Millions of people who have fallen behind in paying off their student loans have just received some very welcome news.
In addition to extending the pause on student loans – in place since spring 2020 – until August 31, the US Department of Education announced on Wednesday that it was withdrawing borrowers who were in default before the pandemic. They will receive a “fresh start” on reimbursement by “eliminating the impact of delinquency and default and allowing them to re-enter reimbursement in good standing,” the department said in a statement.
Borrowers default after missing nine monthly payments, after which they lose access to certain repayment plans and their accounts are sent for collection.
Before the pandemic, about 20% of all federal borrowers were in default. The fresh start will apply to all federal borrowers in default, including those with direct loans, as well as former federal Family Education Loans program loans.
The department’s decision to remove defaulting borrowers is an important step toward fixing a broken student loan system, said Abby Shafroth, acting director of the National Consumer Student Loan Borrower Assistance Project. Law Center, in a written statement. This will ensure that when the pause ends, borrowers and their families will not be delayed by default collection practices, she added.
The move is significant because the consequences of defaulting on payments are drastic for borrowers, as Persis Yu, director of policy and counsel at the Student Borrower Protection Center, previously told Money. The government can seize borrowers’ wages, social security benefits, and tax refunds and credits without going to court.
And because there is no statute of limitations on collections during the borrower’s lifetime, they can do so forever. Failure to pay can also have lasting effects on a person’s finances; for example, it can hurt their credit score.
About 90% of the 7.7 million borrowers with federally held loans who were in default when the pandemic began are still in default, according to data from the Department of Education. While a little-known provision of the CARES (Coronavirus Aid, Relief, and Economic Security Act) passed in March 2020 could have helped many borrowers out of default completely, few knew about it.
As a result, advocates have called on the Biden administration to automatically withdraw defaulting borrowers throughout the pandemic. They argued that asking borrowers who are already in dire financial straits to handle the paperwork-intensive process themselves was not working. It seems that the administration listened.
Yu applauded the Biden administration’s decision on Wednesday, but joined the growing chorus of voices urging the president to go further and cancel student debt entirely.
“The Department must not waste this opportunity to fix the broken student loan system,” Yu said in a statement. “As part of this new rapid deadline, the Department must work quickly to end its punitive collection practices, secure meaningful avenues for borrowers to deleverage, and provide widespread debt cancellation.”
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