End of grace period for student loan repayment

The Biden administration’s one-year grace period for federal student loan borrowers ended Monday, and advocates who work with borrowers are preparing for the worst.

During the grace period, which was intended to make it easier for borrowers to repay after the three-year payment break, those who failed to make their payments were spared the worst financial consequences, including default. But now, for the first time in more than four years, borrowers will be able to default on their loans.

Before the pandemic, nearly 20% of borrowers were in default and approximately one million borrowers defaulted each year. About 43 million Americans receive federal student loans. Debt relief and consumer protection advocates fear default rates could eclipse pre-pandemic rates in nine months. Millions of borrowers have not had to make payments since leaving college, and federal judges have suspended new repayment plans and a loan forgiveness plan for nearly 28 million borrowers, sowing even more confusion and throwing the system into disarray.

“I’ve been doing this for 14 years, and this is the worst I’ve seen in the system,” said Natalia Abrams, president of the Student Debt Crisis Center, a nonprofit organization that advocates on behalf of borrowers. “Basically, borrowers do everything they are told while the system collapses beneath them.”

Another program known as Fresh Start, which offers borrowers who defaulted before March 2020 a faster exit from default, was also supposed to end Monday, but the department extended it until Oct. 2 to 3 a.m. ET due to website issues.

Nearly 30 percent of borrowers were behind on their loans earlier this year, the U.S. Government Accountability Office found. A survey conducted through the Pew Charitable Trusts Student Loan Initiative found that financial insecurity is one of the top reasons borrowers don’t make payments. About a third of borrowers with household incomes below $25,000 were late and didn’t make their payments, said Brian Denten, head of the student loan initiative. Overall, 13 percent of respondents were not current on their loans and 12 percent reported making irregular payments.

“Our concern is that borrowers will return to a system that has never done a good job of getting them back on track,” Denten said.

Denten added that the department needs to be more proactive in communicating with borrowers about their options and how to navigate the system. Otherwise, he said, “this confusion really risks derailing a lot of people financially, if everything doesn’t go well.”

Starting Tuesday, borrowers who go 90 days without making a payment will be reported to credit agencies. After nine months without payments, they will no longer be able to repay their loans. In order to get out of default, borrowers must pay the overdue amount, among other penalties.

“I’m very worried about a massive wave of defaults next year, nine months from now,” Abrams said. “There are so many borrowers… (who) graduated in 2019, 2020 – they immediately took a break. They never made a payment. They don’t know this system. They were promised debt cancellation.

Defaulting, Abrams added, prevents borrowers from taking out other federal loans and “destroys your credit.” Additionally, those who fail to meet their obligations may be denied a portion of their tax refunds or Social Security checks. The department can also automatically deduct up to 15 percent of a borrower’s salary, but that system is currently suspended, according to the agency’s website.

Abrams said the grace period ending without repayment and debt relief options in place is a worst-case scenario.

“The fear is that default will be much higher than before because it’s much more confusing and broken than before,” she said.

For colleges, the return of default means a key accountability metric is back in play. The government uses a measure known as the cohort default rate to hold colleges accountable. The rate measures the proportion of an institution’s borrowers who have defaulted over a three-year period, and a high rate can lead institutions to lose access to federal financial aid. The national cohort default rate was 11.5 percent in fiscal year 2017, but it has remained at zero percent for the past two years, although that could change next year.

“Because a lot of things have to do with the default rate and the importance of default for student loan borrowers in terms of garnishing their wages or clearing their tax returns or their Social Security checks, “It’s really this seismic element in the system that acts as a basis for a lot of how everything works,” Denten said. “With (reimbursement) coming back and the gears turning with it, I. thinks there could be unintended consequences if this happens during such a confusing time.”