By Katie Lobosco, CNN
Washington (CNN) — Sen. Elizabeth Warren and three other liberal senators are raising concerns about how the Department of Education and federal student loan servicers are handling the return of student loan payments after a three-plus year, pandemic-related pause.
Federal student loan payments resumed in October, but the 12-month on-ramp period provided by the Department of Education for struggling borrowers could experience implementation errors and potentially cause “unanticipated consequences” to borrowers’ credit scores through next September, the senators warn in a letter sent to the Department of Education on Friday and first shared with CNN.
“The chaotic resumption of federal student loan payments has raised questions about the extent of errors and the measures being taken by the Department to address these concerns and provide assistance to affected borrowers,” said the letter, which was signed by Warren of Massachusetts, fellow Democratic Sens. Richard Blumenthal of Connecticut and Chris Van Hollen of Maryland, and independent Sen. Bernie Sanders of Vermont.
The senators have requested the Department of Education to provide them with an audit of the number of borrowers who missed their October student loan payment, as well as to answer several questions about the agency’s processes regarding the on-ramp period and its oversight of student loan servicers.
In a statement sent to CNN, the Department of Education said it “received the letter and will review it.”
A rocky return to repayment
Federal student loan payments and interest were frozen from March 2020 until September 2023. The pandemic benefit was extended several times by both the Trump and Biden administrations until a law passed earlier this year by Congress set a final expiration date.
Bringing roughly 28 million people back into repayment at the same time was an unprecedented task, and industry experts expected the process to be bumpy.
Plus, lawmakers left funding flat for the Federal Student Aid office, which oversees the financial aid system, despite its bigger workload this year. The office got about $800 million less from Congress than what the Biden administration had asked for. In addition to resuming student loan payments, the Federal Student Aid office is also launching a new financial aid application form, known as the FAFSA, this month.
As payments resumed this fall, many student loan borrowers faced hourslong waits on the phone when trying to reach a customer service representative to find out basic information like how much they owe. An estimated 305,000 people initially received student loan bills with the wrong amount.
In addition, one of the government’s student loan servicers failed to send billing statements on time to 2.5 million borrowers. More than 800,000 of those borrowers were late making their payment as a result. The Department of Education penalized the servicer, MOHELA (Missouri Higher Education Loan Authority), by withholding $7.2 million of its October payment.
The Department of Education has directed servicers to put borrowers who have been impacted by a mistake in forbearance – a period during which payments are not required and interest is frozen – until the issue is resolved. The agency also recently announced new strategies for holding student loan servicers accountable, including using “secret shoppers” to monitor the repayment process.
The senators “commend” the Department of Education’s decision to ramp up enforcement of student loan servicers, but noted that “MOHELA’s blunder underscores the urgent need for stricter oversight.”
How the on-ramp period should protect borrowers
Borrowers who miss a federal student loan payment through September 2024 will be offered a reprieve by the Department of Education’s on-ramp period.
Normally, a federal student loan becomes delinquent the first day after a payment is missed and loan servicers will report the delinquency to the three national credit bureaus if a payment is not made within 90 days – which can damage a person’s credit score.
But during the on-ramp period, a borrower won’t be reported as delinquent or in default – which usually occurs when a borrower doesn’t make the scheduled student loan payments for at least 270 days.
The on-ramp period “prevents the worst consequences of missed, late, or partial payments, including negative credit reporting for delinquent payments for twelve months,” according to the Department of Education.
But the department also says on its website that while it won’t report borrowers as delinquent, it does “not control how credit scoring companies factor in missed or delayed payments.”
The senators say this could mean that a borrower who misses a payment may get dinged on their credit report after all if the department does not adjust its implementation process.
They also said there have been problems when the Department of Education has sought to put similar protections in place in the past, citing an inspector general report that found that some defaulted borrowers continued to see their wages garnished during a pause on collections during the Covid-19 pandemic.
“Bureaucratic complexities and insufficient oversight” have led to errors, the letter said.
A new way to pay off federal student loans
There’s another way the Biden administration has tried to ease the transition to repayment.
A new income-driven repayment plan, known as SAVE (Saving on a Valuable Education), launched this summer and likely offers the smallest monthly payment for lower-income federal student loan borrowers when compared with other existing repayment plans.
A single borrower earning $32,800 or less or a borrower with a family of four earning $67,500 or less will see their payments set at $0 if enrolled in SAVE, for example.
In July 2024, the terms of the repayment plan will become even more generous for borrowers with federal loans from undergraduate school by cutting their monthly payments in half.
President Joe Biden’s signature student loan forgiveness program, which promised up to $20,000 in debt relief for low- and middle-class borrowers, was struck down by the Supreme Court in June.
But his administration has canceled a record $127 billion of federal student loan debt for nearly 3.6 million people through existing forgiveness programs on a rolling basis since taking office.
That’s more student loan forgiveness than was granted under any other administration – in part due to the Biden administration’s efforts to temporarily expand some debt relief programs and to correct past administrative errors made to borrowers’ student loan accounts.
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