Student-loan companies aren’t prepared to restart payments in October, which could be a ‘financial catastrophe’ for borrowers

Elizabeth Warren
  • Elizabeth Warren asked student-loan servicers last month how they were preparing borrowers to restart payments.
  • They responded on Tuesday that they need more time, calling the transition into repayment “unprecedented.”
  • Lawmakers and advocates are calling on Biden to extend the payment freeze through next year.
  • See more stories on Insider’s business page.

The resumption of student-loan payments on October 1 is quickly approaching as borrowers, lawmakers, and advocates continue to sound the alarm on the risks with restarting payments too early.

As it turns out, the companies that collect the payments aren’t ready, either.

Last month, Sens. Elizabeth Warren of Massachusetts, Ed Markey of Massachusetts, and Tina Smith of Minnesota sent a letter to the CEOs of all student-loan servicers, requesting information on how each of them were preparing to transition borrowers back into repayment.

On Tuesday, the senators released the responses from those servicers, and the overarching theme was that servicers, along with borrowers, have concerns with restarting student-debt payments in just three months.

“The responses to our inquiry indicate that neither student loan borrowers nor student loan servicers are prepared for payments to resume, and servicers will need significant time to ensure that staffing and procedures are ready to provide borrowers with a high level of support,” the senators wrote in a letter to President Joe Biden.

One servicer even noted in its response that attempting to move over 43 million borrowers back into repayment at once is “unprecedented.”

Other main findings from the responses include:

  • The payment pause has provided significant relief to borrowers, with 2.5 million borrowers having fully repaid their loans during the pandemic;
  • Most borrowers had very little contact with their servicers during the pandemic, suggesting they will not be adequately prepared to restart payments;
  • Servicers need more time to ensure staffing is sufficient to support borrowers;
  • And transitioning borrowers from FedLoan Servicing, which recently announced it is not extending its contract, will require additional time to ensure borrowers are not harmed in the process.

Last week, the Pennsylvania Higher Education Assistance Agency (PHEAA) notified the Education Department that it would not extend its 12-year-old contract for FedLoan Servicing – which handles the loans of 8.5 million borrowers – beyond December 14. The senators wrote in their letter that attempting to restart payments only weeks after transferring servicers would “overwhelm an already broken student loan system.”

The fight to extend the payment pause continues to grow. On June 21, 64 Democrats, led by Senate Majority Leader Chuck Schumer and Warren, urged Biden in a letter to extend the payment pause until March 31, 2022, or until the economy returns to pre-pandemic employment levels, whichever is longer.

A few days later, 128 organizations, including the American Civil Liberties Union (ACLU) and Service Employees International Union (SEIU), sent a letter to the president, urging him to extend the payment pause until the administration has followed through on its promises to fix the student-loan system and cancel federal student debt.

And on June 30, Patty Murray and Bobby Scott, chairs of the Senate and House Education Committees, respectively, sent a letter to Biden urging him to extend the payment pause until early 2022 to ensure borrowers have the information they need to restart payments.

Education Department officials have also reportedly urged Biden to extend the payment pause, and while Education Secretary Miguel Cardona has not confirmed or denied whether such an extension will happen, he has hinted at the possibility of doing so.

“As the economy recovers from this unprecedented crisis, borrowers should not be faced with an administrative and financial catastrophe just as they are beginning to regain their footing,” the senators wrote. “We strongly urge you to extend the pause on student loan interest and payments in order to allow time to begin to repair the broken student loan system.”

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Freezing student-loan payments saved just $2,000 per borrower, report finds

Average student loan balance
  • Student-loan payments are paused through September, with national savings of $82.7 billion on interest payments.
  • A report by Upgraded Points found this saved each borrower an average of $2,001 in interest.
  • California saved the most interest overall at over $8 billion – 10% of the national total.
  • See more stories on Insider’s business page.

President Joe Biden extended the pause on student loan payments through September 30, and while the inclusion of the 0% interest rate on those payments provided financial relief, it didn’t add up to much for the average individual.

A report released on April 5 by Upgraded Points – a travel research group – found that since student-loan payments were originally paused under the CARES Act in March, the average interest saved per borrower was $2,001, and the national average for principal paused per borrower was $34,971. The state that saved the most interest overall was California at over $8 billion (10% of the national total), with New York slightly behind at $5.2 billion in interest saved.

The report noted that while national averages and total state savings were high, “on an individual borrower level, average borrowers only saved a couple thousand dollars in interest over the 12 months. While those couple thousand dollars could have been imperative in keeping borrowers in the black during pandemic-related hardships, these borrowers are still far from climbing out of the holes they dug in college. “

When the report analyzed the states that saved the most interest per 100,000 people, DC, Georgia, and Maryland were the top three locales, which results from a combination of small populations and high savings. On the other hand, the top three states with the lowest savings per 100,000 people were Wyoming, Utah, and Alaska because although those states have smaller populations, they also generally have lower principal debts and therefore fewer interest savings.

