ACA International breaks down the end of the student loan payment pause for servicers and consumers. If there is a government shutdown at the end of the month, there could be some disruption in the payment process.
ACA International breaks down the end of the student loan payment pause for servicers and consumers. If there is a government shutdown at the end of the month, there could be some disruption in the payment process.09/22/2023 10:35 A.M.
8 minute read
More than 30 million federal student loan borrowers are set to resume their payments Oct. 1 after a series of pauses in the last three years.
The first pause came in March 2020 in response to the pandemic and provided relief to nearly 44 million borrowers.
Student loan interest resumed Sept. 1, 2023, and the U.S. Department of Education set Oct. 1 as the date for payments to start.
With the same date of Oct. 1, Congress is working to avoid a government shutdown, according to a report from The Hill. The last proposal on the defense funding bill at the center of the shutdown risk from House Speaker Kevin McCarthy failed to get votes from some of his Republican colleagues, according to the article.
If there is a government shutdown, the DOE has a “contingency plan,” as do all other federal agencies, but there hasn’t been an update since 2021—when student loan payments and interest were paused, The Hill reports.
The plan states servicing federal loans could continue, but only for a “limited time” and operations could experience “some level of disruption.”
Still of note for student loan servicers if the government shutdown is avoided, the DOE is instituting a 12-month plan for borrowers whose payments will resume Oct. 1. Those who miss payments from Oct. 1, 2023, to Sept. 30, 2024, will not be “considered delinquent, reported to credit bureaus, placed in default, or referred to debt collection agencies” during that time, according to a DOE fact sheet.
Scott Buchanan, executive director at the Student Loan Servicing Alliance (SLSA), said the 12-month plan is essentially a forbearance for borrowers.
Student loan servicers contracted with the DOE will apply the forbearance automatically; however, the borrower will still receive a delinquency notice for the missed payment.
The forbearance will bring the borrower’s account current and prevent collections and credit reporting, and the process will start over again [each time they miss a payment], according to Buchanan.
Buchanan said while there are upsides to the plan as a grace period for borrowers resuming their payments, it could cause confusion when they receive a delinquency notice, yet their account is marked as current.
That’s why servicers have been communicating that information to borrowers since the payment pause was permanently lifted and encouraging borrowers to reach out to their servicers with questions, he said.
Navigating the Payment Pause
Students could make payments during the pauses over the last three years if they chose to but, according to a report from the Government Accountability Office (GAO), there was some disconnect in communicating with borrowers.
The report, released when payments were expected to resume in May 2022, says DOE officials were communicating regularly with borrowers throughout the payment pauses, but expected challenges in motivating borrowers to start up payments again.
“I think every extension or change to the student loan payment pauses was intended to do good, but they also came with the consequences of borrower confusion and apathy,” said Sara Wilson, director of product innovation at Student Connections.
Student Connections is a division of Loan Science and works with schools and consumers on student loan payments and focuses on student outreach on behalf of educational institutions.
Wilson said when the payment pauses started, their communication with borrowers shifted from working on default prevention and managing delinquent accounts to helping them navigate the process if they wanted to continue making payments and informing them about their options.
Student Connections also makes sure borrowers know which student loan servicer they are assigned to, or how to find the company.
In some cases, a representative from Student Connections will talk with the borrower and their student loan servicer together to help them understand their account, Wilson said.
“We take the time to understand what the borrower needs help with. If they need to be in contact with their loan servicer to make a payment or other action, we help them with that process,” she explained.
The DOE’s 12-month plan for borrowers whose payments resume Oct. 1, and who may miss payments, impacts Student Connections’ outreach strategy, Wilson said.
It’s hard to know how the process will play out for servicers and the borrowers they work with until Oct. 1 and the weeks afterward, he added.
“Once people start getting billing statements, that’s when we’re going to start getting a lot more communications,” Buchanan said.
Wilson, from communications with student loan servicers, understood that the plan means the process when a student’s account is reported as delinquent to credit bureaus at 90 days past due is suspended.
“We will continue helping borrowers, especially those who are not making a payment even though they’re not facing the typical consequences of being delinquent. It’s not clear yet what other outreach will be done proactively during this 12-month on-ramp period,” said Wilson.
