should student loan collections be delayed further

The U.S. Department of Education announced on August 6, 2021 that the payment pause and interest waiver will end on January 31, 2022.

Student loan repayment will resume in February 2022. Collection activity for defaulted loans will resume at that time as well.

But should it? Or should student loan collections be delayed beyond the unfreezing of repayment? We consider the need (and precedents) for providing a transition or grace period on defaulted federal student loans before collections activities restart.

The Department Of Education Has Strong Collection Powers

When a borrower defaults on a federal student loan, the U.S. Department of Education has strong powers to compel repayment. Here are a few of the actions they have the authority to take:

  • Garnish up to 15% of the borrower’s wages administratively. This means they do not need to obtain a court order like private lenders
  • Seize federal income tax refunds (also known as tax offsets)
  • Offset up to 15% of Social Security disability and retirement benefit payments
  • Deduct collection charges from payments before the remainder is applied to the loan balance

The Need For A Transition Period

Would it be prudent for student loan collections to be delayed further beyond the January 31, 2022 deadline? And if so, why? Here are some reasons.

First, borrowers who default on their federal student loans often do so because they’re experiencing economic hardship. In other words, these borrowers are the ones who are most likely to have lost their jobs during the pandemic. But because they’re in default, they no longer have access to deferments and forbearances that can ease their return to repayment.

“These borrowers are the ones who are most likely to have lost their jobs during the pandemic.”

In addition, the American Rescue Plan Act provided advanced payment of child tax credits during the pandemic which are not subject to offset to repay defaulted federal student loans. However, the other half of the new child tax credits, that taxpayers will claim on their 2021 federal income tax returns, will be subject to offset. 

This will have a negative impact on the children of borrowers who are experiencing financial distress. The federal government gives with one hand while taking back with the other. Delaying the restart of collections could allow defaulted borrowers to retain this year’s income tax refund.

Impact Of The Pandemic On Loan Rehabilitation

During the pandemic, the paused payments counted toward loan rehabilitation agreements. A loan rehabilitation agreement returns the borrower’s loans to a current status and removes the default from the borrower’s credit history after the borrower makes 9 out of 10 consecutive payments.

For the payments to count they must be, full, voluntary reasonable and affordable payments on their loans. Thus, any borrower who was in a loan rehabilitation agreement at the start of the pandemic will have satisfied the requirements for rehabilitation.

The restart of repayment for these borrowers presents a high risk of re-default, especially because it is happening during a pandemic with high unemployment rates. And loan rehabilitation is a one-time opportunity. If the borrower defaults again, they will no longer be able to rehabilitate their loans. 

Rehabilitated borrowers have options for continuing to suspend repayment if they are still experiencing financial distress, but they may need to be reminded of these options. The options include:

  • Income-driven repayment. Loan rehabilitation usually involves a requirement that the borrower be switched into an income-driven repayment plan. Borrowers can ask the loan servicer to re-certify their income early, if they’re still unemployed or underemployed. 
  • Deferments and forbearances. Once the loan has been rehabilitated, the borrower regains eligibility for deferments and forbearances. They may be able to get an economic hardship deferment, unemployment deferment or a general forbearance. Each of these deferments and forbearances has a three-year limit.

Precedents For A Transition Period

There are several precedents for providing a transition period. Here are a few examples:

  • Wage garnishment and financial hardship. Borrowers are already allowed to ask for a review of the wage garnishment amount if they’re experiencing financial hardship (i.e. unable to pay for basic living expenses). Any change in the wage garnishment amount or suspension of wage garnishment remains effective for 6 months.
  • Wage garnishment and unemployment. There is an exclusion from administrative wage garnishment if the borrower has been involuntarily separated from employment and has not been reemployed continuously for at least 12 months.
  • 80-day delay before tax refund offset. After a borrower receives a notice that their federal income tax refunds will be offset, they have 65 days to file a request to review records relating to the offset. This is followed by a 15-day period for reviewing the records.

Note that borrowers may be able to avoid offset of their 2021 income tax refunds by filing their returns early before collection activity restarts.

Should Student Loan Collections Be Delayed Further?

It’s clear that the U.S. Department of Education allows transition periods before collection begins in certain circumstances. But does it have the power to institute a similar transition period at the end of the payment pause and interest waiver to further delay student loan collections?

Yes, the Department of Education has the legal authority under the Heroes Act of 2003 to provide a 6-month or longer transition period before restarting collection activities. Such a transition period would offer two key benefits.

First, it would let the defaulted borrowers retain their 2020 federal income tax refunds. Second, it would give them six more months to achieve financial stability and/or choose a student loan relief strategy such as income-driven repayment, forbearance, or deferment before collection activity begins.

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