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Domino: A Blog About Student Debt Millions of Borrowers Had a Special Chance to Exit Default During COVID. The Biden Administration Must Fix the System Failure that Led Almost None of Them to Access It.

Millions of Borrowers Had a Special Chance to Exit Default During COVID. The Biden Administration Must Fix the System Failure that Led Almost None of Them to Access It.

By Ben Kaufman | November 16, 2021

New data from the Department of Education (ED) paint a bleak picture of the student loan system’s failure to deliver the most financially distressed borrowers relief that they are entitled to under the law during COVID.

In particular, while millions of borrowers in default on federal student loans had a unique opportunity to costlessly bring their loans out of default under protections first created through the CARES Act, the student loan industry has systematically failed to guide borrowers toward this protection. As a result, among the 7.7 million borrowers who were in default at the start of COVID on student loans that the federal government manages, ED’s new data show that more than 93 percent are still in default.

In fewer than 100 days, key protections that student loan borrowers across the country have depended on during the pandemic will expire, and borrowers struggling under the weight of defaulted student loans will lose the chance to bring their loans out of default at no cost. Instead, they will be stuck reckoning with the domino effect of financial fallout and added costs that simply being in default triggers.

The Biden administration must act quickly to protect these borrowers and right the historic wrong that the student loan industry has brought upon them by failing to deliver on these unique but time-barred protections.

During COVID, Borrowers in Default Were Granted a Unique Opportunity for Relief

Federal student loan borrowers enter default if they fail to make a payment on their loan for 360 days. Senior policymakers have noted that defaulting on a federal student loan should be nearly impossible given the array of existing protections for borrowers, but predatory practices by the student loan industry and indifference from ED have led to an epidemic of unnecessary default. In the last year before the pandemic, for example, a federal student loan borrower defaulted every 26 seconds. And like much of the damaging consequences of the student debt crisis, default falls hardest on Black and Latino communities.

Defaulting is extremely costly and damaging for borrowers. As we have written before, default on a federal student loan can harm borrowers’ ability to find a job, rent a home, or maintain a professional license, all on top of borrowers facing harsh collections measures. Borrowers in default can have their wages garnished, Social Security checks seized, and even Child Tax Credit benefits taken away.

Luckily, borrowers in default have certain pathways out. The most commonly used one is the federal rehabilitation program, where borrowers are given the opportunity to make nine reduced payments over a ten month period. If they do that, their loans are brought back into good standing.

During the COVID payments pause, borrowers in default on most federal student loans have been able to count their $0 monthly “payments” as progress toward rehabilitation. That means that with no cost out of their pocket, these borrowers could have exited default and left behind the huge costs that it entails. An opportunity like this has never been available to borrowers in default.

Unfortunately, this protection suffered from a fatal flaw: it depended on active, successful participation by the student loan industry. In particular, beyond having to make nine payments, borrowers completing the rehabilitation process also have to navigate various administrative hurdles including completing onerous paperwork. Doing so—and learning about rehabilitation in the first place—requires that borrowers have a student loan industry that can be relied on to deliver timely, accurate, and complete information regarding borrowers’ rights and obligations under the student loan system.

It appears that the student loan industry fell far short of that need.

The Student Loan Industry Failed Millions of Defaulted Borrowers

New data from ED show that the student loan industry has largely failed in guiding defaulted borrowers toward the cost-free but time-limited path out of default that they were granted during COVID.

In particular, ED’s data and our analysis of it indicate the following:

  • At the start of COVID, 5.7 million borrowers were in default on $125 billion in federal Direct student loans. More than 91 percent of these 5.7 million borrowers are still in default.
  • At the start of COVID, 2.8 million borrowers were in default on $43 billion in student loans that were originated under the older, bank-based student loan program but that are owned by ED. More than 95 percent of these 2.8 million borrowers are still in default.
  • At the start of COVID, 7.7 million borrowers were in default on $168 billion in student loans across the entirety of the federally managed student loan portfolio. More than 93 percent of these 7.7 million borrowers are still in default.

It is no exaggeration to say that even with massive federal intervention to provide borrowers a pathway out of default during COVID, hardly any borrowers successfully accessed it. These findings are a startling indictment of the systems that borrowers depend on to secure their rights under the law.

The Biden Administration Must Act

The failure of the Biden administration’s effort to lift borrowers out of default during COVID must be met with an even more sweeping response. And it appears that one may already be in the works.

News reports recently indicated that the Department of Education is considering a plan to automatically remove 7 million borrowers from default. Dubbed “Operation Fresh Start,” this proposal would involve ED using its existing authorities to waive the administrative hurdles that surround the rehabilitation process, count time spent during the past 18 months of paused payments as progress toward rehabilitation for defaulted borrowers, and immediately determine that these borrowers had met the criteria for their loans to be current again. 

The Biden administration absolutely must commit to implementing Operation Fresh Start. With fewer than 100 days left before the resumption of student loan payments and the expiration of COVID-related borrower protections, a promised doorway to relief is about to swing closed for the most financially strapped borrowers in the student loan system. If that happens, the next round of data from ED can be expected to be as troubling or even more dire than this one. Administratively waiving the red tape that has kept defaulted borrowers from accessing the historic relief they were pledged during COVID is a straightforward solution that will immediately deliver relief to millions.

It’s time for the Biden administration to take the bold action necessary to correct for the breakdowns that pervade the student loan system. Defaulted borrowers have waited long enough.

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Ben Kaufman is the Head of Investigations and a Senior Policy Advisor at the Student Borrower Protection Center. He joined SBPC from the Consumer Financial Protection Bureau where he worked as a Director’s Financial Analyst on issues related to student lending.

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