About the author: Mark Kantrowitz is a student loan expert and the author of How to Appeal for More College Financial Aid and Who Graduates from College? Who Doesn’t?
After nearly two years of a payment pause and interest waiver, more than 20 million borrowers will have to start repaying their federal student loans in February.
Some Democrats have urged the Biden administration to extend the payment pause and interest waiver further, due to concerns over the Delta and Omicron variants and the economy. They refer to the restart of repayment as a “repayment cliff.”
These fears are overstated. Most borrowers will restart repayment without problems. There will be no massive collapse of the student loan system. The return to repayment will not be the start of the zombie apocalypse.
The U.S. Department of Education identified the current extension as the “final extension” back in August. Administration officials have recently confirmed that there will be no further delays in the restart of repayment. The U.S. Department of Education has already started sending email messages to borrowers about the February restart of repayment and is planning targeted outreach to at-risk borrowers.
There undoubtedly will be some teething pains with the restart of repayment. Call centers may get clogged despite expanded hours and additional staff. But this will be a short-term problem, and borrowers can send secure email messages through the loan servicer’s online portal.
A handful of borrower surveys have characterized the restart of repayment as a doomsday scenario. One survey reported that 89% of borrowers say that they are not financially secure enough to resume payments in February. That survey seems to suffer from selection bias. A different survey, which is based on a randomized sample of student loan borrowers, reports that only 29% of borrowers are not ready to resume repayment.
Of course, what people say and do are two entirely different things.
Some borrowers may indeed struggle to repay their student loans, just as they did prior to the pandemic. Excluding borrowers in an in-school or grace period status, 28% of borrowers in the Direct Loan program were in a deferment, forbearance or default and 9% were in a serious delinquency as of Dec. 31, 2019, based on an analysis of government data.
Meanwhile, unemployment rates for college graduates have normalized, dropping from a high of 8.2% in April 2020 to 2.1% in November 2021, according to data from the Bureau of Labor Statistics. Most new jobs created in 2021 went to college graduates.
Deferment and forbearance rates on federal student loans that weren’t eligible for the payment pause and interest waiver have also returned to prepandemic norms. As of June 30, 2021, based on the most recent government data, 75.5% of commercially-held loans from the Federal Family Education Loan program are in repayment, compared with 73.5% as of Dec. 31, 2019 and 1.2% of borrowers who were eligible for the payment pause and interest waiver. Only 6.5% of borrowers are in forbearance and 2.4% in deferment, compared with 6.5% in forbearance and 3.7% in deferment prior to the pandemic.
There are similar results for private student loans, which were also ineligible for the payment pause and interest waiver. Based on Sallie Mae’s 10-Q and 10-K SEC filings, 2.26% of Sallie Mae’s private student loans were in forbearance and 2.42% were delinquent, as of Sept. 30, 2021, compared with 3.62% in forbearance and 2.77% in delinquency as of Sept. 30, 2019.
So, there is no need for a further extension of the payment pause and interest waiver.
To ensure that they learn of their new payment due date, all borrowers should make sure that their loan servicers have up-to-date contact information. They should also update their contact information at StudentAid.gov. Borrowers will receive at least a half dozen notices before repayment restarts.
Monthly loan payments and interest rates will be the same in February as they were before the pandemic, although payment due dates may change. The payment pause and interest waiver put the loans into hibernation. (Although the Federal Reserve plans to increase interest rates in 2022, 2023, and 2024, this will not affect existing federal student loans, most of which have fixed interest rates.)
Borrowers who use AutoPay to automatically transfer payments from their bank account to the loan servicer may need to confirm that their bank account information has not changed. Do not assume that the payments will be automatically transferred at the restart of repayment.
Other borrowers may wish to sign up for AutoPay. Those who do are much less likely to be late with a payment, thereby avoiding late fees and collection charges. Most lenders provide a slight interest rate reduction, typically 0.25 or 0.50 percentage points, as an incentive.
If a borrower’s spending increased during the pandemic, they should review their budgets to free up money to start making student loan payments. Cut back on discretionary expenses. Borrowers can also increase their income by asking for a raise, working a part-time job in the evening and weekends, or by switching to a better-paying job.
More than a third of borrowers in the Direct Loan program are experiencing a change in loan servicer, due to four student loan servicers leaving the student loan program. A change in student loan servicer can cause confusion, since the payment address and the servicing portal will change. Loans and payment history sometimes get lost and payments may be misdirected. This disruption would have occurred regardless of the restart of repayment. Borrowers whose loan servicer is changing should save or print a copy of their loan information now, before the transition, and confirm that their loans were transferred correctly afterwards. They may need to sign up for AutoPay again with the new loan servicer.
For borrowers who are still struggling financially, there are other options for financial relief. One is deferments and forbearances. Borrowers may use the unemployment deferment, economic hardship deferment or general forbearances to suspend repayment of their federal student loans. Each of these has a 3-year limit. Another is Income-driven repayment. If a borrower’s income is less than 150% of the poverty line, their monthly student loan payment is zero under income-based repayment, pay-as-you-earn repayment, and revised pay-as-you-earn repayment. Interest may continue to accrue under these options, unlike the payment pause and interest waiver. If the borrower’s income has decreased, they can ask the loan servicer to recertify their income early to qualify for a lower monthly loan payment.
A prediction: Deferment, forbearance, and delinquency rates will be lower than they were before the pandemic, due to higher wages and lower unemployment.
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