How Strong Is the State of the Student Loan Repayment System?

The last year has brought several major changes for federal student loan borrowers, including new options that are helping more of those feeling a financial burden get on a path to successful repayment. President Biden’s State of the Union on March 7 is likely to highlight these improvements, including some reforms based on recommendations from The Pew Charitable Trusts.

The payment pause put in place early in the COVID-19 pandemic ended last October, and borrowers have started making payments again after three and a half years; many are doing so for the first time. Last August, the Biden administration launched a new income-driven repayment (IDR) plan known as Saving on a Valuable Education (SAVE). The plan significantly expands the number of borrowers eligible for low or $0 payments, puts a stop to the balance growth that has discouraged borrowers in the past, and shortens the time until loan forgiveness to 10 years for those who borrowed $12,000 or less.

The administration also implemented a limited-time program called Fresh Start for borrowers who had missed payments for at least 270 days—those in default status. In addition to pausing collections, the program enables eligible borrowers to exit default in as few as 10 minutes. Borrowers who opt into Fresh Start can enroll directly into SAVE, a move that likely provides them with much more affordable payments than before the pause—even as low as $0 per month.

SAVE and Fresh Start were both created to make it easier for borrowers to re-enter repayment without facing the significant financial penalties that often make it harder to repay their loans. Although SAVE enrollment continues to increase, the numbers signing up for Fresh Start appear to have lagged. This means that many borrowers might have to contend with declining credit scores, wage garnishment, or seizure of tax refunds and Social Security benefits when student loan collection activity resumes later this year.

With these stakes in mind, the U.S. Department of Education should continue to monitor borrower repayment rates and experiences to make sure that those eligible are aware of and enrolled in Fresh Start and SAVE before September. That’s when this year’s “on-ramp” period and the Fresh Start program end.

SAVE extends important affordability benefits to low-income borrowers

SAVE has been building strong momentum since it was introduced last summer. Total enrollment as of February had reached 7.5 million borrowers. And about 4.3 million of them can make $0 monthly payments because they have such low incomes. The ability to make $0 payments while still staying current on loan repayment helps limit financial burdens. It also allows borrowers to continue to build payment records that improve their credit worthiness and helps them receive loan forgiveness as soon as they are eligible.

SAVE incorporates several recommendations Pew made in recent years to improve IDR plans, including steps to boost payment affordability for low-income borrowers and limit balance growth. For example, SAVE protects a higher threshold of borrowers’ income from being calculated into payment amounts than previous IDR plans, increasing that threshold from 150% to 225% of the poverty line. It also puts a stop to ballooning balances by subsidizing the unpaid interest that remains after borrowers make payments. Additionally, as of this summer, payments on undergraduate loans under SAVE will be cut in half, dropping from 10% to 5% of borrowers’ discretionary income. These changes make SAVE more affordable for low-income borrowers than the previous IDR plan known as REPAYE, or the Revised Pay As You Earn plan.

The Education Department has also implemented a 2019 law called the FUTURE Act that makes it easier for borrowers to enroll and stay in IDR plans for several years. Previously, the process was much more cumbersome, resulting in many borrowers getting disenrolled from year to year.

Borrowers with defaulted loans are at risk of missing out on SAVE benefits

In a Pew survey, many borrowers reported experiencing financial instability ahead of the resumption of payments. In the two decades leading up to the pause, research by Pew estimates that around 1 in 3 borrowers had experienced loan default at some point—with the majority of those borrowers doing so multiple times.

At the end of 2023, about 300,000 borrowers were enrolled in Fresh Start while some 6.2 million had a defaulted federally managed loan around the same time. With Fresh Start ending this fall, those who don’t sign up risk missing out on an easy pathway out of default, lower payments, and progress toward forgiveness. The sooner borrowers enroll in SAVE, the more they could benefit from interest subsidies that prevent balances from growing.

Continued targeted outreach from the Department of Education and from organizations that have joined the “SAVE on Student Debt” campaign will be instrumental to ensuring that struggling borrowers can take full advantage of the supports available. To help, Pew has identified several demographic, financial, and educational factors that are linked to higher rates of default and can help inform where to direct communications.

Increased efforts to boost Fresh Start enrollment between now and the end of the program would help focus support on the borrowers who need its benefits the most.

Brian Denten is an officer and Ilan Levine is a senior associate with The Pew Charitable Trusts’ student loan initiative.