Student loan servicers are in a tough bind, dealing with reduced staff as they prepare for the unprecedented situation of 44 million borrowers returning to payments later this summer.
Student loan payments are expected to restart at the end of August at the latest, including for many borrowers who graduated during the pandemic and have never made such payments before.
“I think the real challenge is the resource constraint, right? That’s really on the customer service side,” said Scott Buchanan, executive director for Student Loan Servicing Alliance (SLSA). “Systemically, we can handle this, but that customer service component is going to be constrained, and that’s because the [Education] Department has continued to make cuts to the customer service funding for student loan servicers.”
SLSA is a nonprofit trade association that works on student loan servicing issues. It says its members, which include federal student loan servicers Aidvantage and Edfinancial Services, are “responsible for servicing over 95% of all federal student loans and the vast majority of private loans.”
The lack of money for customer service in the industry can be traced back to a denial of increased funding for the Federal Student Aid (FSA) office by Congress last year.
“It’s important to think about this holistically,” said Sarah Sattelmeyer, project director for education, opportunity, and mobility in the higher education initiative at New America. “FSA’s budget constraints are certainly affecting servicers. And I think that’s an incredibly huge problem because it affects the ability to effectively have a student loan support system. … All of the things that FSA has on its plate — it’s never had more things on its plate. There’s a lot of new reforms coming down the pipe, and a lack of funding is really impacting its ability to do all of that work.”
A spokesperson for the Department of Education said the funding Congress gave to FSA was inadequate for the tasks ahead.
“As the Department has repeatedly made clear, restarting repayment requires significant resources to avoid unnecessary harm to borrowers, such as cuts to servicing,” the spokesperson said.
While Buchanan recognizes the FSA did not get the funding it requested, he believes the Education Department still has the ability to fully fund the needs of student loan servicers.
“I think the real challenge is that the department has sufficient money to provide for resumption and probably could always use more to make it a better experience,” he said, adding that “they spent money on other programs,” taking money away from customer service.
In preparation for student loan payments turning back on, the Education Department has announced multiple initiatives they say will make the transition easier for borrowers, including reforming the income-driven repayment (IDR) system so some borrowers wind up owing as low as $0 a month.
The department is still hoping the Supreme Court won’t kill President Biden’s student debt forgiveness program, though that will require it and the student loan servicers to take on the Herculean task of sweeping debt relief and loan repayment resumption at the same time.
In the best of times before the pandemic, student loan servicers faced many complaints about customer service, with borrowers confused about the process and what programs they should be entering.
Spencer Orenstein, an officer on student borrower success for the Pew Charitable Trusts, says the organization tracked 400,000 borrowers over a five-year period and found 8 in 10 had interactions with their student loan servicer.
“Even prior to this, we were in a system where servicers played a very important role,” Orenstein said.
Between the potential changes to student loan repayment programs and restarting payments for millions of borrowers, a lack of staff for customer service could start a ripple effect of negative consequences throughout the whole system.
“The department has meaningfully reduced the amount of resources we have and people we can put on the phones. That’s going to be a challenge where we will probably have longer hold time, and processing time for requests and applications could take a lot longer than usual,” Buchanan said.
“We clearly communicated to the department the consequences, them knowing we need customer service and them making these kinds of cuts. Those discussions absolutely happened,” he said.
Forty-four million borrowers have been cozy for three years without having to make any payments, and they are still in limbo because there is no exact date when payments will resume. The Biden administration said a 60-day countdown to the payment resumption would start either after the Supreme Court rules on Biden’s student debt relief plan or on June 30, whichever comes first.
If all borrowers wait until the 60-day countdown begins to talk to their loan servicer, it is expected to put a lot of strain on the companies.
The best way to avoid this backlog is to start encouraging borrowers now to reach out to their loan servicers to figure out their financial situation and options for repayment.
Buchanan says the Department of Education needs to start encouraging borrowers now to be proactive about their student loans, but he thinks they are waiting until the Supreme Court’s decision is announced.
“We strongly advise against that because a 60-day window is not sufficient time to educate many people who it’s not just repayment for them, it’s beginning payment. They’ve never done it before. And there needs to be a lot of education work and that should be started over many months, not just 30 days, and then here’s your bill,” Buchanan said.
The Department of Education emphasized it is going to do “everything in its power” to make the transition for borrowers into repayment as smooth as possible.
“We continue to urge Congress to fully fund President Biden’s FY24 budget request, which would provide critical resources to FSA. At the same time, we will continue to work closely with servicers to prioritize providing services to borrowers as quickly and effectively as possible,” the spokesperson said.