Trump’s student loan cliff threatens chaos for Biden

At midnight on New Year’s Eve, President Donald Trump’s pause on student loan payments for 33 million Americans is set to expire, just three weeks before President-elect Joe Biden is slated to take over.

The Education Department started warning borrowers through text messages and emails this week that their monthly payments will resume in January. Even though Trump said this summer that he planned to later “extend” the freeze beyond Dec. 31, a White House spokesperson declined to comment on whether the president is still considering another executive action to move the expiration date.

If Trump doesn’t act unilaterally and Congress doesn’t act to avert the cliff either, Biden could wave his own executive wand once inaugurated, though the president-elect's campaign will not divulge his plans. The intervening weeks of limbo could cause mass confusion and uncertainty for borrowers. For the incoming president, the economic and administrative mess could take months to untangle, consuming the early days of his Education Department.

The federal student loan system “was not designed to start and stop at the same time for 30 million borrowers,” said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group that represents the companies that collect and manage loan payments on behalf of the Education Department.

“It would be very chaotic,” he said.

In March, it took a couple of weeks for the Education Department to fully suspend student loan payments after the CARES Act bestowed those benefits, and there were some administrative hiccups. The Trump administration was sued for failing to fully halt debt collections against defaulted borrowers. And one of the department’s loan servicers incorrectly reported data about the paused payments to credit bureaus about more than 5 million borrowers, lowering their credit scores in some cases.

The student loan relief has kept borrowers out of default and delinquency over the last eight months, with the pandemic cratering the economy and unemployment skyrocketing. The benefits have even modestly helped improve the credit scores of student loan borrowers during the pandemic, especially for borrowers who were pulled out of default, according to analyses by the New York Fed and Urban Institute.

In an unusual alliance, loan industry officials are advocating alongside congressional Democrats, higher education groups and consumer organizations, all warning that suddenly turning back on the federal government’s massive student loan apparatus — mostly frozen since March — in the midst of a presidential transition could lead to anguish for everybody involved.

The Education Department’s previous, targeted payment pauses in response to natural disasters have led to spikes in delinquencies among borrowers after the relief, noted Debbie Cochrane, executive vice president of The Institute for College Access & Success.

“It’s hard to think that this goes well for borrowers,” she said. “Helping borrowers get back into repayment smoothly has never been done at this scale.”

Nearly 41 million federal student loan borrowers have had interest suspended on their loans since March 13, beginning with the CARES Act and continued under Trump’s executive action over the summer. Roughly 33 million of those borrowers have had their payments paused, and the Education Department has stopped seeking to collect from the 8 million other borrowers who were in default.

A Pew survey earlier this fall found that 58 percent of borrowers who said their payments had been paused during the pandemic reported that they would face difficulty if they were required to resume making those payments in the next month.

Advocates for extending the benefits say turning payments on in the midst of a surge of coronavirus cases and unemployment levels that remain high would result in an increase in defaults.

“There’s no indication that we are through the pandemic, and it’s a bit of a mystery why the administration that has extended the benefits already wouldn’t extend them once again,” Cochrane said.

When Trump took executive action in August to provide the loan forgiveness, he said, “Today I’m extending this policy through the end of the year, and we’ll extend it further than that, most likely right after Dec. 1.”

Many Democrats, including Sens. Chuck Schumer and Elizabeth Warren (D-Mass.), are pushing the incoming Biden administration to use executive authority to go further than merely pausing payments by outright canceling billions of dollars of outstanding debt.

Biden during the campaign committed to canceling $10,000 per borrower as an immediate economic stimulus during the coronavirus pandemic, though he has not promised to bestow that debt relief through executive action, as progressives want.

The looming expiration of student loan benefits will likely present a more immediate and pressing challenge for the beginning days of the Education Department under Biden, which may have to scramble to reinstate the relief.

In Congress, lawmakers could attach an extension of the student loan relief to a stimulus deal or year-end government funding bill. But Democrats and Republicans have disagreed for months about whether to include an extension of the student loan benefits as part of an economic rescue package.

House Democrats’ stimulus legislation would extend the freeze on student loan payments until next October and keep the interest rate at zero until at least that time — or longer if the unemployment rate remains high.

Senate Republicans’ latest stimulus proposal did not include an extension of the benefits, and Senate Majority Leader Mitch McConnell has said he wants to pursue a smaller pandemic relief bill during the lame-duck session.

Consumer advocacy groups, labor unions and civil rights organizations have already urged the Trump administration and Education Secretary Betsy DeVos to act to extend the benefits for at least another nine months.

“If the cliff isn’t resolved, borrowers will find it harder than ever to make ends meet as they are thrown back into repayment or forced collections while the economy continues to suffer,” the groups wrote in a letter to DeVos last month. “Waiting to address the cliff will cause unnecessary stress, confusion, and errors for borrowers, servicers, and collectors alike.”