Gov’t Extends Student Loan Moratorium, Wipes Out All Existing Defaults, Delinquencies

As expected, the federal government yesterday announced that it was extending the moratorium on making student loan payments for an additional four months — to August 31 — but added in an extra wrinkle that will impact those in the accounts receivable management industry: The 7 million borrowers who are in default on their student loans will have their delinquencies cured and will be returned to good standing with a fresh start.

The announcement from the Department of Education did not provide any details about how it would manage the process of curing loans currently in default. Normally, individuals need to make nine “reasonable and affordable” monthly payments within 20 days of the due date for 10 consecutive months to have their loans removed from default status. Notifying individuals could be problematic. The contractor managing defaulted loans for the Education Department has email addresses for about half of those individuals currently in default, according to a published report.

“The Department of Education is committed to ensuring that student loan borrowers have a smooth transition back to repayment,” said U.S. Secretary of Education Miguel Cardona, in a statement. “This additional extension will allow borrowers to gain more financial security as the economy continues to improve and as the nation continues to recover from the COVID-19 pandemic. It remains a top priority for the Biden-Harris Administration to support students, families, and borrowers – especially those disproportionately impacted by the pandemic. During the pause, we will continue our preparations to give borrowers a fresh start and to ensure that all borrowers have access to repayment plans that meet their financial situations and needs.”

Individuals who have defaulted on their federal student loans can have their tax refunds seized, wages garnished, and lose benefits like Social Security. There are also financial penalties and a prohibition against obtaining new loans when a federal student loan goes into default.

The announcement strengthened calls from Democrats to have all existing student loan debts canceled.

Meanwhile, Republicans used the announcement to call out the government for its “reckless” behavior and insulting individuals who have “responsibly paid debts.”

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