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Millions of Student Loan Borrowers “At-Risk When Payment Suspension Ends,” Says Federal Watchdog Agency

This week, a federal watchdog agency released a major report warning policymakers and stakeholders that millions of student loan borrowers might be at financial risk when payments eventually resume.

Background: Biden extends student loan pause to August

Payments on government-held federal student loans have been paused for over two years following multiple extensions of the CARES Act's federal student loan relief.

Congress passed the CARES Act in response to the deepening economic crisis related to the COVID-19 pandemic. The legislation also froze interest on government-held federal student loans and suspended collections efforts against federal student loan borrowers in default.

The most recent extension of relief was set to end on December 31, 2022. But last week, President Biden announced another payment pause extension, with around August 30, 2023, as the new expiration date unless the courts rule on student loan relief lawsuits sooner.

There are reasons to believe that the payment pause might be extended beyond that date as historic inflation continues and the midterm elections loom in November. White House officials have suggested that they will evaluate the utility of a further extension closer to August.

Report: Student loan borrowers are at risk once the payment pause ends

Regardless of when the payment pause finally expires, Consumer Financial Protection Bureau (CFPB), a federal regulatory agency, warned that millions of borrowers risk falling behind on their payments once billing resumes.

“Although some borrowers might resume payments without serious issues, many borrowers may struggle,” wrote the CFPB. The agency identified up to 20 million borrowers who are at risk of falling behind on payments due to a variety of factors, including:

  • A prior history of delinquency,
  • Multiple student loan servicers,
  • A history of falling behind on other debts, and
  • New non-medical collections since the payment pause took effect.

The CFPB estimates that 15 million borrowers have at least one risk factor, and over 5 million borrowers have two or more risk factors. The borrowers most at risk “are concentrated in low income and high-minority census tracts and are more likely to be 30 to 49 years old.”

“With the record number of borrowers entering repayment at once, recent servicing changes, and many unresolved financial difficulties from well before the pandemic, millions of borrowers might face a difficult road after pandemic-related relief expires,” wrote the CFPB.

Student loan servicing changes

Recent student loan servicing changes, in particular, concerns the CFPB. Navient, one of the nation's largest student loan companies, recently withdrew from the Department of Education's federal student loan system and transferred its accounts to AidVantage.

Meanwhile, FedLoan Servicing, a division of the Pennsylvania Higher Education Assistance Agency (PHEAA), is also in the process of withdrawing from the Department’s federal student loan system, resulting in millions of borrowers being transferred to other loan servicers. FedLoan Servicing has been the sole servicer contracted by the Department of Education to administer the Public Service Loan Forgiveness (PSLF) program.

The CFPB also noted that borrowers might struggle when they must contend with multiple student loan servicers. “Borrowers can have multiple servicers if they have both federal and private student loans or if they have multiple types of federal student loans,” wrote the CFPB.

“Before the pandemic, about 17 percent of student loan borrowers in our sample had more than one servicer. Having multiple servicers does not necessarily mean borrowers will face greater difficulties, but some of these borrowers may be at increased risk of confusion or payment difficulties while coordinating communication and payments with multiple entities.”

“Today’s report shows there’s more work to be done,” said CFPB Director Rohit Chopra in a tweet. “The @CFPB ‘s findings emphasized our concerns that servicing failures can hamper borrowers' access to available loan relief and cancellation options. The CFPB will continue to take action to ensure that student loan servicers follow the law.”

Last month, the CFPB imposed a $1 million penalty on one of the Department of Education’s contracted loan servicers for allegedly misleading borrowers about their eligibility for PSLF.

White House suggests payments will eventually resume

There is a distinct possibility that the payment pause will be extended again as we get closer to December 31, 2022, given the current historic levels of inflation, and critical midterm elections in November. Those elections will determine which party controls Congress, and — in turn — decides whether Biden will be able to enact what remains of his agenda.

Last week, White House Press Secretary Jen Psaki told reporters that officials would continue reviewing economic data, “including costs and inflation,” to determine whether a further extension beyond August 31 is warranted. She said the Education Department will consider “a range of factors as we get closer to that timeline.”

But in a separate Fox News interview in response to whether student loan borrowers would have to resume making payments at some point, Psaki said, “I suspect at some time you will.”

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