- Sen. Warren requested student-loan borrowers in default be automatically returned to good standing.
- 8 million borrowers are behind on payments, causing wage garnishment and child tax credit seizure.
- Warren wants the Education Dept. to act before student-loan payments resume on Feb. 1.
When the pause on student-loan payments ends in 74 days, 8 million borrowers will re-enter the system already behind on their bills.
Massachusetts Sen. Elizabeth Warren wants to make sure they don't lose out on wages and child tax credits as punishment.
On Thursday, Warren led eight of her Democratic colleagues, including Vermont Sen. Bernie Sanders, in sending a letter to Education Secretary Miguel Cardona requesting he remove the default status from 8 million student-loan borrowers automatically. The letter noted that a disproportionate number of borrowers in default are low-income and communities of color, and throwing them back into repayment will only undermine the country's economic recovery.
"If these borrowers remain in default when student loan payments and collections resume, they will be subject to wage garnishment, tax refund withholding, and aggressive collections practices," the Democrats wrote. "Millions of families could see their Earned Income Tax Credit and Child Tax Credit refund payments withheld, undermining the effectiveness of President Joseph R. Biden's signature economic policies."
Along with an automatic return to good standing, the lawmakers also requested the Education Department develop a policy for loan forgiveness in cases of a long-term default for a borrower where it is "unlikely" or "financially unfeasible" for the department to continue collecting payments.
This follows Warren and Rep. Ayanna Pressley leading a group of Democrats in writing a letter to Cardona in July with concerns of "plunging" borrowers back into repayment without a plan to protect their credit scores and financial stability.
Insider reported on Tuesday that, according to Education Department data, 93% of the borrowers who entered the pandemic payment pause in default still are.
During the payment pause, borrowers in default also had the opportunity to participate in the department's "rehabilitation" program, which allowed borrowers to make nine monthly payments during the pause in order to be brought back into good standing. And given the payment pause, borrowers could count $0 payments toward their progress.
But in order to participate in the program, borrowers had to complete significant amounts of paperwork and communicate with their student-loan company, which is no easy feat and leaves many borrowers without the information they need to pay off their debt.
The department is reportedly considering a "safety net" for borrowers once payments resume, one of which could include automatically erasing defaulted payments for 8 million borrowers and giving them a "fresh start." Details for those plans have yet to be finalized, though, and lawmakers and borrowers want answers not only on plans to restart payments, but on broad student-debt cancellation — something the Biden administration continues to be largely silent on.
"Attempting to collect on this debt is likely not a cost-effective use of taxpayer dollars, and forgiving this debt would result in life-changing relief for the affected borrowers that could benefit our overall economy," the lawmakers wrote. "Cancelling $50,000 of student debt would address this issue by relieving the student debt burden entirely for the vast majority borrowers."