The new report illustrates the problem faced by many student loan borrowers: they pay on student loans, but their loan balance is increasing, not decreasing.
V joint report released this week by the National Center for Consumer Rights and the Center for Responsible Lending analyzed data from the U.S. Department of Education on more than 400,000 student loan borrowers who made voluntary payments on their student loans during the Covid-19 repayment hiatus. The report found that 63% of student loan borrowers who made payments during the Covid-19 abstinence still owe more than they originally borrowed. A third of these borrowers owe more than 125% of their original loan balance, despite the fact that no interest was charged during the moratorium.
“This data confirms what we already knew: borrowers want to make progress on their loans, but our broken student loan system has made it harder, with the result that loan balances are in many cases well above the original loan amount,” said the Responsibility Center. Submission of Senior Research Fellow Robin Howarth’s Statement. “Service errors and lack of federal oversight exacerbate flawed federal student loan policies and make borrowers, especially those of color, even more vulnerable.”
Student loan balances can increase over time under various circumstances:
- Interest is accrued during grace periods and on some loans even during school deferrals and grace periods after graduation. As a result, many student loan borrowers start paying off already having thousands of dollars more in debt than they originally borrowed.
- Advocates argued that student loan borrowers sometimes inappropriately encouraged their lenders to be tolerant rather than appropriate repayment plans, resulting in explosive balance sheet growth.
- Some federal student loan repayment plans do not necessarily lead to a decrease in the borrower’s balance sheet. Phase plans, especially for longer maturities, may only cover the current accrued interest at the start of the maturity; it may take years for borrowers to start repaying the principal. And borrowers with income-based repayment plans may not have payments that would ever be high enough to cover the accrued interest, leading to runaway balance sheet growth for years to come.
- Interest outstanding may be capitalized periodically or added to the principal balance under various circumstances, which has a significant compounding effect.
- Failure to meet obligations on federal student loans can in some cases result in severe financial penalties up to 25% of the total loan balance.
“As this data shows, unfortunately, too often, student loan borrowers see their account balances increase rather than fall during repayment,” said Abby Shafroth, attorney for the National Center for Consumer Rights. “Balances increase when borrowers in financial distress cannot afford to make payments. They also rise when the monthly payments in income-based repayment plans are insufficient to cover interest, which is common for low-income borrowers, which means that, despite making good faith payments, their balance increases rather than decreases. And unpaid interest is often capitalized, so borrowers pay interest on interest. Swelling balance sheets not only make education more expensive for those who have to borrow, but also make many feel hopeless that they will ever get free of their student debt. “
The Ministry of Education recently announced a public hearing schedule review key federal student loan programs… The Department will conduct ad hoc evaluations of student loan forgiveness programs, income-adjusted repayment plans and interest capitalization measures, among other programs and areas of concern. The department indicated that it will continue to work to change the rules and provide expanded assistance to student loan borrowers, including student loan forgiveness. But while these changes may be major, they will not happen quickly; an agreed rulemaking process for developing new rules can take years before final rules are adopted.
Advocates for student loan borrowers are urging the Biden administration to go further and cancel student loan arrears. “It is imperative for the Biden administration to provide immediate assistance to existing borrowers by fully writing off student debt as the administration works to close the welfare gap and get the economy back on a sustainable path,” Howarth said.
“The Biden administration can and should end practices that increase debt in the future and provide assistance to borrowers already affected by debt write-offs,” Shafrot said.