Millions of federal student loan borrowers are facing an array of problems as the return to repayment commences.
For more than three years, much of the federal student loan system was effectively turned off. Payments were not due, interest did not accrue, and collections activity against defaulted borrowers was halted. During that time, some federal student loan servicers pared down operations and even laid off staff due to the lack of activity.
But the student loan pause ended in August. Monthly payments are resuming now for the first time in over 40 months. And the federal student system is facing an increasingly dire crisis, as loan servicers appear to be ill-equipped to handle not only the unprecedent resumption of payments, but also implementation of several new Biden administration initiatives, including the new SAVE plan, which officials are touting as the most affordable income-driven repayment plan in history.
And the situation appears to be worsening.
Widespread errors in student loan payment calculations
This week, The New York Times reported that more than 400,000 borrowers had their monthly student loan payments miscalculated by their loan servicer during the last several months. Specifically, borrowers who had applied to the new SAVE plan – or were automatically enrolled because they were previously in the REPAYE plan – were billed at higher monthly payment amounts than they should have been.
MOHELA, one of several loan servicers contracted by the Education Department to administer the government’s sprawling federal student loan portfolio, miscalculated the SAVE payments for at least 280,000 borrowers, according to the Times; although it characterized the errors as “modest.” MOHELA also is the sole servicer tasked with administering the Public Service Loan Forgiveness program.
But the problems have not been limited to MOHELA. The Education Department has determined that borrowers with other loan servicers may have also experienced student loan payment miscalculations. Officials have instructed loan servicers to audit accounts to determine if other borrowers are being asked to pay an erroneous monthly payment.
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Borrowers face other difficulties with student loan servicing
The payment calculation problems are on top of other servicing-related problems student loan borrowers are experiencing. The Consumer Financial Protection Bureau, a federal watchdog agency overseeing the financial services sector, has been receiving a steady stream of complaints from borrowers who are experiencing extremely long call hold times when trying to reach their servicer, and receiving conflicting or erroneous information about their student loans and their options.
“Our complaint monitoring, enforcement and supervision efforts have uncovered red tape, errors, delays, and even illegal practices that left borrowers paying more than they should,” said the CFPB in a report last month.
In late September, a coalition of nearly two dozen state attorneys general sent a letter to President Biden and Education Secretary Miguel Cardona, urging the administration to do more to protect borrowers and ensure that new initiatives, like the SAVE plan and IDR Account Adjustment, are smoothly implemented.
“We commend the historic work that your Administration has undertaken to transform our broken federal student loan repayment system, including creating a new more affordable income-driven repayment (IDR) plan, providing loan cancellation for borrowers qualified under long established IDR criteria, restoring borrowers’ credit toward Public Service Loan Forgiveness (PSLF), making total and permanent disability discharge more accessible to disabled borrowers, and providing group discharges to defrauded students,” they wrote.
“At the same time, we are concerned that circumstances are aligning to create serious and widespread loan servicing problems. Unprecedented volumes of borrowers must now navigate a complex system, many for the first time, with new servicers that have little to no experience with such volumes and do not appear to be sufficiently staffed to respond to them. Compounding this, the historic number of loans that transferred to new servicers during the COVID-19 payment pause has created the potential for significant and widespread account errors. Simultaneously, servicers appear to be struggling to operationalize some of the recent and necessary improvements that the Department made to the federal loan repayment system.”
Survey shows student loan borrowers are struggling
A recent survey released by the Student Borrower Protection Center indicates that many borrowers are struggling to navigate a complex and faltering student loan system.
“SDCC surveyed over 17,500 supporters and found that borrowers not only feel loan servicer communication is lacking, but that they are untrustworthy,” wrote the SDCC in a statement last week. “Only 20% of respondents feel they have the information they need to prepare for the resumption of payments, coupled with the fact that over a quarter (27.5%) of respondents have not received any recent communication from their loan servicer, leaving borrowers scrambling to find information on their own.”
In addition, nearly three out of four borrowers who tried to contact their loan servicer during the last two months were unable to get their questions issued or a problem resolved, according to the SDCC.
“These survey results are coming at an inflection point for the future of student debt for millions of borrowers,” stated Natalia Abrams, President of the Student Debt Crisis Center, in a statement. “Borrowers do not trust their servicers and are relying on the Department of Education and nonprofit organizations like us to help them navigate the complexities of repayment.”
More student loan problems on the horizon
The issues student loan borrowers are facing show no immediate sign of improving. And they may only worsen in the coming weeks.
The federal government is facing another possible shutdown in November, after Congress narrowly avoided one earlier this month following the last-minute passage of a federal stopgap spending bill. But with House Republicans embroiled in turmoil and unable to agree on a speaker, there is an increasing possibility that Congress may not be able to come to an agreement on federal spending in time to avert a shutdown in mid-November.
If the federal government shuts down, the Education Department would likely furlough 90% of its staff. While loan servicers would continue to operate, the Department would slow or halt processing of key federal student loan forgiveness operations, as well as dispute resolution and oversight provided by the FSA Ombudsman group – leaving borrowers with even less recourse when they encounter problems.
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