How the latest student loan break could help borrowers – even without forgiveness – The Hill
The story at a glance
- In his fourth extension to the student loan moratorium, President Biden also pledged to give defaulting borrowers a “fresh start.”
- Borrowers who have fallen behind on their loan repayments will see their balances updated.
- Debt collection agencies will no longer hold overdue loans or be able to charge collection fees.
All student borrowers currently in default will get a fresh start once the federal student loan repayment moratorium expires — a move that experts say could help free millions of people from crippling debt.
While the “fresh start” offered by the Biden administration’s new plan would not actually cancel debt — the step demanded by advocates and the one the president promised during his campaign — it would reduce penalties for borrowers. that could help them pay their bills and lift their credit ratings.
Before the pandemic, millions of borrowers were in default or late on their student loans, which triggers collection fees, negatively impacts credit scores and can even lead to wage garnishment in order to repay the loan.
“The current default system is like quicksand: it charges a host of confusing fees and offers limited exit routes, some of which can only be used once, meaning borrowers can easily get stuck or back and forth,” Sarah Sattelmeyer, project director of education, opportunity and mobility at New America’s higher education initiative, told Changing America.
“And the consequences of default, including collection costs; wage garnishment; withholding federal benefits and tax refunds, including earned income tax credit and child tax credit; and damage to credit score – are too punitive and felt more intensely by vulnerable communities,” she added.
Sattelmeyer written in a previous analysis for the Brookings Institution that borrowers of color, those with low incomes and first-generation students, among others, experience particularly high default rates.
At the same time, these groups were more likely to have struggled during the coronavirus pandemic.
Department of Education the data shows about 20% of borrowers are in default, ie they have gone at least 270 days without payment. Once that happens, the department reallocates a loan to a private agency to collect the debt, with collection fees and up to 25% of principal and interest added.
Throughout this time, interest continues to accrue on the loan.
the Federal Reserve Bank of St. Louis even predicted that as the economy continues to be disrupted by COVID-19, “severe default rates for student debt could return from historic lows to previous highs in which 10% or more of student debt were in pain”.
The administration’s “fresh start” pledge would return all current loan balances for borrowers to default, meaning their loans would no longer be held by a debt collection agency, no fees could be charged. charged and that borrowers would become eligible for essential programs such as income-driven programs. repayment plans and new loans if they want or need to go back to school.
A clean slate could also help defaulting borrowers improve their credit scores, an important financial benchmark for securing a mortgage, car loan and rental property.
While Biden’s action doesn’t address student debt erasure, Sattelmeyer told Changing America that the administration’s latest push to reform the repayment system is an important step, adding that pushing it through a federal bureaucracy is “no small matter”.
“But there are many details to work out to ensure borrowers are protected and well served by this transition, and much more needs to be done to reform the system in the future,” she said.
The Student Debt Crisis Center, an advocacy group, also applauded the president’s “fresh start” pledge for defaulting borrowers, but said there was only one real solution to the debt crisis. student debt.
“A fresh start is a step in the right direction, but permanent debt cancellation is the only lasting relief that gives families the financial freedom to thrive long into the future,” the organization said. said in a press release.
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Published on April 08, 2022