Student Loan Payments Resume: Federal Agency Warns Servicers, as Borrowers Face Hurdles

More than 40 million borrowers are simultaneously returning to repayment this month following the historic end of the student loan pause in August. As borrowers begin to report problems, a federal watchdog agency is warning loan servicers that it is monitoring student loan companies for unfair, deceptive, or illegal conduct. 

Here’s the latest.

Student loan pause ends, and payments are resuming

The student loan pause officially ended on August 31, after more than three years of short-term extensions by former President Trump and President Biden. Since March 2020, most federal student loan borrowers had no payments due and no interest accruing on their loans. But federal spending legislation passed by Congress and signed by President Biden earlier this year, to avert a debt ceiling crisis, codified the end of the student loan pause, preventing Biden from issuing any further extension.

Interest began accruing on federal student loans on September 1^st. The first billing statements will be generated later this month, and borrowers’ first student loan payment due dates will be in October. 

To ease the transition back into repayment, the Biden administration has announced several initiatives. These include the SAVE plan, a new income-driven repayment plan that officials are touting as the most affordable student loan payment option ever. The administration is also highlighting a 12-month “on-ramp” period, during which borrowers will not be reported as delinquent to credit bureaus for missing payments. 

But borrowers are already encountering problems, such as inconsistent information provided by loan servicers about loan repayment and student loan forgiveness, erroneous monthly payment calculations, and extremely long call hold times when trying to reach their loan servicer. Many advocates have long warned that the abrupt return to repayment would seriously tax an already overstretched and underfunded student loan servicing system, and at least some of these concerns appear to have been well founded. 

Agency warns loan servicers about repayment and student loan forgiveness issues

The Consumer Financial Protection Bureau (CFPB), a federal watchdog agency that has oversight over much of the financial services industry (including student loan servicers), warned student loan companies that it’s watching as borrowers begin to report problems. 

“In October, most federal student loan borrowers will receive their first monthly bill since March 2020. The CFPB has information for borrowers that may be eligible for reduced payments or loan cancellation,” said Rohit Chopra, Director of the CFPB in a series of tweets last week. “In our nearly 10 years of supervising federal student loan servicers, we’ve seen many borrowers harmed by errors and illegal practices. The CFPB will continue to take law enforcement actions against wrongdoers.”

“Unfortunately, the CFPB has found in the past that some student loan servicers have made it harder for borrowers to access lower payments and loan cancellation programs,” said the CFPB in a blog post last week. “Our complaint monitoring, enforcement and supervision efforts have uncovered red tape, errors, delays, and even illegal practices that left borrowers paying more than they should… As borrowers prepare for student loan payments to resume, CFPB is working to ensure that servicers follow the law and that consumers are protected. We will be looking closely at loan servicers’ practices, borrower outcomes, information from fellow regulators, and issues raised through consumer complaints.”

Long call hold times for borrowers seeking help with student loan forgiveness and repayment programs

Borrowers trying to reach their loan servicer have been reporting exceptionally long call hold times for weeks, and the problems seem to be worsening. Loan servicers are severely understaffed due to budget cuts at the federal level, which have hindered the ability of loan servicers to staff up and train new employees after many were laid off during the Covid pause.

The situation has been made only more complicated by major loan servicing transfers that occurred during the Covid pause. Many accounts that were with FedLoan Servicing were transferred to MOHELA and other loan servicers. Direct federal student loan accounts that were with Navient have been transferred to Aidvantage. And most recently, Great Lakes Higher Education transferred its federal student loan portfolio to Nelnet. The result has left millions of borrowers dealing with companies that they have never interfaced with before.

Some advocacy groups are trying to highlight the widespread call center problems by staging a nationwide “call your loan servicer” day this week. 

“CALLING ALL STUDENT LOAN BORROWERS… JOIN A COUNTRY-WIDE ACTION THIS THURSDAY AT 2PM ET—ALL YOU HAVE TO DO IS CALL YOUR STUDENT LOAN SERVICER! With repayment underway, help us stress test @POTUS ’s new SAVE plan to make sure it's working for borrowers,” said the Student Borrower Protection Center (SBPC) in a tweet this week. The SBPC is telling borrowers to call their loan servicer, ask their loan servicer questions, report back on the outcome, and file a complaint with the CFPB if there are any issues or problems. 

“Borrowers deserve a functioning student loan system!,” said a message on the website of the Campaign to Cancel My Student Debt, a coalition of organizations that includes the SBPC, as well as a number of major national labor unions, including the American Federation of Teachers, the National Education Association, and the National Association of Social Workers.  

But some advocates expressed concern that the campaign might actually make student loan servicer call centers even more backlogged, preventing some borrowers who need to reach their loan servicer on time-sensitive matters from being able to do so. 

Questions raised about student loan on-ramp

Meanwhile, the Education Department clarified its position on the so-called on-ramp period, which is supposed to protect borrowers from incurring negative credit reporting outcomes, due to missing student loan payments during the next 12 months. The Department quietly updated its guidance on the on-ramp period.

“To help borrowers successfully return to repayment, we created a temporary on-ramp period through Sept. 30, 2024. This on-ramp period protects borrowers from having a delinquency reported to credit reporting agencies. This prevents the worst consequences of missed, late, or partial payments,” says the department’s guidance. “However, payments are still due, and interest will continue to accrue (add up). We will not report you as delinquent during the on-ramp, but we do not control how credit scoring companies factor in missed or delayed payments.”

The updated language suggests that borrowers could still incur credit damage from missed payments during the on-ramp, despite assurances to the contrary.