The Biden administration is unveiling an ambitious new student loan repayment program today that will be more generous, flexible and forgiving than previous plans — but it's unclear how or when the administration will be able to fully implement it.
The U.S. Department of Education says proposed updates to its income-driven repayment plan would, among other things, cut loan payments in half for undergraduate borrowers, but its rollout could be complicated by the fact that the Office of Federal Student Aid (FSA) — the agency that oversees the government's student loan portfolio — is in an unexpected funding crisis, created by a political fight between Congressional Republicans and Democrats, and the White House.
Behind closed doors, officials at FSA and the U.S. Department of Education are surprised and angry, sources tell NPR, because they must now safeguard priorities like today's announcement while also scrambling to find hundreds of millions of dollars to cut from other current and future programs.
In December, Congress approved a massive, $1.7 trillion government funding bill known as an "omnibus," but the bill did not deliver nearly enough money for FSA to do everything it has been asked to do in 2023 — by Congress, the Biden administration and even the courts.
A "big f***ing deal" is how one federal official describes the surprise decision, last month, to abandon a much-needed funding increase for the Office of Federal Student Aid.
Another person familiar with FSA's inner workings worries that the result, not just for the agency but for people with federal student loan debts, could be "catastrophic."
"There is a lot of work at FSA that can benefit students and borrowers that it simply cannot do now," says a third government official.
That work includes not only recent initiatives but also potentially basic, everyday loan oversight functions — like making sure loan servicing companies don't keep borrowers waiting hours on the phone to talk with a customer representative.
This is the story of the politics behind the funding crisis, and why any resulting cuts would hurt millions of borrowers. It is based on the accounts of ten people, including eight officials across government who are familiar with FSA's inner workings but who are not authorized to speak publicly.
2023: Big promises for student loan borrowers
FSA is a relatively small federal agency with a Herculean job: managing the U.S. government's entire federal student loan portfolio. It's a $1.6 trillion program that touches the lives of more than 44 million borrowers. In 2022, FSA ran on a $2 billion budget.
For 2023, the White House knew FSA would need more money, both to keep up with routine loan management and to fulfill long-laid plans, some mandated by Congress, to improve the whole system. In its initial 2023 budget proposal, the Biden administration pitched increasing FSA's budget by a third, to the tune of $2.65 billion. Why propose such a big bump?
For starters, the agency is in the middle of a massive, Congressionally-required overhaul of the Free Application for Federal Student Aid, or FAFSA. Approved three years ago, the bipartisan goal is to make the famously complicated forms college students and their families must fill out easier to complete.
In addition, 2023 is expected to include a host of expensive new reforms meant to directly help borrowers, including improvements to a loan forgiveness program for people who work in public service, a move to lift seven million borrowers out of default, today's unveiling of a new income-driven repayment plan (IDR), and a review of millions of borrower records to help those who were unfairly hurt by past IDR failures make up lost ground toward loan forgiveness.
On top of all that, FSA is responsible for handling the enormous — and enormously expensive — task of helping millions of federal student loan borrowers start paying back their loans later this year after the long pandemic pause. The agency will need to pay for communicating timelines and expectations to borrowers, fielding questions and processing mountains of new paperwork.
This long list of expected expenses doesn't include Biden's headline plan for debt relief, announced in August but now tied up at the Supreme Court. That plan ran into Republican opposition, but some of the largest reforms on FSA's agenda this year have enjoyed bipartisan support in the past.
So why not give the agency the money it needs?
How December funding talks fell apart
During bipartisan wrangling among Congressional negotiators and the White House last month over funding the federal government, multiple sources tell NPR that Republicans initially offered a roughly 20% budget increase for FSA, lower than the initial White House proposal but still a meaningful bump.
"There was a proposal put forward to the White House to say, 'Listen, we'll give you an extra couple hundred million dollars here, in order to focus on improvements... for the student loan program,'" says one source familiar with the negotiations. "But that came with a tradeoff."
That tradeoff, required by Republicans, was that the money could not be spent to implement President Biden's debt relief plan, should the Supreme Court let it go forward.
According to sources involved in the negotiations, both sides agreed to not include any conditional language, known as riders, that had not been part of past budgets.
But, according to a source familiar with Republicans' thinking, Republicans were frustrated by Biden's efforts to try to unilaterally erase student debt. They were not inherently opposed to increased funding for things like better customer service, but they were not supportive of spending on debt relief.
A Democratic source close to the negotiations argues that in demanding conditions on FSA funding, Republicans broke their agreement not to add riders to the budget bill, giving Democrats, concerned a concession would open the negotiations to a flood of other riders, no choice but to reject the proposal.
Which is exactly what happened. Democrats and the White House held firm on the no new riders agreement, Republicans refused to agree to additional money for FSA without a debt relief exception, and the agency's prospects for new funding evaporated. FSA ultimately received not a single dollar more than it had gotten the year before, and must now figure out what, of its many obligations, it can and cannot afford to fulfill.
In its write-up of the result, Senate Republicans crowed that the omnibus "provides no new funding for the implementation of the Biden Administration's student loan forgiveness plan." It did not mention the impact on other FSA work.
The White House also got a modest win: A funding bill with no restrictions against paying for debt relief.
But borrowers and FSA, the agency in place to help them, will lose mightily.
