Jumping off the student loan cliff

January will be the craziest month in student loan history

Jan 1st 2021, immediately after celebrating the end of a truly ridiculous year, 40 million Americans will wake up and realize that their student loan payment is due that month. They’ll have seen emails and texts from Federal Student Aid and their servicer warning about this, but the rubber meets the road when the “payment due date” is real again.

For most, this realization will be catastrophic financially. Millions are used to not paying their student loans and have adjusted their budgets accordingly. Folks who were already delinquent are going to be less likely to repay. Anyone in default isn’t going to be incentivized to get out of it.

What does the cliff look like?

Based on a recent survey from PEW Institute, we can paint a clear picture of what the “student loan cliff” means:

• 6 in 10 borrowers — representing 24 million Americans — said it would be somewhat or very difficult to afford their payments if they had to begin making them in the next month.
• 9 million will want to know their options and start by calling their servicer

Servicers at MOST see a call volume of 2 million / month across the entire system. They should expect 9 million additional borrowers inquiring about their payments in January and February.

They have never experienced call volume of this scale, which will lead to more borrowers abandoning assistance and ending up in default / delinquency unless there are more available resources for them.

Can’t servicers just hire more people?

According to Scott Buchanan from the Student Loan Servicing Alliance, the U.S Department of Education reduced how much servicers are paid per borrower, so they will not have more staff available than normal to take calls.

On top of that, servicers are working remotely due to the pandemic and capacity is strained on their system. They’ve already adapted many times over from the thrashing requirements that ED and the Trump administration have put in place the past 9 months.

How are borrowers handling this?

If you’re one of the 40 million borrowers who are impacted by the COVID-19 forbearance period, you’re probably thinking a few things:

I don’t know when my payments will start up again. How can I plan my finances when my student debt payment = my rent payment?

I keep hearing about student loan reform but the numbers keep changing so I have no idea what to believe. What can I rely on?

I have no idea if I’m on the right plan because my income was decimated in 2020.

I’m used to not making my student loan payment and probably will keep not paying.

What about extending forbearance?

Extending the forbearance period sounds like a good idea, but it really is a “kick the can” approach. The longer borrowers are not in repayment, the more they are used to not paying and less likely they are to resume payments.

That said, I am all for better borrower outcomes — if FSA works with servicers and the private sector to improve access to income-driven payments and offers grace periods for at-risk borrowers, that could mean a more gradual cliff. 

The question is: why haven’t they done this already?

Trump could extend it again!

Yesterday, Secretary DeVos gave a speech at the FSA conference and said nothing about providing more relief to student loan borrowers. However, ED signaled to servicers they should delay bill notifications until Dec 8th. If the Trump administration acts, it would need to be before then.

The last time Trump extended the forbearance period was in August, months before the actual deadline and pre-election. We’ve blown past that deadline in this case. There seems little political reason for the Trump administration to do anything with forbearance — it’s unlikely they will but we’ll know in the next week.

Congress will do something for sure!

There’s nothing coming from Senate Republicans regarding any student loan forbearance extension in a stimulus bill. Right now, Congress seems very divided about this topic and any stimulus bill will likely be very small ahead of Jan 1, 2021.

The most likely scenario

My prediction: the student loan cliff happens on Jan 1. The actual "due date" depends on how ED interprets mixed federal regulation language about collecting payments after a forbearance period. To make collection easier, it's possible ED waits 30 days following the expiration to post the first due date, meaning the first possible bill is due January 31st, 2020.

Depending on the fallout, Biden may elect to extend the forbearance via executive order. However, by then borrowers will already be sufficiently confused and the system will be overwhelmed. Terry Hartle, the American Council on Education’s senior vice president for government relations, put it really well:

“The worst outcome is for the current provision to expire and then to reinstate it”

Tell me good news!

The government already has plenty of relief options in place. What they don’t need is to introduce more of them, further confusing the landscape.

The student loan ecosystem is not communicating the benefits of these programs clearly enough. While the media spends a lot of time talking about forgiveness reform, there’s already plenty of relief options that Biden helped create in his tenure as VP!

The issue is the distribution, not the product.

For borrowers looking for help right now, they can visit some of the partners who use our API for student loan relief:

• Trim
• Future Fuel
• Origin
• Chipper

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