For Many, Paying Student Loans Doesn’t Stop Balances From Growing; Advocates Push Cancellation As A Fix - Forbes

A new report illustrates a problem that many student loan borrowers face: they make payments on their student loans, but their loan balance goes up, not down.

The joint report issued this week by the National Consumer Law Center and the Center for Responsible Lending reviewed data from the U.S. Department of Education for over 400,000 student loan borrowers who have been making voluntary payments on their student loans during the Covid-19 payment pause. The report found that 63% of student loan borrowers who made payments during the Covid-19 forbearance still owe more now than they originally borrowed. One-third of these borrowers owe more than 125% of their original loan balance, despite the fact that no interest has been accruing during the moratorium.

“The data reinforces what we already knew: borrowers want to make progress towards repaying their loans, but our broken student loan system has made it difficult, resulting in loan balances that in many cases greatly exceed the original amount borrowed,” said Center for Responsible Lending Senior Researcher Robin Howarth in a statement. “Servicing errors and lack of federal oversight exacerbate flawed federal student loan policies and leave borrowers, particularly those of color, even more vulnerable.”

Student loan balances can increase over time under a variety of circumstances:

Interest accrues during periods of forbearance, and for some loans, even during in-school deferments and post-graduation grace periods. As a result, many student loan borrowers enter repayment already owing thousands of dollars more than they originally borrowed.
Advocates have contended that student loan borrowers were sometimes wrongfully steered into forbearances, rather than appropriate repayment plans, by their loan servicers, leading to explosive balance growth.
Certain federal student loan repayment plans do not necessarily result in reducing a borrower’s balance. Graduated repayment plans, especially on longer repayment terms, may only cover ongoing accruing interest during the initial phase of repayment; it may be years before borrowers start paying off principal. And borrowers on income-driven repayment plans may not have payments that are ever high enough to cover interest accrual, leading to runaway balance growth for years.
Outstanding interest can be periodically capitalized, or added back on to the principal balance, in a variety circumstances, which has a significant compounding effect.
Defaulting on federal student loans can result in massive financial penalties as high as 25% of the overall loan balance in some cases.

“As this data shows, it is unfortunately all too common for student loan borrowers to see their balances go up instead of down while in repayment,” said National Consumer Law Center Attorney Abby Shafroth. “Balances go up when borrowers in financial distress cannot afford to make payments. They also go up when monthly payments in income-driven repayment plans are insufficient to cover interest, which is common for low-income borrowers, meaning that despite faithfully making payments their balance goes up instead of down. And unpaid interest is often capitalized, so borrowers pay interest on interest. Ballooning balances not only make education more expensive for those who must borrow but make many feel hopeless that they’ll ever be free of their student debt.”

The Department of Education recently announced a public hearing schedule to overhaul key federal student loan programs. The Department will be specifically evaluating student loan forgiveness programs, income-driven repayment plans, and interest capitalization events, among other programs and areas of concern. The Department indicated that it will be proceeding with the goal of rewriting regulations and providing expanded relief to student loan borrowers, including student loan forgiveness. But while these changes could be major, they will not happen quickly; the negotiated rulemaking process to craft new regulations can take years before final rules are enacted.

Advocates for student loan borrowers are urging the Biden administration to go further and cancel student loan debt. “It is imperative for the Biden Administration to provide immediate relief to existing borrowers with across-the-board student debt cancellation as the Administration works to reduce the wealth gap and get the economy back on a sustainable path,” said Howarth.

“The Biden Administration can and should end the practices that cause debt to balloon going forward and provide relief to borrowers already harmed through debt cancellation,” said Shafroth.