Student-loan companies aren't prepared to restart payments in October, which could be a 'financial catastrophe' for borrowers, senators say

• Elizabeth Warren asked student-loan servicers last month how they were preparing borrowers to restart payments.
• The servicers said they needed more time, calling the transition into repayment "unprecedented."
• Lawmakers and advocates have called on Biden to extend the payment freeze through next year.

The resumption of student-loan payments on October 1 is quickly approaching as borrowers, lawmakers, and advocates sound the alarm on restarting payments too early.

As it turns out, the companies that collect the payments aren't ready either.

Last month, Sens. Elizabeth Warren of Massachusetts, Ed Markey of Massachusetts, and Tina Smith of Minnesota sent a letter to the CEOs of all student-loan servicers to request information on how each was preparing to transition borrowers back into repayment.

On Tuesday, Warren and Markey released the responses from those servicers. The overarching theme was that servicers, along with borrowers, had concerns about restarting payments in just three months, the senators said.

"The responses to our inquiry indicate that neither student loan borrowers nor student loan servicers are prepared for payments to resume, and servicers will need significant time to ensure that staffing and procedures are ready to provide borrowers with a high level of support," the senators wrote in a letter to President Joe Biden.

They said that one servicer even noted in its response that attempting to move over 43 million borrowers back into repayment at once was "unprecedented."

Other main findings from the responses included:

• The payment pause had provided significant relief to borrowers, with 2.5 million having fully repaid their loans during the pandemic;
• Most borrowers had very little contact with their servicers during the pandemic, suggesting they wouldn't be adequately prepared to restart payments;
• Servicers needed more time to ensure staffing is sufficient to support borrowers;
• And transitioning borrowers from FedLoan Servicing, which recently announced it would not extend its contract with the Education Department, would require additional time to ensure that borrowers are not harmed in the process.

Last week, the Pennsylvania Higher Education Assistance Agency notified the department that it would not extend its 12-year contract for FedLoan Servicing, which handles the loans of 8.5 million borrowers, beyond December 14. Warren and Markey wrote in their letter that attempting to restart payments only weeks after transferring servicers would "overwhelm an already broken student loan system."

On June 23, 64 Democrats, led by Senate Majority Leader Chuck Schumer and Warren, urged Biden in a letter to extend the payment pause until March 31 or until the economy returns to pre-pandemic employment levels, whichever is longer.

The next day, 128 organizations including the American Civil Liberties Union and the Service Employees International Union sent a letter urging the president to extend the payment pause until the administration has followed through on its promises to fix the student-loan system and cancel federal student debt.

And in a letter on June 30, Sen. Patty Murray and Rep. Bobby Scott, the chairs of the Senate's and the House's education committees, urged Biden to extend the payment pause until early 2022 to ensure that borrowers have the information they need to restart payments.

Education Department officials have also reportedly urged Biden to extend the payment pause. While Education Secretary Miguel Cardona has not said whether such an extension will happen, he has hinted at the possibility that it could.

"As the economy recovers from this unprecedented crisis, borrowers should not be faced with an administrative and financial catastrophe just as they are beginning to regain their footing," Warren and Markey wrote. "We strongly urge you to extend the pause on student loan interest and payments in order to allow time to begin to repair the broken student loan system."