43 million borrowers will soon have to restart paying their student loans

BY Sydney LakeSeptember 28, 2021, 1:26 PM
Students on campus at the American University in Washington, D.C., U.S., as seen in September 2021. (Photographer: Dee Dwyer—Bloomberg/Getty Images)

The CARES Act of 2020 froze payments on federal student loans, and this forbearance was extended a handful of times amid the economic ebbs and flows of the COVID-19 crisis. Borrowers, however, will resume their payments just ahead of the two-year anniversary of the CARES Act.

On Jan. 31, 2022, federal student loan payments will resume for 43 million borrowers, and that day also signals the end of the 0% interest rate on federal student loans. Some borrowers and student loan forgiveness proponents have hoped and pushed for a further freeze, but President Joe Biden and other White House officials say this will be the final such extension

The extended freeze “will give the Department of Education and borrowers more time and more certainty as they prepare to restart student loan payments,” Biden said in an Aug. 6, 2021 statement. “It will also ensure a smoother transition that minimizes loan defaults and delinquencies that hurt families and undermine our economic recovery.”

Aside from simply stating that the payment pause will cease on Jan. 31, 2022, the FSA and Department of Education haven’t provided explicit instructions on how the 43 million federal student loan borrowers are supposed to start making payments again. That information is left to the federal student-loan servicers—some of which have indicated they aren’t ready to resume collections from students, and some of which have chosen not to renew their contracts with the federal government after this year.

Is anyone ready for the freeze to end?

The idea of the freeze is to give borrowers more time to prepare themselves to make payments again and for student-loan servicers to ready themselves to support borrowers. But federal student loan experts have told Fortune that—at only three months out from payment reinstatement day—neither of these groups are really prepared.

“The economy is far from recovered, and millions of Americans are still struggling with unemployment, facing evictions or foreclosures, and dealing with ongoing national disasters including hurricanes, floods, fires, and the COVID-19 pandemic,” Adam S. Minsky, a student loan lawyer, previously told Fortune. Yet, an additional freeze is “very unlikely,” he adds.

Student-loan servicers also don’t seem ready to resume pre-pandemic operations, either. In July, Democratic senators Elizabeth Warren and Ed Markey sent a letter to Biden with findings from a questionnaire sent to federal student-loan servicers that indicate the companies need more time “to ensure that borrowers are supported when reentering payment on their student loans.” 

Student-loan servicer Pennsylvania Higher Education Assistance Agency (PHEAA), also known as FedLoan, made matters more complicated when it announced in July that it would stop servicing federal student loans when its contract with the government ends on Dec. 14, 2021. Borrowers using FedLoan will have to be transferred to another student-loan servicer. While borrowers won’t have to worry about doing this themselves, it’s a heavier lift for the Education Department. Transfers like this don’t have a promising precedence.

In 2012, the Education Department terminated its contract with ACS, which serviced more than 35 million student loans. This caused a slew of problems for borrowers, including inaccurate loan balances and a lack of communication that the transfer had occurred, according to a study released in 2020 by the Student Borrower Protection Center.

Richard Cordray, chief operating officer of Federal Student Aid, insists that there will be a smooth transition when payments resume in 2022, however.

“This plan will feature early and frequent communications and clear guidance on what borrowers should expect, as well as strong oversight from FSA during this transition,” Cordray told Inside Higher Ed. “The U.S. Department of Education is committed to using all of the tools in our toolbox to make sure borrowers are supported and not negatively impacted during this transition.”

While student-loan servicers and borrowers prepare for the freeze to let up, some politicians are still pushing for student loan debt to be wiped out. Senate Majority Chuck Schumer is fighting for further student loan forgiveness ahead of forbearance.

“Students don’t need their debt paused,” Schumer said at the Student Debt Crisis Center’s State of Student Debt Summit on Sept. 20. “They need it erased.”

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