System Changes
With millions of borrowers on the hook for student loan payments starting next month, loan repayment through the DOE or student loan servicers could bog down the system and cause delays for borrowers to make payments or connect with their servicer.
Some borrowers are not ready to make payments after the pauses; on the other hand, the system isn’t ready to process payments from that many borrowers.
“Loan servicers are not built in a way to handle 30 million borrowers returning to payment all at one time,” Wilson said.
That’s why organizations like Student Connections, student loan servicers and Federal Student Aid (FSA) are encouraging consumers to connect with their servicers now—and find out if they have a new servicer on their account.
Wilson said approximately 40% of borrowers they worked with before the payment pause have a different student loan servicer than who they started with.
In anticipation of the payment pauses ending, servicers could hire and train new staff, according to a report from Student Connections, “Repayment is Coming: The Looming Danger of Mass Student Loan Delinquency and How to Fight It.”
There were also several contract changes for federal student loan servicers in the last three years. As a result, some servicers have left, while others have been added.
The DOE announced it is working on a permanent contracting approach to cement greater stability, servicer transparency, accountability and performance beyond the two-year period authorized by Congress, ACA International previously reported.
A few noted contract changes with the remaining services reduced the fees paid per borrower by 10%, the required minimum hours of operation, and required service levels. This was noted in a report Nelnet, as a publicly traded company, filed with the Securities and Exchange Commission, according to Student Connections’ research.
The DOE expected the changes in staff and schedules would increase hold times for callers and double the minimum “call abandonment” rate from 4% to 8%.
There may also be struggles for consumers who started their education during the payment breaks and therefore did not have a student loan payment to factor into their budget, until now.
Those borrowers never got into that habit of budgeting for the monthly payment amount, and now will be expected to start Oct. 1 for the first time since they started their loan repayment, Wilson explained.
“Prior to the payment pause, about 325,000 former students trickled into repayment each month. Once the pause began, graduating students were placed directly into forbearance,” according to the Student Connections repayment report. “None of them have been required to make a payment on their loans. Today, there are approximately 13 million such borrowers.”
Borrowers in the first years of repaying their loan may not have a job or are underemployed and need assistance through income-based repayment plans, for example. They likely would need additional help from their loan servicer to understand their options, according to Student Connections.
Next year, DOE will work on streamlining student loan repayment with its five contracted servicers, according to a news release.
“These awards are the first step toward implementing the [d]epartment’s new servicing environment next year, which will be FSA’s long-term loan servicing solution. The new environment is designed to provide federal student loan borrowers with a high-quality customer experience and to deliver support for at-risk borrowers so that all borrowers can take advantage of the most affordable ways to repay their loans, avoid default, and claim loan forgiveness, if they are eligible for it,” according to the DOE.
Account management for borrowers will be available on StudentAid.gov and the goal is to reduce disruptions from account transfers and increase servicer accountability through clear, service-level metrics.
The contracts, which go into effect in 2024, include updated cybersecurity provisions and compliance with consumer protection rules, among other changes.
The goal is to transition account management to the FSA website rather than individual servicer websites.
How Can Servicers Help?
ACA members in student loan servicing have successfully helped consumers develop income-driven repayment programs that work. They also explain the options for consumers who truly cannot afford to pay. In many cases, discussions with servicers can also rectify past financial decisions that were not a consumer’s best option.
Student loan servicers are encouraged to communicate with borrowers they had been in touch with before or during the payment pauses.
Place contact information on your website as well as details about the payment start process.
If you have contact with existing borrowers on behalf of clients, according to Student Connections you should:
- Provide consistent and accurate information to borrowers.
- Reinforce the importance of keeping contact information up to date.
- Make sure borrowers are in the right repayment plan.
This is especially important before and in the early stages of the payment starting Oct. 1 because of the influx of calls servicers may get.
For borrowers with questions, the FSA website has resources that can align with your repayment strategies on behalf of education clients. ACA’s Know My Debt financial literacy website also has resources.
Remember, subscribe to ACA Daily and Member Alerts under your My ACA profile when logged in to acainternational.org to receive updates on the ACA Huddle.
