Federal Student Loans: Return to Repayment

Federal Student Loans: Return to Repayment

Updated September 1, 2023
Federal Student Loans: Return to Repayment
In response to the COVID-19 pandemic, since March 2020,
As of May 30, 2023, about 29 million student loan
the accrual of interest, monthly payments, and involuntary
borrowers with more than $1.1 trillion in ED-held loans had
collections have been paused on most federal student loans.
their monthly payments paused. (Borrowers affected by the
The Fiscal Responsibility Act of 2023 (FRA; P.L. 118-5)
interest accrual pause may not necessarily have participated
specifies that the interest accrual and monthly payment
in the payment pause, such as individuals whose loans were
pauses shall cease to be effective 60 days after June 30,
in in-school status.) Of these borrowers, 6.3 million with
2023 (i.e., August 29, 2023). Thus, after over three years of
student loans totaling $264 billion only have loans that have
no interest accrual and no required monthly payments on
not yet been placed into a repayment plan (email from ED,
most federal student loans, the Department of Education
Office of Legislation and Congressional Affairs to CRS,
(ED), contracted student loan servicers, and millions of
July 10, 2023.) This may be an indication of borrowers who
federal student loan borrowers are preparing for or are in
have never previously been in repayment status on their
the midst of the end of those flexibilities.
current outstanding loans and, thus, may not have any
previous experience making payments on their student
This In Focus provides an overview of ED’s plans for
loans.
transitioning federal student loan borrowers into repayment
on their federal student loans and discusses selected policy
On-Ramp to Repayment
issues. Detailed information about the federal student loan
To facilitate transition into repayment status for borrowers,
interest accrual and monthly payment pauses can be found
ED announced a 12-month “on-ramp” to repayment, which
in 46314
is a set of flexibilities “to protect the most vulnerable
borrowers from the worst consequences of missed
Interest Accrual
payments following the payment restart.” For October 1,
From March 2020 through August 31, 2023, interest accrual
2023, to September 30, 2024, borrowers who miss monthly
on ED-held loans was suspended. As of June 30, 2023, at
payments due on their loans are not to be considered by ED
least 38 million student loan recipients with balances
to be delinquent on those loans, nor are such borrowers to
totaling about $1.4 trillion had interest accrual paused on
be reported to consumer reporting agencies as delinquent,
their loans. (CRS analysis, ED, “Federal Student Loan
placed in default status, or referred to private collection
Portfolio Summary”)
agencies. Unlike the payment pause, periods of missed
payments are not to count toward meeting loan forgiveness
For most borrowers, the interest rate charged on their loans
requirements, such as under PSLF.
is to be the same as it was before the interest accrual pause
began. Borrowers who consolidated their loans into a Direct
Saving on Valuable Education (SAVE) Plan
Consolidation Loan during the interest accrual pause would
On July 10, 2023, ED published a Final Rule to revise the
have interest rates on their new Consolidation Loans equal
current Revised Pay As You Earn (REPAYE) repayment
to the weighted average of the interest rates on the loans
plan (a type of income-driven repayment [IDR] plan). In
they consolidated, with the result rounded up to the next
doing so, ED renamed the plan the SAVE plan. In general,
higher one-eighth of a percentage point.
the SAVE plan will result in lower monthly payments for
all qualifying borrowers as compared to current REPAYE
Monthly Payments
plan rules. Also, after applying a borrower’s monthly
During the payment pause, borrowers were not required to
payment to their loan, any unpaid accrued interest is not to
make monthly payments on their ED-held federal student
be charged. Provisions of the plan are to be implemented on
loans. (In practice, ED placed all such loans in
a tiered schedule, with some provisions effective July 30,
administrative forbearance.) Borrowers could opt out of the
2023, and others effective July 1, 2024. Provisions
payment pause. While periods of forbearance do not
implemented in both tiers would generally lower borrower
typically count toward required payment periods under
monthly payments. ED intends to automatically place all
various loan forgiveness programs (e.g., Public Service
borrowers currently enrolled in the REPAYE repayment
Loan Forgiveness [PSLF]), payments that would have been
plan into the SAVE plan “later this summer.” Borrowers
made during the payment pause count toward meeting such
not already enrolled in the REPAYE repayment plan may
loan forgiveness requirements.
apply for the plan as of July 30, 2023.
ED’s contracted loan servicers began sending monthly
Selected Issues
billing statements to borrowers in August 2023, and
This section highlights selected policy issues regarding
monthly payments are due beginning October 2023.
federal student loan borrowers’ return to repayment.
https://crsreports.congress.gov

