Student loan delinquencies mount as Congress considers reforms

The financial party has ended for those who owe student loans but the fallout is just beginning.

After a nearly five-year hiatus, borrowers were required to resume loan payments in September, with delinquencies starting to pile up in January. Nationally, outstanding student loans total about $1.6 trillion, spread among more than 35 million borrowers.

And while President Donald Trump has shifted away from Joe Biden’s failed attempts to forgive massive amounts of student debt, the new administration faces challenges of reforming the student loan program while helping borrowers adjust to having to pay them, some for the first time.

“We have 35 million borrowers, only about a third of whom are actually making payments on their loans,” Preston Cooper, a senior researcher with the American Enterprise Institute, said in a presentation. “That can wreck their credit scores. That can have consequences for whether they’re going to be able to fully participate in the economy.” 

In addition to the long lull in payments, which started during COVID-19 and was extended for an additional year by Biden, most loans shifted to new service providers during that time, meaning many borrowers weren’t aware of or didn’t know how to establish connection with their new loan servicer, Cooper said. 

That is contributing to the delinquencies, even among borrowers who can afford to pay. 

Congress could make changes to the student loan program as part of its budget reconciliation process, where a simple majority can advance measures in the Senate that deal with taxation, spending and federal borrowing. 

Republicans control the Senate, House and presidency, meaning there is a good chance of reforms going through. 

Some of those changes could include simplifying the system by reducing the number of payment plans, imposing “common sense” loan limits and holding colleges accountable if students in certain programs fail to pay their loans. One proposal would tax university endowments to pay off the loans. 

Another target could be PLUS loans, which allow graduate students or parents of undergraduates to borrow almost unlimited amounts of money. Republicans could cap or even eliminate those loans altogether, turning graduate and parent borrowing over to the private sector, said Lindsey Burke, director of the Heritage Foundation’s education policy center. 

“We would like to see PLUS loans tackled outright,” said Burke, who participated in a separate presentation with Cooper and two others. “We know that PLUS in particular has been incredibly inflationary on the price of college … and the PLUS loan program really is responsible for a lot of the borrowing that has not served students well in the long run.”

Cooper said he would also like the administration to raise more awareness about the need to pay back student debt. That could include Congress providing assistance to loan servicers, who spend time and money tracking down borrowers, and offering incentives such as a $500 bonus for making three on-time payments on a delinquent or previously paused student loan. 

“Now, of course, that’s going to cost money, but I do think that will pay off in the long run because that will get more borrowers reengaged with the system, more borrowers making their monthly payments and more borrowers sending payments towards the Treasury, which will make sure that the federal bottom line is sound,” he said.

“So Congress, while they’re chasing all the wonderful things that they could do in reconciliation for the student loan program, they shouldn’t forget that we also need to look backwards a little bit and figure out what to do about the $1.6 trillion portfolio that already exists.” 

Biden’s multiple attempts to forgive student loans created confusion among borrowers, who got their hopes up or believed they wouldn’t have to pay, only to have courts rule Biden’s actions unlawful. A few programs, such as expanded forgiveness for federal workers, made it through, but most were struck down.

It was also hard on servicers, who had to monitor multiple repayment plans and pause or un-pause loans based on court rulings. 

Once Trump took office in January, his administration abandoned any appeals to preserve programs such as SAVE, which brought payments for some borrowers down to zero. The plan is still in court but will likely be repealed.  

Although Trump mocked Biden’s attempts and campaigned against large-scale student loan forgiveness, Cooper admitted the administration might not want to be seen as the “bad guy” for coming on too strong to urge borrowers to pay.  

Still, the crisis is unfolding with 7.4 million borrowers delinquent as of Sept. 30, the most current data available. Another 5.6 million are in default, meaning no payments for nine months, and 9 million are in forbearance, which gives borrowers more time if they are still in school or are otherwise temporarily unable to pay. 

Trump recently blocked new applications for four income-based repayment plans, a sign he is likely trying to eliminate them. And while that’s bad news for some borrowers, seeing the loans go unpaid would be bad for the country’s bottom line. 

“The $1.6 trillion in student loan debt, that is supposed to get repaid at some point,” Cooper said. “If that does not get repaid, that is a serious risk to the federal fiscal position that could widen deficits (and) make the student loan program even more unsustainable from a fiscal perspective than it already is.”