The novel coronavirus pandemic and related economic downturn have taken a significant toll on households and businesses around the country. Congress acted to help mitigate the serious challenges confronting student loan borrowers and servicers—companies hired by the U.S. Department of Education to collect and help borrowers manage payments—and responded with bipartisan legislation. The Coronavirus Aid, Relief, and Economic Security (CARES) Act included provisions to pause payments and interest charges for most borrowers who were repaying their loans and suspend collection efforts for those in default until Sept. 30, 2020.
However, the difficulties that borrowers and servicers are facing are likely to outlast these temporary interventions. At that point, more than 26 million borrowers will transition back into repayment at the same time. And servicers will need to manage the related, and probably unprecedented, outreach from borrowers as millions contemplate their options for dealing with ongoing financial insecurity. During and after this national emergency, policymakers need a clear understanding of the points within the repayment process where borrowers typically lose their way, and specific actions that can promote successful repayment.
Recent focus group research by The Pew Charitable Trusts, involving more than 150 borrowers in eight cities, provides many of the critical insights these policymakers need. Most pertinently, the study revealed that financial insecurity drives repayment behavior. Borrowers consistently reported that economic shocks—including job loss, unexpected health problems, and natural disasters—were the biggest barrier to repayment. Many said they wanted but were unable to make payments. Some even took another job to make up the difference, which may no longer be an option for many borrowers. A borrower from Seattle said, “The payments stopped because I didn’t have work. … And so [I’m] just trying to take care of myself in survival mode.”
In addition, focus group participants reported that income-driven repayment (IDR) plans—an important tool available to help make repayment affordable, especially during periods of financial stress—are difficult to enroll and remain enrolled in, in part because of complex application and annual recertification processes. IDR plans tie monthly payments to family size and income, and data shows that borrowers enrolled in IDR plans are less likely to default than those in other plans.
With millions of Americans experiencing pandemic-related economic shocks, and many more likely to do so in the coming months, policymakers can take key actions to provide targeted assistance to those with student loans.
Automatically extend deadlines for re-enrolling in IDR plans to help borrowers maintain their current payments. The income and other data needed to enroll in these plans and calculate monthly payments must be recertified annually, and borrowers frequently use tax information to do so.
Extending the deadline for borrowers to recertify until early 2021, when borrowers will file new tax information, would ease the number of transactions and requests for help that servicers must process during this busy period. And that would allow them to focus on helping those borrowers struggling most with repayment.
Permit borrowers who have reductions in income to enroll in or recertify for an IDR plan without a lengthy application process on a temporary basis. In the past several months, millions of Americans have lost their jobs and will continue to experience income volatility because of the economic downturn. This means that the information in their tax returns may not match their current incomes. The process for updating income information—to reduce monthly payments as part of an IDR plan—can be time-intensive for borrowers and servicers.
To provide repayment flexibility at a time of great uncertainty, servicers should be temporarily permitted to enroll borrowers into an IDR plan without requiring extensive paperwork—for example, over the phone, through a website, or through electronic communication.
Facilitate a robust outreach campaign by servicers before and after the paused payments end. Borrowers who were struggling financially before the pandemic are likely to continue to do so, given the sharp increase in unemployment. Pew research highlights indicators that can help identify at-risk borrowers before they are in distress, such as those who miss payments early, repeatedly suspend payments, or have previously defaulted.
The CARES Act already includes outreach requirements for servicers. As part of these or additional initiatives, they could use existing data to target borrowers who were delinquent, experiencing hardship, or had paused payments repeatedly and for long periods before the pandemic. These borrowers may need additional repayment assistance—including help enrolling in an IDR plan—now and after the paused payments end.
Automatically allow additional forbearance for those who miss payments immediately after the current protections expire to give servicers more time to reach them. Borrowers may also need time to re-enroll in automatic debit arrangements, given that they might not be reinstated without intervention.
Of course, the downturn alone did not cause the problems that borrowers now face: Before the pandemic, many families were already struggling with financial insecurity, nearly 20% of the nation’s 43 million federal student loan borrowers were in default, and millions more were behind on their payments. These policy recommendations not only can assist borrowers during and immediately after the pandemic, but they also have the potential to address many of the longer-term issues identified in Pew’s focus group research, including:
Many struggled early in repayment. The interaction between student loan payments and other expenses, such as child care and transportation, was the primary factor in borrowers’ choice of repayment plan, rather than the specific features of each plan. And many borrowers had difficulty understanding the full range of available options. A borrower from Phoenix noted that the student loan repayment system is “not as user-friendly to find out what you’re supposed to do. …It’s like so many steps, and it’s so much overwhelming information.”
Most borrowers reported pausing payments and doing so for far longer than they planned. Borrowers said suspending their payments was easy and helpful in times of financial stress, and many chose this option over more complicated solutions, such as enrolling in IDR plans, especially when they needed immediate repayment relief. A borrower from Phoenix reported that he “went to go to lunch like maybe six minutes away, literally, and … by the time I got to the parking lot of the Smashburger, I was already on deferment, like it was super-duper easy.” (Although provisions of the Fostering Undergraduate Talent by Unlocking Resources for Education (FUTURE) Act, enacted in late 2019, could help streamline enrollment in IDR plans, these changes have yet to be implemented.)
Increasing balances overwhelmed and discouraged borrowers. Having a growing balance—as a result of interest accrual, capitalization, periods of paused or nonpayment, or income-driven payments that did not cover the accruing interest—created psychological and financial barriers to repayment for many. In addition, many were discouraged by confusing repayment rules, unaffordable payments, inconsistent interactions with servicers, and impacts on other areas of their financial lives. Even those who were initially motivated to repay and had made payments or interacted with their servicers said failures of the system chipped away at their resolve.
As policymakers from both sides of the aisle consider short- and long-term options to aid borrowers, they should focus on maintaining flexibility, reducing repayment complexity, and supporting at-risk borrowers. Pew’s focus groups also provide lessons for implementing structural changes, which, together with the temporary provisions enacted during the pandemic, can help meet the longer-term ne of those struggling most with delinquency and default.