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'It will never go away unless someone does something drastic': Why borrowers may never be ready to resume student-loan payments

By Jillian Berman

Both advocates and detractors of a more dramatic policy shift are taking the recent extension as a sign that something drastic isn't off the table

Hello and welcome back to MarketWatch's Extra Credit column, a look at the news through the lens of debt.

Student debt holders got an extra few months reprieve last month when President Joe Biden announced his administration would extend the pandemic-era pause on student loan payments collections and interest until May 1.

Despite weeks of pressure from borrowers, activists and lawmakers, administration officials maintained that payments would resume on Feb. 1, until just a few days before announcing they wouldn't. The extension is one of several times over the course of the pandemic that officials have pushed back the start of student loan payments.

In his statement announcing the pause would remain in place until May, Biden explained his administration decided to extend it in part because "millions of student loan borrowers are still coping with the impacts of the pandemic and need some more time before resuming payments."

But for millions of borrowers, the pause has provided benefits beyond helping them cope with the immediate and public health threat of COVID-19. To proponents of broad student debt reform, who advocate for mass cancellation, borrowers' anxiety over resuming payments is an indication of the financial challenges student debt posed even before pandemic.

In the most dire cases, student loan payments can threaten borrowers' tax refunds or Social Security benefits, while in more typical circumstances, the bills can make it difficult to address other financial priorities like buying a home or saving for retirement. The disproportionate impact of student loans on borrowers of color and Black borrowers in particular, has meant that a tool designed to enhance economic mobility has wound up exacerbating the racial wealth gap.

"The problems with the student loan system are not just limited to struggles related to the pandemic, but really it's more structural problems," said Louise Seamster, a sociologist at the University of Iowa, whose research has highlighted some of the economic and racial equity benefits of student debt cancellation. "If they're looking for the time to be right for 40 million-plus Americans to be ready to start repayment again, we're not actually going to find those conditions because the problem goes much further back."

To opponents of broader student loan reform, the ability of some borrowers to use the pause period to pay off other debts, or have more funds available for other financial priorities, is an indication that relief that reaches every borrower is too blunt a tool.

"I've heard a lot of testimonials from people saying how great this was for them personally," said Jason Delisle, a senior policy fellow at the Urban Institute, a Washington think tank. "I'm not sure that's the right measure. What they're saying is, 'I have more money today than I had yesterday.' That's a great thing. The question is, Could you have afforded to pay the loan? We have a whole system for sorting that out."

Regardless of which side you fall on, one thing is clear: the impact of student loan payments on Americans' financial lives pre-pandemic means it's going to be difficult to find a good time when borrowers feel ready to pay them.

Take Christine Gauthier, a New Hampshire borrower who says that if student loan bills resume in May or at a later date she would find a way to pay them -- just like she always has -- though it hasn't been easy.

"Everything that I do, that I've done in my life has been focused on getting rid of this debt so I can move forward," Gauthier said. She's lived away from her family and community in New Hampshire for long stretches so she could earn more money to throw at her loan payments. Gauthier, 46, who is a therapist and until recently worked in public schools as a psychologist, only started saving for retirement about five or six years ago -- something the pause allowed her to accelerate. She's put off plans to adopt or have a child biologically over concerns about how she could save for their college costs while repaying her loans.

Though Gauthier has been working towards getting relief through a loan forgiveness program for public servants, her experience with the student loan system doesn't make her confident the nearly $30,000 she still owes will disappear any time soon. "I've been paying on my student loans for decades, just the very notion that I still carry this burden at this point in my life -- it just feels daunting," she said. "It feels a little bit like it will never go away unless someone does something drastic."

Both advocates and detractors of a more dramatic policy shift are taking the extension as a sign the "something drastic" Gauthier is hoping for isn't off the table. This week we'll explore what this latest extension of the pause may mean for the future of the student loan system. But first, we'll dig into some of the factors surrounding the decision to give borrowers more time.

The Omicron wave

One of the most prominent changes between Dec. 10, when White House officials confirmed student loan payments would resume on Feb. 1, and Dec. 22, when they announced borrowers would have until May, was the increase in COVID case numbers due to the Omicron variant. During that period, new cases went from 133,549 to 245,397, according to the Centers for Disease Control.

And indeed, Secretary of Education Miguel Cardona said the extra few months "will allow our Administration to assess the impacts of Omicron on student borrowers," in a statement announcing the extension.

"People with the loan balances who wanted to see this extended, sadly they had Omicron to thank," said Claudia Sahm, a senior fellow, at the Jain Family Institute.

Sahm, a former Federal Reserve economist, said she believes the pace of the economic recovery is good. Still, each new wave of COVID presents a risk that sectors of the economy will shut down and the paychecks borrowers use to repay their loans could be in jeopardy.

"We are facing very clearly another one of those bumps in the road in January," Sahm said.

The next few months will provide more time for the student loan system to prepare

The task of turning on student-loan payments for tens of millions of Americans is operationally complex -- it involves coordination between the government, the servicers it hires to manage the student loan portfolio, and borrowers themselves.

The restart of student loan payments for so many borrowers is also unprecedented and it was set to take place in the midst of other major changes to the student loan system. That had advocates worried that borrowers would face challenges accessing the relief they're entitled to -- like an affordable payment plan -- once student loan payments resumed.

Millions of borrowers are in the midst of being transferred to new student loan companies, after multiple student loan servicers announced they wouldn't continue with the program. Mike Pierce, the executive director of the Student Borrower Protection Center, an advocacy group that pushed to extend the pause, noted that on social media borrowers were reporting long call wait times even before payments resumed.

"That's alarming and it doesn't suggest that things are going to go smoothly," he said. Pierce added that the Biden administration had put some steps in place -- such as allowing borrowers to get into affordable payment plans over the phone -- aimed at smoothing the transition. But if the system wasn't ready those efforts could be put in jeopardy.

"That's great public policy," Pierce said of allowing borrowers to enroll in affordable repayment plans over the phone. "But it only works if someone answers your call."

A Department of Education spokesperson wrote in a statement that the agency is continuing to "work with borrowers and all student loan servicers to ensure that all borrowers get the support they need when payments resume." As part of the process of getting the system ready for when payments resume, the agency has issued change requests, essentially marching orders for its contractors, that include expanded call center hours and additional outreach to borrowers at risk of missing payments.

Servicers say they were taking steps to prepare the system for payments to resume and that extending the pause may actually complicate their efforts. "We were surprised by the last-minute decision," said Scott Buchanan, the executive director of the Student Loan Servicing Alliance, a trade group representing student loan servicers.

Buchanan said his members were in the process of hiring thousands of call center representatives in order to meet what they expected would be increased call volume come February 1. "We're spending money hiring people who now have nothing to do," he said. In some cases, servicers may let those workers go, or at least pause their training, he added.

To make these and other changes possible, servicers were deploying a large chunk of the annual resources available to them through their contracts with the Department of Education, Buchanan said. "We spent that money, it's gone and now we're going to have to make do with whatever is left," in order to staff up again, he said.

It's politically challenging to stop the pause -- and advocates were reminding officials that's the case

Just days after officials confirmed student loan payments would resume on February 1, a poll from Data for Progress -- a progressive think tank and polling firm that's reportedly influential in the White House -- found that sticking firm to that deadline was "out of step with the views of a majority of national likely voters."

Roughly 55% of likely voters in a poll conducted by Data for Progress between Dec. 7 and 11, said the government should extend the student loan payment pause past Jan. 22. One-third of Republicans, 56% of voters with no college and 56% of independent or third-party voters agreed, the poll found.

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01-15-22 1213ET

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