5 Million Student Loan Borrowers At Risk of “Financial Delinquency” When Student Loans Resume

Earlier this month, the Biden Administration announced an extension to the moratorium on federal student loan repayment. The suspension, which began to combat the financial impact of the Covid pandemic, has been extended multiple times and was most recently scheduled to end in May. Citing inflation and Covid-related financial concerns, President Biden announced that the deadline would be extended through August, allowing millions of borrowers to breathe a sigh of temporary relief. But when payments resume, many millions will be at risk of financial calamity, a new report from the Consumer Financial Protection Bureau warns.

Forty-five million Americans currently carry the burden of student loan debt totaling close to $1.7 trillion. When the moratorium lifts, experts expect households to lose on average $393 per month from their monthly budgets to repay student loans, with some paying dramatically higher monthly payments. In addition to the loss of the Child Tax Credit in December and record-breaking inflation, many low- and middle-income families stand to lose the ground they’ve made when repayment begins.

A recent report from the CFPB sheds light on just how many borrowers will be negatively impacted when student loan payments resume, and the numbers are sobering. The CFPB examined a subset of borrowers, around 30 million, which accounts for close to 80% of Americans who have student loan debt, and determined how many might have trouble resuming student loan payments based on five risk factors. According to the report, those risk factors are “ pre-pandemic delinquencies on student loans, pre-pandemic payment assistance on student loans, multiple student loan servicers, delinquencies on other credit products since the start of the pandemic, and new third-party collections during the pandemic.”

They found that 15 million borrowers, almost half, have at least one risk factor, while 5 million have two or more. The CFPB determined that those with two or more risk factors are at risk of severe financial consequences, including future delinquency on loans once payments resume.

As part of Biden’s extension, he also announced that any borrowers who are delinquent or in default on their loans will be returned to good standing, giving them a so-called “fresh start” which would cancel wage garnishments and tax refund seizures and allow borrowers to establish a plan to repay. There is no indication, however, that the fresh start would apply to those who become delinquent after the moratorium ends.

The CFPB findings stand to underscore the Administration’s failure to make good on one of its main campaign promises — the erasure of $10,000 of student debt for those with federally backed student loans. Though some loan forgiveness has happened, the wide-scale relief promised on the campaign trail has not come to fruition despite the fact that it’s a promise Biden could make good on without the cooperation of the Congress.

Now it looks like some Senate Democrats may have left faith with the Administration and want to ensure Biden makes good on his promise to return borrowers to his standing and not continue to kick the can proverbial can down the road as he’s done with loan forgiveness.

Elizabeth Warren and a group of Senate Dems including Raphael Warnock, Bernie Sanders, Cory Booker, Chris Van Hollen, Tammy Baldwin, Richard Blumenthal, and Dick Durbin sent a letter to Education Secretary Miguel Cardona asking for specifics on how the Department of Education plans to implement the “fresh start” for delinquent borrowers.

“This move, which we requested in a November 2021 letter, has the potential to provide significant relief to millions of borrowers, particularly those who have most struggled with repaying their loans,” the legislators wrote. “We now write to request further detail about the steps ED (Education Department) intends to take to implement this plan and protect borrowers who have been in default for an extended period of time.”

The group requested answers from DOE no later than May 4th to the following questions that were included in the letter:

1. How many borrowers will benefit from the “fresh start” program?

1. Will the removal from default status happen automatically?

1. How will borrowers with privately-held FFEL loans be impacted?

1. And will the department forgive loans of those in long-term default?

The program, if successfully implemented, stands to benefit millions of borrowers who are currently delinquent or in default but how the Administration will provide relief to the estimated 5 million at risk for default even repayment resumes remains to be seen.