly 19 million were not, leaving their accounts delinquent, in default or still on pause, according to the latest data from the Department of Education.
“The non-payment rate is really emblematic of a system that is not doing its job,” said Persis Yu, legal counsel for the Student Borrower Protection Center, an advocacy group.
Seven million borrowers with federally administered loans were at least 30 days delinquent at the end of 2023, the highest delinquency rate since 2016, according to the department’s public records. Under a policy adopted by the Biden administration, these borrowers won’t be penalized for nonpayment until October at the earliest.
Millions more have had their accounts frozen through deferment or forbearance (which allows borrowers to temporarily stop making payments), and nearly six million borrowers remain mired in defaults that began before the pandemic.
The reasons why borrowers are not paying are varied. Some say they cannot afford it, while others are entangled in bureaucratic problems. Many people are taking advantage of a transition period that lasts until September, during which late payments will not be reported to credit bureaus and borrowers will not be put in default, although interest will continue to accrue.
When President Biden ended the moratorium that had been in place under President Donald J. Trump in March 2020, he pledged to fix key elements of the long-troubled federal loan program. While the Supreme Court struck down Mr. Biden’s most ambitious policy — canceling at least $10,000 of debt for each of millions of borrowers — his administration has resurrected other avenues for eliminating the debt.
Mr. Trump’s Education Department blocked programs that provided aid to government and nonprofit employees, permanently disabled borrowers and people defrauded by for-profit schools. Under Mr. Biden, the agency revamped and expanded those and other initiatives and used them to cancel $167 billion in debt for nearly five million people.
Mr. Biden also created a new repayment program, SAVE, that reduced repayments for many borrowers or reduced them to zero for millions of low-wage workers. Consumer advocates hailed the measures as essential to ensuring that borrowers’ bills are manageable.
But the slew of changes to repayment rules and the slew of lawsuits filed by Republican-led states against those rules have compounded the already difficult task of getting more than 40 million people back on track. The Education Department and its five lending agencies are struggling to adapt their systems and guide borrowers through repayment options that sometimes change overnight.
Last week, federal judges in Kansas and Missouri temporarily blocked elements of the SAVE program, ruling in favor of states that challenged the president’s authority to impose such generous terms without congressional approval. In the Kansas lawsuit, the states called the president’s debt relief maneuvers “a rushed effort to evasively do what the Supreme Court has already told defendants they cannot do.”
But on Sunday, the U.S. Court of Appeals for the 10th Circuit temporarily overturned the Kansas decision, clearing the way for the department to proceed with payment reductions scheduled this month for millions of borrowers.
Travis Wattles, 39, has had his account on hold since the payment pause ended in the fall because his service provider, Aidvantage, has been unable to determine the amount of his monthly bill. (Aidvantage declined to comment and referred questions to the Department of Education.)
Mr Wattles, who works in automotive product marketing, spent several years abroad. During that time, his income was below the foreign income exclusion limit (a tax break that protects certain income), so he had no taxable income and owed nothing to repay his student loan.
But Mr. Wattles, who moved near Nashville in early 2020, now earns a six-figure salary. He signed up for the SAVE plan in August and has twice submitted paperwork to Aidvantage to have his payment recalculated based on his current income.
“They keep putting me on leave because they don’t understand,” he said. “I don’t want that. I don’t mind making a payment; I understand I took out a loan.”
Karlyn Granger, a 36-year-old graphic designer, earned her master’s degree in 2019. When the pandemic freed her from paying her federal loans, she got married, bought a house in Atlanta and had a baby. The cost of caring for her family eats up most of her paycheck and “feels much more present and dire” than her loan, she said.
A deluge of emails from Aidvantage has her trying to figure out which payment plan would work best for her. But the choices are confusing: Should she try to keep her monthly bill as low as possible, or prioritize paying more to reduce her interest?
The changing legal landscape has amplified her uncertainty. The SAVE plan, for example, waives unpaid interest for those who keep up with their monthly payments and cancels any remaining debt after 20 years. But those benefits could disappear if legal challenges to the plan are successful. And the Internal Revenue Service generally treats canceled debt as income. Granger is wary of making a decision that could ultimately land her with a huge tax bill.
“I’m kind of in analysis paralysis, where I’m not doing anything,” she said.
The Education Department anticipated that millions of borrowers would need extra time, assistance, and small boosts. There is no historical example of the entire loan system being suspended for years. But when natural disasters struck—which may have provided borrowers with an excuse to temporarily suspend payments—“about a third of borrowers defaulted on their payments in the first few months after payments resumed,” two senior officials wrote in a blog post in April. “Their payment rates gradually recovered over a period of two to three years.”
For lending companies, alarm bells start ringing when a borrower is more than 90 days late on a payment, said Scott Buchanan, executive director of the Student Loan Servicing Alliance. That’s when they normally file a negative credit report. But until September, lending companies were instructed to place those borrowers in deferment.
This complicates the data. With so many borrowers automatically steered into a moratorium, it is difficult to distinguish those who can afford to pay but choose not to from those who are actually struggling.
“For a while, we’re going to have this group of borrowers who are going to say, ‘I’ve been late on a payment and nothing’s happened,’ and then they’re going to ask themselves, ‘Why am I making a payment?’” Buchanan said. “That’s always the risk of the on-ramp. You want to encourage people to make payments. If you’re doing it all for them, it doesn’t encourage them to make payments.”
Mr. Biden often touts his student debt strategy as a major success. “My administration has taken the most significant step to relieve student debt in the history of this country,” he said in April. “This relief can change people’s lives.”
And for millions of people, it has, despite the difficulties and legal turbulence of the past year.
Clayton Lundgren, 25, earned a master’s degree in engineering physics in 2021 and then moved to Los Angeles to work as a freelance content creator. If the Supreme Court had allowed Mr. Biden’s massive debt cancellation program, nearly half of the $21,000 Mr. Lundgren owes would have disappeared.
But thanks to the SAVE program, which exempts people with incomes up to 225 percent of the federal poverty level, Mr. Lundgren has no monthly debt on his loan bill. That helps him pay his rent and other living expenses. “It gives him a little bit of a break,” he said.
And because the SAVE program prevents interest from accruing, Mr. Lundgren’s balance doesn’t increase. That’s a radical departure from how federal student loans used to work: Previously, millions of borrowers on income-tested plans made payments each month but watched their bills keep rising because their payments weren’t enough to cover even the interest on their debts.
Mr. Lundgren said he was grateful for SAVE, but also felt a little unsettled by the fluctuations in the loan system.
“I’m just resigned to the fact that there is almost certainly no reality where the socially just thing would happen, which would be loan forgiveness and universally affordable public colleges,” he said.
Rep. Virginia Foxx of North Carolina, a Republican and chair of the House Education and Workforce Committee, welcomed the court rulings against the SAVE plan.
Mr. Biden “chose to hand out taxpayer dollars and illegally rewrite loan contracts,” she said. “This is a blatant attempt to buy the votes of college graduates on the backs of the working class.”