Programs that may be cut or trimmed
Sources tell NPR it's too early to know exactly how this flat funding will impact a whole host of programs, though it's clear FSA will need to make hundreds of millions of dollars in difficult cuts. Agency staff are now looking at their options, including reviewing reforms already underway.
For example, in April last year, after NPR, as well as borrower advocates and a subsequent GAO report, revealed widespread mismanagement of previous income-driven repayment plans, the department pledged a sweeping "account adjustment" that would fully erase the debts of tens of thousands of borrowers and bring millions closer to forgiveness.
But the bulk of that account adjustment isn't scheduled to happen until July of this year, and multiple sources tell NPR that without new funding, it could be delayed for an undetermined length of time.
2023 was also due to bring further improvements to the Public Service Loan Forgiveness program — changes that could also be delayed or abandoned.
In fact, the list of borrower-focused efforts that could be postponed or cut is long.
In early 2022, the Education Department committed to restore 7 million federal student loan borrowers who had been in default to good standing. This so-called Fresh Start program would require considerable money and staff in 2023. It's unclear now where either could come from.
Also affecting the department's priorities are legal obligations the Education Department must fulfill. As part of its settlement in a class-action case, it will be on the hook to reconsider the cases of tens of thousands of borrowers who say they were defrauded by their mostly for-profit colleges and deserve to have their debts erased.
Several sources suggest one of the biggest initiatives that could be on the chopping block is an effort, already long overdue, to sign new, long-term contracts with the servicing companies that manage all federal student loan accounts.
These federal student loan servicers have been working on short-term, stop-gap contracts while FSA develops a much-needed new system that's meant to improve and streamline many of the problems that make the current servicing system hard for borrowers to navigate.
This planned new arrangement with servicers, known as the Unified Servicing and Data Solution or USDS, was set to begin this year. It would include important new safeguards around cybersecurity that would cut down on scammers and lay the groundwork for what some student loan insiders consider their holy grail: a single portal where all borrowers could make payments, get help, and make changes to their accounts.
But now, sources tell NPR, the best-case scenario for USDS is that it will be stripped of many of its most important — and expensive — provisions. Worst-case: It will be delayed indefinitely.
And then there's the new income-driven repayment plan being unveiled today.
A new effort to help vulnerable borrowers
On a call with reporters Monday night, senior administration officials trumpeted this new IDR program, saying it would be even more generous to low-income borrowers and, unlike previous IDR plans, would prevent accruing interest from exploding.
According to details of the plan provided by the Department of Education, no borrower who earns less than $30,600 a year would have to make a monthly loan payment.
What's more, undergraduate degree borrowers in this new plan would be required to pay only 5% of their discretionary income — "half the rate charged on the most generous existing IDR plans," according to the Department announcement.
"We cannot return to the same broken system we had before the pandemic, when a million borrowers defaulted on their loans a year and snowballing interest left millions owing more than they initially borrowed," said Education Secretary Miguel Cardona in a statement.
The announcement was noticeably vague, though, on how the Department would pay to implement the new initiative and on its timeline, saying only that it aims to "start implementing some provisions later this year."
Multiple sources tell NPR that this new repayment plan could be costly to set up and, under FSA's flat-funded budget, the agency could not roll it out without delaying or scaling back other things on its long list of obligations.
Worse customer service may be ahead
Multiple sources, both inside the Education Department and within the servicing industry, say FSA could be forced not only to cut programs but to quietly lower the customer service standards it requires loan servicers to meet — because it cannot now afford them.
For example, how long a servicer takes to process a student loan-related application. Or how long a borrower has to wait on the phone to reach a call service representative. Over the past year, many borrowers have taken to social media to complain that those wait times are already too long.
"An easy way for [FSA] to reduce their costs is to [tell servicers], 'Cut your call center hours.' Well, that cuts costs," says Scott Buchanan, executive director of the Student Loan Servicing Alliance, the trade association that represents federal student loan servicers.
But Buchanan says, that kind of austerity isn't ideal for anyone, "in an environment where we're trying to talk about improving the experience for borrowers."
"I always say, on student loan servicing, you get what you pay for," Buchanan says. "And if you want improvements, we've got to invest in them."
But FSA's flat funding will make it difficult to pay servicers for the increased demand that inevitably accompanies new programs — not to mention the help borrowers will need later this year if they are required to begin repaying their loans after the pandemic pause, as the Department has pledged.
One source points to the hollowing out of the IRS as a cautionary tale of the impact this kind of underfunding can have, and who feels it.
The prospect of millions of borrowers calling servicers later this year at the same time servicers are potentially being told to scale back worries many borrower advocates.
Mike Pierce, executive director of the Student Borrower Protection Center and an outspoken supporter of Biden's debt relief plan, says, as long as there are federal student loan borrowers, there must be investment in a system to support them.
"If they are confused about what their options are, it costs money to pay a person to walk them through what their rights are," Pierce says. "If they just need paperwork processed, it costs money to send them that paperwork, to process that paperwork, to update their student loan account, to send them an accurate bill at every step. Someone needs to touch the borrower's account, and that costs money."
For now, officials at the Education Department and FSA are scrambling to figure out how to save both money and their most ambitious plans, but sources warn: The choice to underfund FSA will cost borrowers dearly.