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There are still options to delay loans and panelists say long-term reforms can be made
When the Department of Education begins collecting on defaulted student loans this summer, some borrowers will have problems.
However, there are still avenues to delay or restructure payments, according to a recent American Entreprise Institute panel.
Hosted on Wednesday, May 21, “Bracing for the Student Loan Default Cliff” discussed the current situation and what can be expected in the coming months.
“The immediate implications” will be felt the most by those who are already in default and were likely in the same situation before COVID, according to Preston Cooper, an AEI economist. There are about “5 million borrowers currently in default,” Cooper estimated.
“The big wave of collections activity will probably hit when that default cliff arrives this summer,” Cooper said, in reference to those who have not paid since loans were restarted in Oct. 2023. However, the Biden-Harris administration did not make a real effort to collect on the loans.
Some student loan borrowers are victims and helpless, according to Sarah Sattelmeyer of New America, a left-leaning group. She said they are “stuck in a system that traps a lot of borrowers in default and traps them in debt for really extended periods.”
This new cliff “includes a much wider variety of borrowers,” Sattelmeyer said. Many have high credit scores, for example. She said efforts need to be made to reach out to these borrowers.
Alex Ricci with the National Council of Higher Education Resources provided the perspective of college and universities.
Higher education institutions must reach out to their former students, Ricci noted. The Department of Education reminded them of this responsibility, Ricci said during the panel.
The “cliff” is actually “slow moving,” he said. Borrowers who are not yet in default likely have already seen notices and can reach out to their loan servicer for help.
He echoed Cooper’s point that borrowers in default had “had a number of opportunities in the past…to get out of default.” Ricci’s group is “concerned” but noted there is a “lag time” with collections as the federal government must restart certain processes.
“Maybe this is more of a slow moving snowball,” AEI host Beth Akers said, summarizing Ricci’s point.
The panel also discussed “big fixes” that can be made in the future.
Cooper cited a Republican proposal to allow borrowers in “Income Driven Repayment” plans to have interest waived if they regularly make payments. A current problem, according to Cooper, is that people are making lower payments but their interest accrues. This leaves them with a similar or higher balance even after making regular payments.
Sattelmeyer with New America said she agrees with many of Cooper’s ideas “in principle.”
She said the Department of Education needs to boost funding for the federal student aid office to address staffing issues. Sattelmeyer previously expressed her concerns earlier in the panel about cuts to the Dept. of Ed. cuts.
“There does need to be more money in that system,” Sattelmeyer said.
Ricci with the National Council of Higher Education Resources made two suggestions.
First, he said around 12 percent of borrowers did not even know they had a student loan, citing a 2014 study from Akers, now with AEI. She wrote the study while at the Brookings Institution. Upfront counseling on loans could help with some of these issues, Ricci said. Alternative financing options should also be explored, Ricci said.
Second, while Ricci is not endorsing bankruptcy, he floated the idea of “considering” allowing loans to be discharged, in certain situations.
Later in the discussion, Cooper provided his perspective on structuring the loans. While he said it might make economic sense to stretch out student loan payments, because the gains from the degree come throughout a lifetime, it does not work from a behavioral standpoint. People want to be done with their student loan as quickly as possible.
“There’s a cohort of about 25 percent of undergraduate borrowers that actually pay off their loans within just five or six years,” Cooper said.
He said drawing out the repayment plan, “makes sense from an economic perspective” but “borrowers really don’t like that.”
Sattelmeyer said discussions should take into account how families discuss finance, since student loans are part of a household’s broader economic situation.
“We often think about our policies and silos but when people sit down at their proverbial kitchen table with their family to talk about finances it’s not like on Tuesday they talk about higher ed and on Wednesday they talk
about child care and on Thursday they talk about groceries,” she said.
Rather, “these are all things…there are tradeoffs that
are happening.” It is why the income-driven repayment plan formulas must be accurate, she said.
For “a lot of people” they want to pay their loans and are not intentionally neglecting their responsibility.
However, Ricci said collections restarting can be positive as it adds real “consequences” for student loans. He said for other bills there are consequences for not paying, such as having a phone turned off or not having health insurance. This is why, in his opinion, collections are good, as it makes the situation real.
Editor’s note: The article has been updated to note student loan repayments restarted in October 2023, not 2024.
MORE: The student loan tab comes due
IMAGE CAPTION AND CREDIT: A graduation cap on top of a pile of money; Zimmytws/Shutterstock.com