How navigating the student loan repayment system can feel like a maze

The student loan system is broken in ways that get little attention amid all the controversy over debt forgiveness, a study out Wednesday morning from New America finds.

Why it matters: The paper highlights the ways the system can appear stacked against these borrowers — and how they feel trapped within it.

• The student loan payment pause that started in 2020 as part of the CARES Act is set to end next year, while President Biden's debt forgiveness plan is in legal limbo. That means millions of borrowers will soon be required to make monthly payments again.

Context: The report presents the findings of focus groups that New America, a left-of-center think tank, held with borrowers who defaulted on federal student loans prior to the COVID pandemic.

• The researchers sought to understand why borrowers default and the barriers to returning to good standing.
• "It's important to understand people's lived experiences," says Sarah Sattelmeyer, a project director at New America and co-author of the report. "There are people sitting at the table making policies who maybe haven't experienced the downsides of those policies and programs."

State of play: There are programs out there meant to keep borrowers on track and head off default — but they can quickly morph into a maze of confusion.

• Pre-default, when borrowers first have trouble affording their monthly payments, they can go on income-driven repayment plans, for example. But these plans can be difficult to enroll in, and remain in, because of confusing annual paperwork requirements, the report says.
• Plus, many borrowers don’t even know they exist, it adds.

Meanwhile, after defaulting, many focus group participants lost track of their loans as they were batted around between a series of servicers and collectors.

• “Borrowers reported feeling confused and frustrated when they had to track down and establish a point of contact with yet another company. This system also made it difficult for borrowers to make sense of which rules applied to their loans and when, who was contacting them, and why,” the report says.

• Eye-popping stat: A government report from earlier this year estimated that contact info is missing for about a quarter of borrowers in default.

Many of the study's participants struggled to identify and use the available debt forgiveness programs — or other options like consolidation or settlement deals to help them exit default.

• "The lack of official guidance is compounded by misinformation and scams related to loan discharge, which makes it challenging for borrowers to know whom to trust and how to understand their eligibility for various programs," according to the report.
• And for some, the government unexpectedly garnished money from paychecks or tax returns.

What to watch: New America recommends reforms to make the system more borrower-friendly with component parts that aren't so siloed from one another — and simply increasing borrowers' awareness of their options.