Riding the repayment roller coaster.

Hold onto your butts.

Welp, my predictions from Friday’s post came true, and advocates are blaming the Trump administration for returning borrowers to repayment - and a return of student loan collections.

As has been noted in many press pieces in the last few days, the Trump administration will resume collections on defaulted student loans on May 5 after involuntary collections have been paused since the COVID payment pause started in March 2020¹. In its press release on restarting collections, the Trump administration spit some fire, which unfortunately for the Biden folks happens to be mostly true:

While Congress mandated that student and parent borrowers begin to repay their student loans in October 2023, the Biden-Harris Administration refused to lift the collections pause and kept borrowers in a confusing limbo. The previous Administration failed to process applications for borrowers who applied for income-driven repayment and continued to push misguided “on-ramps” and illegal loan forgiveness schemes to win points with borrowers and mask rising delinquency and default rates.

Though I’m not quite sure where that October 2023 date is coming from re: Congress, there has been a confusing limbo on student loan payments and consequences.² For those in default, even though repayment (which should include collections) was supposed to return to normal, the Biden administration didn’t turn collections back on when regular billing started happening again in 2023… or when the on-ramp ended in 2024. It’s also true that the Biden administration didn’t process IDR applications for 6 months (from July 2024-December 2024) due to the SAVE injunction (which BTW has led to the backlog of applications right now), and significantly delayed publishing portfolio performance data showing that 7+ million people were about to go delinquent on their student loans.

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A quick aside

Lest some folks get it twisted and start spewing some BS about how I’m “too close to industry” and hate borrowers, I’ve spent the last 10 years or so building what is probably the most comprehensive portfolio of research and policy recommendations on defaulted borrowers and how to help them. This is a population of folks that became very important to me after I wrote a (somewhat groundbreaking, if I do say so myself) report with my pal Nick Hillman (hi Nick!) on the repayment behavior of community college students in Iowa. We found that borrowers who defaulted on their loans aren’t those who borrow the most - they’re the ones who actually borrow the least, because they drop out of college, thus gaining no benefit from their education but experiencing the worst consequences of borrowing to enroll in college. By and large, defaulted borrowers are truly the ones being left behind by our higher education system. My findings have repeatedly been backed up by much more representative studies from people who are way more qualified to do statistical research than me, so it’s a real thing. If you target defaulted borrowers with a policy, you target those most underserved by the system.

Given that I became so committed to higher education administration and policy as a caree0r (because higher education changed the trajectory of my life), it didn’t feel right to bang the drum for college enrollment while so many people - especially people of color, low-income people, and other vulnerable populations - were being left behind. I continued to write over and over again about defaulted borrowers, identifying for the first time that student parents make up about a quarter of defaulters, finding that certain populations (like veterans) are more likely to default, and even testifying about how Congress could end default altogether. So, let’s be ffr, I care a whole lot about borrowers, especially those who got the raw end of the deal.

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It’s also true that the Biden administration could have done a WHOLE LOT more to make delinquent borrowers aware of their status and options, requiring servicers to notify borrowers whose delinquencies have been reset or sending those emails from FSA. They also could have done more outreach to defaulted borrowers to inform them that consequences of being in default would come back at some point, and that those consequences are required by law and can be devastating. But the Biden administration could also have done what they said they’d do and saved the most vulnerable borrowers from the terrible repercussions of student debt.

See, the administration was constantly looking for ways to forgive loans. And more than once I proposed that ED exercise its settlement and compromise authority - which is really only ever used on defaulted debt - to forgive the loans of borrowers in default. After the Supreme Court struck down broad-based debt relief I made one last salvo, providing data showing that writing off these loans would cost very little, especially for borrowers who had been in default for more than 10 years, who we hadn’t performed any collections on, mostly because they didn’t make enough money to qualify for involuntary collections. But I was shut down. The White House said those people - you know, the people of color who were low income and didn’t finish college - weren’t sympathetic. They didn’t vote. So the Biden administration decided they weren’t worthy of relief.

ANYWAY.

If the Trump folks were really after student loan borrowers, they’d have started collections on Day 1 of the administration on January 20 or 21, but they didn’t. This is probably because there really wasn’t an ED/FSA transition team, so appointees were only getting familiar with the state of affairs once they were sworn in after the inauguration. Now, a few months in, they’re ready (apparently) to start involuntary collections on 5 million borrowers.

