Student loans: Democrat calls for payment freeze if the government shuts down
Rep. Ayanna Pressley (D-Mass.) is calling for a freeze on student loan payments if the federal government shuts down.
Federal student loan payments are set to restart in October after a three-year forbearance pause during the pandemic. At the same time, the federal government faces a shutdown on Oct. 1 if Congress can’t come to a last-minute deal to avoid a closure, which is looking more likely.
A shutdown would only complicate the restart in payments, the lawmaker argued, placing an undue burden on borrowers.
Read more: How a government shutdown would impact student loans
"As we stare down an impending Republican government shutdown, it is abundantly clear that student loan payments should not resume October 1," Pressley said in a press release. "To throw borrowers back into repayment with bad faith loan servicers and an under-staffed Department of Education is a recipe for disaster and would deeply undermine the progress we have made to advance economic justice for student loan borrowers."
The restart in payments already faces complications.
More than 44% of borrowers have a new loan servicer since the pandemic began and payments were put on pause. When a new loan service provider is added, the chance for mistakes increases as accounts are transferred.
There also have been complaints by borrowers of long wait times trying to reach loan servicers and delays in processing applications for the Saving on A Valuable Education, or SAVE, plan, the new income-driven repayment plan.
A Department of Education spokesperson said that the department is working with loan servicers to process applications faster, but if borrowers applied on the Federal Student Aid (FSA) website, applications would be processed quicker.
Additionally, numerous studies have shown that some borrowers may struggle financially when payments resume.
Borrowers are expected to see monthly payments increase $200 to $500 per month, according to a Transunion study. One out of 5 borrowers indicated that they could struggle when scheduled payments resume as other debt obligations have increased by 24%, according to a Consumer Financial Protection Bureau report.
The vast majority of borrowers (85%) think they'll face financial hardship due to student loan repayment. About half (49%) say they'll have a hard time paying other bills, 43% will have to postpone other financial goals, and 36% won't be able to contribute toward their savings, the US News and World Report found.
"If House Republicans shut down the federal government, the Biden administration must shut down the student loan system, too," Mike Pierce, executive director of the Student Borrower Protection Center, said in a statement. "As it stands, the Administration plans to keep paying the student loan companies botching this effort to restart payments while furloughing the federal employees who are supposed to help borrowers when things don't go according to plan. This will result in more borrowers receiving bad information with less oversight and fewer resources to fix problems. Forty million people are being thrown to the wolves. It will be a catastrophe."
Still, it is unclear if President Joe Biden would have the authority to freeze those payments.
The debt ceiling deal that the White House struck with House Speaker Kevin McCarthy (R-Calif.) this summer stipulated that student loan payments would be due beginning in October and the president couldn't extend forbearance again.
Read more: Worried about when student loan repayments resume? These programs could help.
Rep. Pressley did not address the mechanics of a freeze in her press release and did not immediately respond to Yahoo Finance for comment.
"Even if Republicans needlessly shut down the government, loan payments will continue to be due starting this month," a Department of Education official said, noting a prolonged shutdown lasting more than a few weeks could substantially disrupt the return-to-repayment effort and long-term servicing support for borrowers.
Borrowers still can take advantage of the 12-month on-ramp during which missed or late payments won't be reported. Borrowers do not have to register for this on-ramp.
Before payments restart, borrowers should go to the Federal Student Aid (FSA) website to find out who their loan servicer is, their monthly payment amounts, and to enroll in an income-driven repayment plan, like SAVE. Borrowers should also make sure their contact information is correct on both their loan servicer’s website and in their StudentAid.gov profile, so they can receive notifications from the Department of Education.
"While the Administration works diligently to push back on the corrupt Supreme Court’s obstruction of President Biden’s historic cancellation plan, we should take immediate steps to prevent borrowers from entering into repayment at a time when the infrastructure is not there and bad actors will seize on the lack of government capacity caused by Republican dysfunction," Pressley said.
Ronda is a personal finance senior reporter for Yahoo Finance and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda.
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