Federal Student Loans: Return to Repayment
Risk of Delinquency and Default
Issues with previous transfers among loan servicers have
Millions of student loan borrowers have not been required
been identified, including the following:
to make monthly payments on their federal student loans
• some loan servicers have experienced significant
since March 2020, and a large portion of those borrowers
operational challenges in managing borrower account
may have no previous experience in making loan payments.
transfers while also implementing major loan program
changes, and
ED has indicated that federal student loan borrowers may
be at heightened risk of delinquency and default as they exit
• transferee loan servicers have reported receiving
forbearance. Specifically, ED has pointed to previous
incomplete borrower account information from the
instances in which it provided student loan borrowers who
transferor loan servicer.
experienced local and regional natural disasters with
forbearances. ED cited data showing that in the calendar
Other issues with the administration and loan servicing
year before the disaster declarations for Hurricanes Maria,
environment of the federal student loan programs have been
Harvey, and Irma, and the northern California wildfires in
previously identified. For example, the CFPB has identified
late 2017, only 0.3 percent of borrowers living in a state
problems relating to loan servicers’ disclosure of student
(and county, when relevant) that was a federally declared
loan terms and conditions and breakdowns in customer
disaster area defaulted on their loans. However, 6.5% of
service. Loan servicers have reported receiving fragmented,
borrowers defaulted in the calendar year after they exited
incomplete, and untimely guidance from ED with respect to
the forbearance in which they were placed in response to
implementing ED policies.
those disaster declarations.
Transfers of student loan accounts among servicers and
historical issues encountered in the administration and loan
Consumer Financial Protection Bureau (CFPB) research
servicing environment may pose additional complications
indicates that one-in-five student loan borrowers have risk
for borrower return to repayment.
factors (e.g., pre-payment pause delinquencies on student
loans) that suggest they may have difficulty making
Funding for Administration and Servicing
scheduled payments on their student loans when they
Funds for the administration of the federal student aid
become due.
programs, including the student loan programs, are
provided via annual discretionary appropriations. Over the
Loan Program Administration and Loan Servicing
past several years, funding for aid administration has
Since the beginning of the payment pause, the federal
gradually increased. For FY2023, ED requested a $620
student loan programs have experienced several large
million (30%) increase in discretionary appropriations over
policy and administrative changes. Statutory updates, which
the FY2022 amount for student aid administration, but
ED has not yet fully implemented, to streamline
funding for FY2023 was provided at the same amount as
administration of the IDR plans have been made. ED has
FY2022.
also substantially updated numerous loan program
regulations (e.g., PSLF, IDR plans like the SAVE plan,
ED and loan servicers have indicated that such “flat
elimination of instance of regulatory interest capitalization)
funding” may be inadequate to support borrowers’ smooth
to effectively expand benefit eligibility and to ease
transition into repayment. For instance, in light of this flat
administrative processes. Many of these changes recently
funding, it has been reported that ED has decreased funding
became effective or are to be effective in the coming year.
to support loan servicers’ customer service efforts. As a
result, federal student loan servicers have recently reduced
Significant statutory and regulatory changes and borrower
their customer service staffing numbers, and ED has
return to repayment may each pose implementation
reduced the minimum number of customer service hours
challenges to ED on their own. The near simultaneous
loan servicers are required to provide. Inadequate staffing
implementation of these may further complicate their
may hamper customer service and leave borrowers
execution. For example, with limited staff and monetary
transitioning into repayment with insufficient support in
resources, ED may need to prioritize some activities over
navigating the terms and conditions of their student loans.
others, which may result in suboptimal or delayed
implementation of some policies.
For FY2024, S. 2624, the proposed Departments of Labor,
Health and Human Services, and Education and Related
Student loan servicers play an integral part in administering
Agencies (LHHS) Appropriations Act, 2024, would provide
the day-to-day aspects of the federal student loan programs,
an additional $150,000,000 in appropriations over FY2023
including sending billing statements to borrowers,
amounts (a 7% increase), specifically for “ensuring the
processing payments, and communicating with borrowers
continuation of student loan servicing activities, including
about and processing borrower requests for loan program
supporting borrowers reentering repayment.” It would also
benefits and features (e.g., deferment and repayment plan
authorize ED to transfer a higher proportion of
options).
appropriations among accounts than is typically authorized
for “continuation of basic operations, including student loan
Recently, several loan servicers have ended their contracts
servicing.” The House Appropriations Subcommittee draft
with ED, thus requiring ED to transfer borrower accounts to
FY2024 LHHS appropriations bill would decrease funding
other servicers. (The CFPB estimates more than 30 million
for student aid administration by $264,736,000 (-13%).
borrower accounts may be affected by transfers among loan
servicers or to different servicing technology platforms.)
Alexandra Hegji, Analyst in Social Policy
https://crsreports.congress.gov

Federal Student Loans: Return to Repayment

IF12472

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