That number used to be much bigger, but the Biden folks did provide some help to borrowers on this one. Prior to the COVID payment pause, there were 8 million borrowers in default. As payments were paused during COVID, the Biden administration provided a way for defaulted borrowers to quickly get back to a “current” status by letting defaulted borrowers opt into a one-time program called Fresh Start. With this policy, most borrowers could simply call a number and say they wanted out of default, and they’d get moved back into normal servicing, no questions asked.³ This was an especially helpful policy for borrowers who had previously used all of their pathways out of default. These include consolidation, where the borrower creates a new loan out of their defaulted loans, or rehabilitation, where the borrower makes 9 on-time payments to get out of default. These policies are one-shot, and unfortunately, its not uncommon for federal student loan borrowers to re-default on their loans, so Fresh Start provided a helpful alternative to facing involuntary collections and the fees associated with them.

This, I suppose, is where we talk about the weirdo terms of federal student loans, which are unique in a whole lot of ways. They are unsecured debt, so anyone can get a loan as long as they pass basic qualifying standards, like being a U.S. citizen and enrolling in an eligible school. That’s the whole point of federal student loans - providing financing (and thus college access) to anyone, regardless of their financial circumstances. Unlike commercial debt, there isn’t an asset to repossess - no one can take away a borrower’s degree or education. And instead of default happening at 90-120 days, as happens in the private market for things like auto loans and mortgages, default on federal student loans doesn’t occur - again by law - until 270 days. But historically, borrowers were only transferred to collections at around 360 days, in large part because because it used to take a good deal of time to transfer the borrower’s loans from their loan servicer (which historically was a private entity in the FFEL program, with the loan only guaranteed by the Federal Government).

Somewhere between 270 and 300 days of delinquency, borrowers were transferred to what’s called the Default Resolution Group (DRG), which is a contractor called Maximus, who sent the default “welcome letter” and provided one last chance for borrowers to get out of default without experiencing the credit or collections consequences. After 30-90ish days, DRG would send borrowers to a private collection agency (PCA) under contract with the department, which would be paid a whole lot of money to initiate involuntary collections - including administrative wage garnishment (AWG) (up to 15% of a borrower’s income) or Treasury offset (TOP) (which would withhold a borrower’s tax refund, including tax credits for low-income people). During the Biden administration, the PCA contractors were fired and the administration decided collections would be done… some other way. But that way was never finalized, and now it seems that it may be up to Maximus to perform most, if not all, collections work under the contract they have which has them operating DRG and the platform that houses defaulted debt, the Debt Management and Collections Syste (DMCS).

Is Maximus ready to do this work? Um. Good question. Maybe, but this is something they haven’t done before on the DMCS contract, and for the last five years they’ve mostly just handled inbound calls from borrowers looking to do something about their defaulted loan. And while contractors that answer FSA’s primary phone line (1-800-4-FED-AID) are authorized to counsel borrowers in default, but it’s unclear right now if FSA will be using these vendors (the BPOs, or Business Process Operations vendors) to perform collections work, whether that be manning the phones or processing AWG and TOP.⁴

Regardless, this will probably suck for the 5 million people in default. It’s likely that these folks may not realize they’re in default until they’re missing money from a paycheck. If they do try to resolve their default, it could be hard to get a customer service representative on the phone, and subsequently may be hard to get into an agreement that gets them out of default.

But the truth of the matter is that if Democrats were in the White House, they’d be taking a similar action, and I have no doubt that press would be covering it differently, though I must say that the administration hasn’t helped themselves on this front with their rhetoric. By and large, defaulted borrowers fall out of the system. In order for the value of the government’s loan portfolio to be stable, collections have to happen. If that portfolio isn’t stable, the feasibility of an unsecured, government-backed, extraordinarily generous loan program goes out the door. And with that, so does college affordability. So, this all sucks, and it’s about to get a lot worse. But let’s not pretend this is a partisan problem. This is a policy problem, with policy solutions. If only someone (or someones) had the guts to stand up and fix the problem.

1. Some borrowers were having their wages garnished for several months beyond this timeframe because turning off wage garnishment requires FSA work through Treasury to get to borrowers’ employers, and the employers have to stop the garnishment, and a bunch of employers didn’t respond to the government for several months.

2. Considering borrowers were supposed to be paying, but if they didn’t pay they didn’t experience any negative consequences, so…

3. I was not a fan of Fresh Start, mostly because I knew defaulted borrowers were mostly those who were hard to engage in terms of repayment, and I worried that whoever opted in would most likely redefault, thus restarting a 7-year negative credit reporting record on their account. Had there been a comprehensive support plan in mind, sure, but based on FSA’s track record and stagnant budget, I wasn’t optimistic about it.

4. Side note that Maximus also has a BPO contract… and a servicing contract. Which more than anything else should highlight that this work doesn’t pay enough to bring in vendors other than the ones already entrenched in the system.