By Owen Daugherty, NASFAA Staff Reporter
The Department of Education (ED) and Federal Student Aid (FSA) will have a significant burden in transitioning millions of borrowers back into making payments on their federal student loan when the extended pause on payments, interest accrual, and collections activity due to the ongoing pandemic comes to an end.
As such, NASFAA has joined a handful of other higher education groups detailing recommendations so borrowers are smoothly and successfully transitioned back into repayment.
"Research has shown that borrowers are confused and anxious about this transition, with many saying they may not be able to afford their monthly payments when the pause ends," NASFAA wrote in the memo. "If not managed properly, this transition could result in borrowers falling through the cracks and into delinquency and default."
Payments will have been paused for borrowers with federal loans for more than 18 months once the forbearance period comes to an end — President Joe Biden's order extended the federal student loan administrative forbearance period, the pause in interest accrual, and the suspension of collections activity through at least Sept. 30, 2021. The action continued the moratorium that received a number of extensions during President Donald Trump's administration.
The lengthy pause in payments for tens of millions of borrowers due to the coronavirus has raised concerns about what the transition back to repayment will look like. A recent survey cited in the memo found as many as 9 million borrowers could be reaching out for assistance all at the same time when payments resume.
In an encouraging sign, the memo points to the roughly $91 million set aside in the latest coronavirus relief package for outreach to student loan borrowers to assist ED and servicers in a successful transition.
Pointing to rising delinquency and default rates after payment pauses ended due to natural disaster-related forbearance periods, the memo highlights the concern regarding borrowers who were in delinquency or default before the pause started in March 2020 at the onset of the pandemic.
While borrowers who were delinquent will begin payments again with a clean slate, "these borrowers remain at high risk of falling back into delinquency and default, and FSA must take targeted steps to keep these borrowers on track," the memo states.
NASFAA, along with the Institute for College Access and Success (TICAS), the Center for American Progress (CAP), New America Higher Education Program, and the Pew Charitable Trusts' Project on Student Borrower Success, laid out several concrete ways ED and FSA can use the next seven months before payments resume to ensure a smooth transition process.
First and foremost, ED and FSA are encouraged to provide intensive and targeted outreach to borrowers who demonstrated signs of struggle before the pause.
Specifically, ED should should reach out as quickly as possible to borrowers who are most at risk of delinquency and default, which include but are not limited to: those who had recently defaulted; those who were 90 or more days behind on their payments; those who missed payments within their first three months of entering repayment; those who entered into a non-administrative forbearance on two or more occasions or for a period longer than a year; or borrowers who paused, missed, or made partial payments while enrolled in an income-driven repayment (IDR) plan.
The memo also highlights several best practices for communication with borrowers, such as clearly articulating the financial insurance aspect of IDR plans for at-risk borrowers, following up with borrowers across several mediums for those who express interest in IDR plans, and notifying borrowers who are facing hardships that they may be eligible to make a lower or $0 payment through an IDR plan. The memo points out that several of the practices are already being utilized by servicers effectively.
Further, the memo stresses the importance of providing borrowers clarity regarding auto-debit payments, which were turned off by servicers when the forbearance period started.
ED "must carefully consider whether it is in the best interest of borrowers to automatically reinstate their auto-debit payments" seeing as how it could pose "significant risks to those who have been negatively impacted by the pandemic," such as borrowers who have experienced a loss in income. The groups further note that if it is deemed that auto-debit should be automatically turned back on, "ED and servicers should also consider whether this should happen immediately when payments resume, or at a different point in time after repayment resumes." The memo also urges ED to "ensure that practices around reinstating auto-debit are consistent across servicers, so that the experience is the same for all borrowers."
Regardless of whether ED and servicers decide to turn auto-payments back on, the department should proactively communicate with borrowers about auto-debit, marking the messages as "urgent" and beginning communications well before repayment resumes to ensure borrowers take notice. In the event that auto-debit is automatically turned back on, the messages should make clear that a borrower needs to take action if they want to opt out, the letter adds.
For borrowers exhibiting signs of distress after payments are resumed, ED should provide additional flexibilities, such as allowing additional short-term, penalty-free periods for borrowers to not make payments if they miss payments immediately after the forbearance period expires.
Another part of easing the transition centers on assisting borrowers into IDR plans both now and in the long term by making the process simpler and more straightforward, with the memo noting how complex and time-intensive the process can be for borrowers and servicers even before the pandemic began.
"In addition to conducting proactive outreach about IDR enrollment, we recommend that ED implement flexibilities to streamline IDR enrollment," the memo states.
Focus on the immediate concerns regarding the transition back to repayment for millions of borrowers should not completely overshadow the important ongoing work on longer-term repayment reform, the memo adds.
Secure data sharing between ED and the Internal Revenue Service (IRS) made possible through the FUTURE Act will reduce the burden on borrowers by simplifying enrollment and recertification for IDR plans once the law is fully implemented, and doing so expeditiously should remain a focus.
"While it's critical for ED to quickly take the above steps to smooth the repayment transition, there remain many overdue reforms to the federal student loan repayment system," the memo states.
Publication Date: 3/16/2021