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Democratic senators urge Education Department to remove millions of student loan borrowers from default status

Aarthi Swaminathan
·Reporter
·2 min read

A group of Democratic senators, led by Elizabeth Warren (D-MA) and Raphael Warnock (D-GA), sent a letter urging the Education Department (ED) to restore defaulted student loans to on-time status amid the ongoing payment pause, Yahoo Finance has learned.

"The Department has the authority to address these accumulating financial pressures and inequities by automatically removing 7.5 million borrowers with federally-managed student loans from default status," the April 19 letter addressed to ED Secretary Miguel Cardona and seen by Yahoo Finance stated.

The interest-free payment pause is set to expire in October. Rohit Chopra, President Biden's nominee to lead the Consumer Financial Protection Bureau (CFPB), previously warned that "an avalanche of defaults" could follow the end of the moratorium.

"Removing borrowers from default status and eliminating their record of default will provide them significant financial benefits," the new letter stated. "It will ensure these borrowers do not immediately face the garnishment of wages, tax refunds, and Social Security, and additional collection fees, once the nationwide forbearance expires."

Senator Raphael Warnock (D-GA) testifies during a Senate Judiciary Committee hearing on voting rights on Capitol Hill in Washington,DC on April 20, 2021. (Photo by EVELYN HOCKSTEIN / POOL / AFP) (Photo by EVELYN HOCKSTEIN/POOL/AFP via Getty Images)
Senator Raphael Warnock (D-GA) testifies during a Senate Judiciary Committee hearing on voting rights on Capitol Hill in Washington,DC on April 20, 2021. (Photo: EVELYN HOCKSTEIN/POOL/AFP via Getty Images)

Under the Higher Education Act of 1965, a loan can be rehabilitated from default status by making nine on-time payments over 10 consecutive months. After this process, any record of default is expunged from their credit history and any garnishment of wages stops.

The letter argues that since the pandemic pause on loans counts each month as an on-time payment and 10 months have passed, "all defaulted borrowers with federally-held student loans have now met the requirement for completing nine payment obligations and are thus eligible to exit default status."

ED has the ability to make various adjustments to these federally-backed loans. The Biden-era ED previously halted interest and debt collection on about 1.14 million defaulted loans in the Federal Family Education Loan Program (FFELP) and erased roughly $1.3 billion in student debt for 41,000 borrowers with total disabilities.

The letter stressed that debt relief is a matter of racial justice given that the student debt crisis has been "particularly devastating for Black, Latino, and Native communities, who face significantly higher rates of student loan default and delinquency compared to white borrowers."

(Graphic: David Foster)
(Graphic: David Foster)

Aarthi is a reporter for Yahoo Finance. She can be reached at aarthi@yahoofinance.com. Follow her on Twitter @aarthiswami.

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