Consider This from NPR - Fresh Start for Student Loan Borrowers in Default

Episode Date: November 16, 2023

Nearly 7 million federal student loan borrowers are in default, and now the U.S. Department of Education is rolling out a new program, called Fresh Start, to make getting out of default easier. NPR's Cory Turner reports on the Fresh Start program and the ripple effects of landing in default. Email us at [e-mail] more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

Payments are due again for roughly 28 million federal student loan borrowers. The COVID pandemic pause that lasted years has ended. Jay Kazmar of Reading, Pennsylvania, is one of those borrowers. They signed up for the newest income-based repayment plan called SAVE. The less you make, the less you pay each month. Just as we kind of predicted, it ended up being about $58.66 a month. Before the pandemic, Jay was paying $300 a month. No surprise, they prefer this new, much lower payment. Which is like a phone bill. $300 a month is like three times my utilities.

Sophie Hernandez-Semianidis, a freelance journalist in New York City, also signed up for this new save plan. She says she got a scare at first when the system based her monthly payment on her salary at an old job. And I uploaded basically my pay stubs for my freelance and they were like, OK, just kidding. You pay zero dollars. That's good. But she also got an email saying her loans accrued more than $1,000 in interest. And I was like, I don't know where that came from, but that seems extreme. There are lots of borrowers right now who are feeling confused, and call centers are being flooded with questions, with hold times often an hour or longer.

Some 7 million borrowers are already in default on their federal loans, like Juan Carlos Moreno. That's not millions of people who are deadbeats. I think most of them are just like me, hardworking people who had no other choice. The problem is default comes with its own crushing consequences. So once you default, that's sent to the credit reporting agencies, your credit is ruined. Consider this. Whether you're on top of your loans or struggling to pay them off, there are new programs that could help. We'll look at how well they're working. From NPR, I'm Ari Shapiro. It's Thursday, November 16th. It's Consider This from NPR. Juan Carlos Moreno is one of the 7 million federal student loan borrowers already in default on their federal loans. NPR's Corey Turner spoke with him about the ripple effects of living in default. Like many Americans, Juan Carlos Moreno ran into financial trouble more than a decade ago

around the Great Recession. Awful. It was awful. In 2011, after struggling to rehabilitate his credit and losing his family's home, Moreno filed for bankruptcy. On the way back from the lawyer's office, where he'd signed the documents, I had to stop the car and my wife had to finish driving the car. I had a panic attack. I didn't know that's what was happening, because I didn't want to do that.

This was money that I owed. I wanted to pay back the money. While the bankruptcy erased his credit card debt, it did not touch his federal student loans. So he tried to pay them back on his salary as a public school teacher in Alabama. But he remembers there just wasn't enough money to go around. I have a wife and I have three children. We need to have four walls. We need to have food. We need to have health care. Moreno called his loan servicer for help, but the repayment options weren't nearly as flexible as that save plan we mentioned earlier. And so he ultimately

stopped paying his loans. It may sound irresponsible and it was terrifying to do it, but I did. I just had to stop. In 2015, his loans plunged into default. I felt so much shame about it. So much shame. And then the default lit a burning fuse of very real consequences. So once you default that sent to the credit reporting agencies, your credit is ruined. Victoria Jackson studies higher ed policy at the Education Trust. They then have difficulty buying a car or renting an apartment. After Moreno and his wife separated, he needed a place to live. And I had to have a cosigner

to get this $500 a month little bitty studio apartment. And defaulting doesn't just trash borrowers' credit, says Jackson. They can have their wages garnished. Or maybe they don't have wages. If they're receiving Social Security, that can be garnished.

And the vice grip gets tighter and tighter. Any tax refunds like the EITC, which is incredibly important for low-income people, can be garnished. And the vice grip gets tighter and tighter. Any tax refunds like the EITC, which is incredibly important for low-income people, can be garnished. And the majority of borrowers who default are low-income. Defaults also tend to exacerbate long-standing racial wage, wealth, and opportunity gaps. And the scale of the problem has been getting worse. Over the past decade, the number of federal direct loan borrowers in default has more than doubled, which is why the Biden administration is testing out a big new idea, a fast track out of default called Fresh Start. I want to make sure that people know this is a

one-step process to get back in good standing. President Biden's Undersecretary of Education, James Quall, says applying for Fresh Start only takes a few minutes and comes with big benefits. The department stops reporting loans in default to the credit agencies. Many borrowers can also sign up for that flexible new repayment plan called SAVE. The problem, says Quall, is just getting the word out. It's going to be really difficult for us to reach all of these borrowers. It's very important to us. The Ed Department is working with grassroots groups, including the NAACP and UnidosUS. Qual says borrowers should act by September of next year.

And so far, more than 300,000 have, including Juan Carlos Moreno. I felt like I was lifting out of my chair. A few weeks ago, he went to studentaid.gov slash freshstart and signed up. I didn't know, you know, the feeling of, that I could walk around every day without this heavy feeling of shame on me all the time, every day. I guess I thought it was never going to happen. Moreno recently got a loan for a car, something he could not do just a few years ago. When the dealer tried to sell him something fancier, Moreno said,

no dream car today, just something that drives and that he can afford alongside his new student loan payment. Corey Turner, NPR News. Let's turn now to the broader return to repayment story and how that is going for the 28 million borrowers who are now required to make payments on their student loans. Corey is still with us. Hey, Corey. Hey, Ari. Okay, two weeks ago, you were on the program on Halloween with some pretty scary news of widespread mistakes that were hurting borrowers. Are things getting any better? Not really, Ari. Call wait times for borrowers who need help are still often an hour or longer. And on some days, a third to half of borrowers who are on the phone give up and hang up before they get through. I think what has changed at this point is our understanding of what's actually going wrong.

We know one servicer failed to send timely billing notices to millions of borrowers, but there are also even more serious problems. One of them is around enrolling in this new save repayment plan we've been hearing about. When they sign up through the ed department site, some information doesn't work its way to loan servicers, which seems to have led to some borrowers getting their payments miscalculated. There's also another potentially very big problem that we've known about for years, and that is when borrowers get transferred from one servicer to another, their records can sometimes either get lost or show up incomplete. And it's hard to know how they're going to be able to fix that or really handle it in the short and medium term. And obviously making all of this harder,

Ari, is what I've been talking about for a long time now. And that is that the Ed Department and loan servicers just haven't been given enough money by Congress to do this. We've been talking so much about congressional funding in other areas. Does the short-term deal Congress just struck do anything for education and loan repayments? Yes and no. It does allow the department now to spend the money it already has faster, which means it won't have to make any additional cuts in the short term. It will be able to reshuffle some money from other programs as well, but it's not getting any extra money to help with the return repayment. So basically, Ari, it's pushing off a pretty serious reckoning

until early next year. That's NPR's Corey Turner, and you can find all of his latest reporting at npr.org slash studentloans. It's Consider This from NPR. I'm Ari Shapiro.