The Return of Student Loan Payments: An Opportunity for Clarity and Repayment Flexibility

The pause on student loan payments and interest has provided needed relief for borrowers amidst the uncertainty of the COVID-19 pandemic. At present, the pause is scheduled to conclude on January 31, 2022; Democrats have proposed extending the pause at least through March 2022 in order to provide additional breathing room for borrowers, while Republicans have pushed for payments to resume as planned in order to limit the ongoing costs connected to the student loan pause—budgeted at about $85 billion over the last two fiscal years.

Regardless of when payments resume, their continuation will prove difficult for some borrowers. Prior to the pandemic, nearly two out of five loans expected to be in repayment in the federally managed portfolio were either delinquent or in default. Making matters worse, the COVID-19 pandemic disrupted the lives and financial circumstances of households of color disproportionately. Black and Hispanic borrowers experience financial difficulties and default at particularly high rates. Additionally, Black and Hispanic workers were more likely than white workers to experience unemployment during the COVID-19 crisis, and their unemployment rates remain higher.

In order to facilitate the transition back into repayment—for all borrowers, and especially those who are struggling financially—the Department of Education should provide clear information about the return of student loan obligations and proactively offer borrowers repayment options designed to minimize financial distress. The Department of Education and loan servicers should notify all borrowers of their balances and payment schedules well ahead of the reinstatement, as borrowers may need time to adjust their budgets or make household decisions to manage reentering repayment.

In this transition, many borrowers would benefit from enrollment in an income-driven repayment (IDR) plan. As opposed to the standard, 10-year plan with a fixed monthly payment, IDR plans tie payments to a portion of a borrower’s discretionary income. Unfortunately, the current array of IDR plans can make it challenging for borrowers to determine which one is in their best interest. Moreover, enrollment in IDR is often burdensome for borrowers, requiring significant paperwork, including annual income verification. Despite the flexibility offered by IDR plans, less than half of borrowers in repayment are enrolled in an IDR option.

To ensure borrowers have easy access to affordable monthly payments, BPC’s Task Force on Higher Education Financing and Student Outcomes endorsed providing borrowers with a single IDR plan, making it the default repayment plan, and allowing for automatic income verification through data-sharing—changes that would put downward pressure on default and delinquency rates. There is bipartisan momentum in Congress behind these reforms, including the Repay Act, co-sponsored by Sens. Angus King (I-ME) and Richard Burr (R-NC), that would consolidate IDR plans and simplify the repayment process for borrowers. Short of these actions, however, as borrowers return to repayment, the Department of Education should facilitate access to IDR by emphasizing it as an option and streamlining the approval process as much as possible.

Recent news that both Pennsylvania Higher Education Assistance and New Hampshire Higher Education Association Foundation will not extend their student loan servicing contract with the Department of Education beyond 2021 presents another challenge for the end of the student loan pause. Borrowers may have a new servicer not long after, or potentially even before, their payments resume. This creates additional confusion for borrowers and may further complicate the department’s plans for a smooth resumption of payments.

Whenever the student loan pause expires, many borrowers will struggle with returning to repayment, and could default. The Department of Education has an opportunity to reduce negative outcomes by providing clear information in advance and by facilitating enrollment in IDR for borrowers who would benefit from the flexibility. No matter when repayments begin, the Department of Education must adequately prepare borrowers.

Note: This blog was updated to reflect the Biden Administration’s expansion of the student loan repayment pause until January 31, 2022.