Student loans

without student loan forgiveness, defaults could increase

Student borrowers gather near the White House to tell President Biden to cancel student debt on May 12, 2020.

Paul Morigi | Getty Images Entertainment | Getty Images

Student loan default rates could soar significantly if the Biden administration’s loan forgiveness plan is stalled, a senior US Department of Education official said in a new court filing.

The warning came as the Justice Department asked a Texas federal judge to suspend an order that temporarily blocked the Biden administration’s debt relief program.

“Unless the [Education] The department is authorized to provide debt relief, we anticipate that there may be a historically large increase in the amount of federal student loans in arrears and defaults as a result of the COVID-19 pandemic,” said said Department of Education Under-Secretary James Kvaal. said in the file.

The Biden Administration stopped accepting applications for its student loan forgiveness plan last week after Judge Mark Pittman of the U.S. District Court for the Northern District of Texas called the policy “unconstitutional” and struck it down.

Meanwhile, six GOP-led states have argued in another lawsuit that the president’s loan relief package threatens their future tax revenues and circumvents the authority of Congress. Their challenge was dismissed by a federal judge, but the states then appealed and the St. Louis 8th Circuit Court of Appeals issued a national injunction temporarily ban the Biden Administration to go ahead with his plan.

Student loans plagued by pre-Covid issues

Even before the pandemic, when the U.S. economy was going through one of its healthiest times in history, problems plagued the federal student loan system.

Only about half of borrowers were in repayment in 2019, according to an estimate by higher education expert Mark Kantrowitz. About 25% – or more than 10 million people – were in default or in default, and the rest had requested temporary relief for troubled borrowers, including deferrals or forbearances.

These grim figures have led to comparisons with the mortgage crisis of 2008.

Federal student loan payments have been on pause since March 2020, when the coronavirus pandemic first hit the United States and crippled the economy. Taking over the bills of more than 40 million Americans will be a daunting task, and the Biden administration had hoped to ease the transition by writing off much of the student debt first.

However, since President Joe Biden announced plans in August to cancel up to $20,000 for tens of millions of borrowersconservative groups and Republican states moved quickly to try to block it.

Despite offering forbearance to student loan borrowers during previous natural disasters, default rates still soared, Kvaal said in the filing.

“[T]The one-time student debt relief program was intended to avoid “this problem, he added.

18 million borrowers most at risk of default

The borrowers most likely to default are those for whom Biden’s student loan forgiveness plan would have wiped out their balance entirely, Kvaal said. The administration estimated that its policy would do so for about 18 million people.

“These student borrowers had a reasonable expectation and belief that they would not have to make additional payments on their federal student loans,” Kvaal said. “This belief may well prevent them from making payments even if the Department is prevented from providing debt relief.”

“Unless the Department is authorized to provide one-time student debt relief,” he continued, “we expect this group of borrowers to have higher default rates in because of the continuing confusion over what they owe”.