Here are the other main findings of the report:

  • The national total interest savings is about $82.7 billion;
  • Similar to most interest saved per 100,000 people, DC, Georgia, and Maryland saved the most interest per borrower, as well;
  • And North Dakota, Iowa, and Wyoming were the states that saved the least amount of interest per borrower.
UP: National impact of student loan freeze
Via Upgraded Points, the national impact of the student loan freeze.

While the payment pause and interest freeze have been instrumental in helping borrowers financially during the pandemic, the student debt crisis still looms far beyond the pandemic, with 45 million Americans holding $1.7 trillion in student debt.

Biden has already acted on the crisis by canceling debt for borrowers defrauded by for-profit schools and borrowers with disabilities, but lawmakers and advocacy organizations continue to call for the president to cancel $50,000 in student debt per borrower to lift the debt burden.

Sen. Elizabeth Warren of Massachusetts is one of the leading lawmakers calling for student debt cancelation, and she said on Twitter on April 17 that borrowers need relief now.

“The whole student loan debt system is broken, and it’s placing a massive burden on tens of millions of people,” Warren said. “They need immediate relief. And we need big, structural change to make higher education within reach for every family.”

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A quarter of Americans support forgiving all federal student-loan debt

College debt
Student-loan debt reached a national high of $1.5 trillion in 2019.

  • Democrats have been going back and forth on how much federal student-loan debt to forgive.
  • President Biden supports up to $10,000, while some progressive Dems are calling for $50,000.
  • A new Insider poll found a quarter of Americans support forgiving all federal student loans.
  • Visit the Business section of Insider for more stories.

Recently, Democrats have been clashing over how much federal student-loan debt to forgive.

Sens. Elizabeth Warren and Chuck Schumer called for $50,000 in student loan forgiveness, but President Joe Biden essentially rejected that plan, throwing his support behind $10,000 in forgiveness.

“I will not make that happen,” Biden said of the $50,000 proposal at a CNN town hall. Democrats like Warren, Schumer, and Reps. Ayanna Pressley and Alexandria Ocasio-Cortez doubled down on their support for the higher loan forgiveness.

In Insider’s most recent poll, respondents were asked: “A policy under consideration would forgive an amount of student loan debt held by Americans. Do you support this? And if so, what amount?”

Out of 1,154 respondents:

  • 25% support “forgiving all federal student loans.”
  • 13% support forgiving $50,000 in federal student loans, while 12% support forgiving $25,000.
  • 19% support forgiving $10,000 in federal student loans.
  • 22% of respondents said “I do not support any amount of student loan forgiveness.”
  • 9% of respondents said “I don’t know.”

When it came to party affiliations, respondents varied in how much forgiveness they wanted. Here are some key statistical takeaways:

  • 30% of respondents who said they would probably vote in their state’s Democratic primaries or caucuses in order to support forgiving all federal student loans. 
  • 15% of likely Republican voters also support forgiving all federal student loans.
  • 30% of respondents who would “probably participate in another primary or caucus” said they support forgiving all federal student loans
  • 25% of respondents who don’t vote in primaries also support complete forgiveness.
  • 20% of both likely Republican and Democratic voters support $10,000 in federal student loan forgiveness.
  • 20% of likely Democratic voters support $50,000 in forgiveness, as do 9% of likely Republican voters.
  • Conversely, 40% of likely Republicans don’t support any “amount of student loan forgiveness,” while 10% of likely Democratic voters don’t support any amount of forgiveness.

 There was also some division between different age groups:

  • 33% of respondents between the ages of 30 and 44 support forgiving all federal student loans, the highest percentage among age groups.
  • Conversely, 40% of respondents over 60 do not support any amount of student loan forgiveness, the highest percentage among age groups. Only 11% of respondents ages 18 to 29 don’t support any forgiveness, the lowest percentage among different age groups.

As Insider’s Hillary Hoffower and Madison Hoff previously reported, forgiving student loan debt – even just $10,000, like in Biden’s proposal – could benefit millions of Americans.

Importantly, student loan forgiveness could make a tangible impact in narrowing the racial wealth gap. Black students graduate with more debt than their white peers. Further, around 87% of Black students at four-year colleges take out loans, while 60% of white students take out loans. 

SurveyMonkey Audience polls from a national sample balanced by census data of age and gender. Respondents are incentivized to complete surveys through charitable contributions. Generally speaking, digital polling tends to skew toward people with access to the internet. SurveyMonkey Audience doesn’t try to weight its sample based on race or income. Polling data collected 1,154 respondents February 22, 2021 with a 3 percentage point margin of error.

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