It is no secret that the federal student loan program is in crisis. Nearly 40% of the 43 million borrowers are either in an uncertain holding pattern under temporary deferment or are already trashing their credit because they failed to resume making payments when the COVID pause ended last year.
The Biden administration fed unrealistic expectations of mass forgiveness that exceeded the president’s legal authority and were rightly dashed by the courts. Now a new administration is shaking things up again with changes to existing repayment plans and collection efforts, all amid Draconian staffing cuts and efforts to eliminate the federal agency responsible for managing the massive program. It is urgent that borrowers understand their options and ensure they are on track, as mistakes today can have lasting consequences.
Let’s begin by recognizing that federal and state support for higher education has been one of the best public investments in American history. The first large-scale federal effort was the passage of the GI Bill in 1944, providing access to a college degree for service members returning from World War II. In 1957, the Soviet launch of the Sputnik satellite prompted President Dwight D. Eisenhower to support a federal student loan program to promote scientific and technical education in what we would call STEM fields today. The government expanded college lending with the Higher Education Act of 1965, creating a loan guarantee program to expand college access.
There have been numerous changes to the student lending infrastructure since the 1970s that, while generally well-intentioned, have resulted in a $1.7 trillion Rube Goldberg contraption that is ensnaring many lower income borrowers into a lifetime of debt. And while there is plenty of blame to go around, it is ultimately up to borrowers to understand their options and take charge of the factors over which they have control even in such an uncertain environment.
President Joe Biden made student debt forgiveness a central element of his 2020 campaign. This effort was destined to fail for two reasons. First, it was manifestly unfair to the millions of Americans who had dutifully repaid their own obligations and would establish a negative precedent for future students. Secondly, the president’s blanket $20,000 erasure for half of all borrowers was ruled unconstitutional by the Supreme Court, which said that while he did possess limited ability to tinker around the edges, he did not have the power to discharge a broad swath of debt without Congressional action.
Biden immediately tried again with his so-called “Plan B” but soon abandoned the effort in the face of legal challenges. A final attempt at liberalizing payment terms and accelerating forgiveness under his Saving on a Valuable Education plan, referred to by the acronym Save, was halted in February by a federal appeals court.
Despite the failure of these high profile efforts, Biden did succeed in securing some relief for students who had been victims of predatory for-profit colleges and some other borrowers. In all, Biden succeeded in abating $189 billion through targeted actions allowable under the Higher Education Act.
President Donald Trump is taking a dramatically different tack. For starters, the Save program is all but dead, as the administration will not continue the appeal. The 8 million borrowers who had applied for the program are currently on hold, and their loans are not accruing interest until a final decision on its fate is reached, but these borrowers will likely need to apply for another plan.
The administration is also eliminating debt forgiveness from two other income-based repayment plans: Pay as You Earn and the Income Contingent Repayment plan. These payment plans remain open but no longer include forgiveness of the remaining debt after 20 or 25 years as they did previously.
Collection efforts targeting borrowers in default (over 270 days past due) are also ramping up. As of May 5, the government will initiate wage garnishments or withholding federal payments including tax refunds, benefit payments or even Social Security checks. Of the 10 million borrowers currently past due, half are in default and should act immediately to avoid further enforcement.
These changes in the student loan program would be challenging under normal circumstances, but the confusion is intensified by the chaotic downsizing of the federal workforce. The agency within the Education Department charged with managing the massive loan portfolio has been cut in half just as it expects to be flooded with applications.
Meanwhile, the president announced on March 21 that the entire student loan program would be shifted “immediately” to the Small Business Administration, sparking further confusion. The previous day, Press Secretary Karoline Leavitt had assured reporters that the loan program would stay at the Education Department and in any event, the change would require Congressional approval. Oh, and the staff at the Small Business Administration is also being cut by over 40%.
Furthermore, the cop on the beat is retiring. The Consumer Financial Protection Bureau had successfully recovered $2 billion in settlements from loan servicing companies for their notoriously abusive practices. The Trump administration is attempting to eliminate the bureau, firing 90% of its staff and ordering the agency to “deprioritize” enforcement. The edict is being challenged in court.
Given the upheaval, it is imperative that all borrowers contact their own loan servicer to verify their status and inquire about options for getting current if they are in arrears. There are still options available for partial forgiveness for public servants and within the remaining income-based program under existing law authorized by Congress. These options and other resources are available on the Federal Student Aid website studentaid.gov. The landscape is shifting rapidly, so it is especially important to be proactive.
Christopher A. Hopkins, CFA, is a co-founder of Apogee Wealth Partners in Chattanooga.
