Student loan borrowers hit snags as payments resume: ‘It’s a challenging environment,’ head of loan servicer group says

Before the pandemic, the federal student loan system caused borrowers frustration and confusion. As the Biden administration resumes payments this month for some 40 million Americans after more than a three-year reprieve, the situation has been especially difficult.

Borrowers describe receiving incorrect bills and spending hours on the phone trying to reach their servicers. One woman told CNBC the estimated wait time to speak to someone at her servicer was 542 minutes.

“It’s a challenging environment,” said Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade group for federal student loan servicers. “Sometimes there are incredibly divergent call hold times from what we’d like to see.”

More from Personal Finance:
Lawmakers target credit card rates, fees as debt tops $1 trillion
Treasury to make it easier to get $7,500 EV tax credit in 2024
77-year-old widow lost $661,000 in a common tech scam

The many recent government announcements related to student loans seem to be adding to borrower confusion, Buchanan said. Though many of those developments are positive for borrowers, including a recent cancellation of $9 billion in student debt, they also raise a lot of questions about who is eligible and how soon that relief might arrive.

Other issues may be due to a change in servicers and incorrect calculations of borrowers bills under a new income-driven payment plan.

The Supreme Court in June struck down President Joe Biden’s broad plan to cancel up to $20,000 in student debt for tens of millions of Americans, rolled out in August 2022.

Before the high court’s ruling, a top official at the U.S. Department predicted some of the problems now unfolding.

“These student loan borrowers had the reasonable expectation and belief that they would not have to make additional payments on their federal student loans,” said Education Department Undersecretary James Kvaal said in a court filing last year.

“Unless the Department is allowed to provide one-time student loan debt relief,” Kvaal went on, “we expect this group of borrowers to have higher loan default rates due to the ongoing confusion about what they owe.”

Former President Donald Trump first announced the stay on federal student loan bills and the accrual of interest in March 2020, when the coronavirus pandemic hit the U.S. and crippled the economy. The pause was extended eight times.

Nearly everyone eligible for the relief took advantage of it, with less than 1% of qualifying borrowers continuing to make payments. Outstanding education debt in the U.S. exceeds $1.5 trillion, burdening Americans more than credit card or auto debt.

To ease the transition for borrowers, the Biden administration worked quickly to implement a new payment plan option, which it describes as the “most affordable repayment plan ever.”

Yet many borrowers who’ve signed up for the Saving on a Valuable Education, or SAVE, plan, complain they’ve gotten incorrect bills.

Higher education expert Mark Kantrowitz said that while he’s heard from several borrowers who’ve run into this issue, he estimates that “hundreds of thousands of borrowers may have been affected.”

According to Kantrowitz, student loan servicers seem, in some cases, to be using the 2022 poverty line to calculate borrowers’ payments instead of the current 2023 figure. (The SAVE plan is supposed to use the poverty data to shield a share of borrowers’ income from their payment calculation.)

Miscommunication between servicers may also have contributed to the errors.

Several of the largest companies that service federal student loans announced during the Covid-19 pandemic that they’ll no longer be doing so, including Navient and FedLoan. As a result, about 16 million borrowers have had a different company to deal with this month.

“Whenever there is a change of loan servicer, there can be problems transferring borrower data,” Kantrowitz said.

Meanwhile, Buchanan said that some of the data provided by the U.S. Department of Education has been wrong. Borrowers can sign up for the SAVE plan with their servicer or with the department.

“We’re having challenges with data integrity issues coming from the department,” Buchanan said. “It’s meant a lot of questions.”

A spokesperson for the U.S. Department of Education said they’ve worked swiftly to resolve these problems.

It directed servicers to notify affected borrowers and put them into an administrative forbearance until they were able to calculate the correct payment amount, the spokesperson said. It may also refund some borrowers.

“Our top priority continues to be supporting borrowers as they successfully navigate return to repayment,” they said.

Still, consumer advocates caution that the new problems will only reduce borrowers trust in the lending system.

“Because of the misinformation being disseminated, borrowers are likely to make overpayments, or underpayments and get off-track,” said Ella Azoulay, a policy analyst at the Student Borrower Protection Center.

“Moreover, being forced to make incorrect monthly payments places additional strain on borrowers’ monthly finances and puts some in the position of being unable to afford necessities, like medication.”