Nearly half of student borrowers still haven’t paid their monthly bills

After an unprecedented three-year hiatus on federal student loan payments due to the pandemic, millions of borrowers began paying down their debts when bill collections resumed late last year. But nearly as many have not.

That reality, combined with court rulings that regularly upend the rules, has complicated the government’s efforts to reboot the system to collect 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 in default, in default or still on pause, according to the most recent data from the Ministry of Education.

“The non-payment rate is really a sign of a system that is not working,” said Persis Yu, legal counsel for the Student Borrower Protection Center, an advocacy group.

Seven million borrowers on government-serviced loans were at least 30 days behind on their payments at the end of 2023, the highest delinquency rate since 2016, as far back as the Department’s public records allow. Millions more have had their accounts frozen in forbearance (which allows borrowers to temporarily stop making payments), and nearly six million borrowers are still stuck in delinquencies that began before the pandemic.

The reasons why borrowers do not pay are varied. Some say they cannot afford it, while others are caught up in bureaucratic blunders. Many people abuse a “start-up” period which lasts until September. During this period, payment arrears are not reported to credit bureaus and borrowers do not default, although interest continues to accrue.

When President Biden ended the moratorium that had been put in place under President Donald J. Trump in March 2020, he promised to fix key parts of the long-troubled federal loan program. While the Supreme Court struck down Biden’s boldest policy — forgiving at least $10,000 of debt for each of the millions of borrowers — his administration resurrected other avenues for eliminating debt.

Biden also created a new repayment program, SAVE, that slashed payments for many borrowers or reduced them to zero for millions of low-wage workers. Consumer groups praised those steps as essential to ensuring borrowers’ bills are manageable.

But the flurry of changes to repayment rules and a barrage of lawsuits from Republican-led states attacking them have compounded the already daunting task of getting more than 40 million people back on track to pay. The Department of Education and its five lenders are scrambling to adjust 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 hasty product designed to dodge what the Supreme Court had already told Defendants they could not do.”

But on Sunday, the U.S. Court of Appeals for the 10th Circuit temporarily reversed Kansas’ decision, allowing the department to move forward with planned payment reductions for millions of borrowers this month.

Travis Wattles, 39, has had his bill in deferment since a payment freeze last fall because his service provider, Aidvantage, couldn’t figure out how much his monthly bill should be. (Aidvantage declined to comment and referred questions to the Department of Education.)

Mr Wattles, who works in automotive marketing, spent a number of years abroad. During that time his income was below the threshold for the exclusion of foreign income (a tax benefit that protects part of the income), which meant he had no taxable income and no student debt.

But Mr. Wattles, who moved to Nashville in early 2020, now earns a six-figure salary. He enrolled in the SAVE plan in August and has twice sent paperwork to Aidvantage to have his payment recalculated based on his current earnings.

“They keep putting me back in forbearance because they can’t fix it,” he said. “I don’t want that. I have no problem making a payment; I understand that I took out the loan.”

Karlyn Granger, a 36-year-old graphic designer, earned her master’s degree in 2019. When the pandemic freed her from the burden of paying her federal loans, she got married, bought a house in Atlanta and had a baby. The cost of caring for her family takes up the bulk of her paycheck and “feels much more immediate and pressing” than her loans, she said.

A flood of emails from Aidvantage has her figuring out which payment plan works best for her. But the choices are confusing her: Should she try to keep her monthly bill as low as possible, or should she prioritize paying more to reduce the interest she owes?

The changing legal landscape has added to her uncertainty. The SAVE plan, for example, eliminates unpaid interest for those who keep up with their monthly payments and forgives all remaining debt after 20 years. But those benefits could disappear if legal challenges to the plan are successful. And the Internal Revenue Service typically treats forgiven debt as income. Ms. Granger fears making a decision that could ultimately leave her with a huge tax bill.

“I’m in a kind of analysis paralysis where I’m not doing anything at all,” she said.

The Department of Education anticipated that millions of borrowers would need extra time, help and nudging. There is no historical parallel for years of shutting down the entire loan system, but after natural disasters — which affected borrowers can use as a reason to temporarily suspend their payments — “about a third of borrowers missed their payments in the first few months after payments resumed,” two senior administration officials wrote in a blog post from april“Their payment rates gradually recovered over a two- to three-year period.”

For lenders, red flags go off when a borrower is more than 90 days behind on payments, said Scott Buchanan, executive director of the Student Loan Servicing Alliance. That’s when they would normally file a negative credit report. But through September, lenders have been ordered to place those borrowers in forbearance.

That complicates the data. With so many borrowers automatically put into forbearance, it’s hard to separate those who can afford to pay but choose not to from those who are really struggling.

“We’re going to have a group of borrowers for a while who see, ‘I defaulted and nothing happened,’ so they think, ‘Why am I paying?'” Mr. Buchanan said. “That was always the risk of the on-ramp. You want to encourage people to pay. If you cure them yourself, it doesn’t encourage payments.”

Biden often cites his approach to student debt as a signature achievement. “My administration has taken the most significant action to relieve student debt in the history of this country,” he said in April. “This relief could be life-changing.”

And for millions of people, it is, despite all the turbulence and legal unrest 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 Biden’s massive debt forgiveness program to go ahead, nearly half of the $21,000 Lundgren owes would have disappeared.

But thanks to the SAVE program, which exempts incomes up to 225 percent of the federal poverty level, Mr. Lundgren has no monthly loan debt. That helps him pay his rent and other living expenses. “It gives him some breathing room,” he said.

And because SAVE prevents interest from accumulating, Mr. Lundgren’s balance doesn’t grow. That’s a huge change from how federal student loans used to work: Previously, millions of borrowers on income-driven plans made monthly payments, only to watch their bills climb because their payments weren’t enough to even cover the interest on their debt.

Mr. Lundgren said he is grateful for SAVE, but also feels a little defeated by the swings in the loan system.

“I’ve just come to terms with the fact that there is almost certainly no reality where socially just measures like student loan forgiveness and the creation of an affordable public university for all are taken,” he said.

Rep. Virginia Foxx of North Carolina, a Republican and chair of the House Education and Labor Committee, praised the court rulings against the SAVE plan.

Biden “has chosen to give away taxpayer money and illegally rewrite loan agreements,” she said. “It’s a blatant attempt to buy college graduate votes on the backs of working-class people.”