States try to catch borrowers before they sink as the Fed resumes student loan collection

New York University students celebrate at the graduation ceremony in 2022. Many borrowers are experiencing obstacles after the pandemic pause, repaid repayments last month on defaulted student loans. (Seth Wenig/AP photo)

Over the past few months, Celina Damian's phone call has been on a confusing, anxious question after anxiety: “What kind of loan is this?” “Do I default?” “Will the government really get my salary?”

“Sometimes they just don’t know where to start,” said Damian, an ombudsman for student loan services in California.

“I'm talking to borrowers of all ages, from new borrowers to – I have 80, 90-year-old borrowers,” she said.

The federal government restarted its collection of defaulted loans last month. State student loan ombudsmen such as Damian have become the only source of contact for concern that borrowers lose in contradictory information about their loan status and repayment plans at the federal level.

Since the COVID-19-19 pandemic in March 2020, the U.S. Department of Education began collecting student loans defaulted in May.

Federal student loans issued by the U.S. Department of Education come with fixed interest rates, set repayment plans and borrower protection. Private service staff handles billing, repayment plans registration and default settings.

According to the U.S. Department of Education, more than 5 million borrowers are in crime, with nearly 10 million (about 25% of the federal student loan portfolio) at risk of default within a few months.

States cannot cancel this debt, but they do register and oversee service personnel operating in their states, operate complaint agencies, adjust tax rules and provide publicity or limited grants – actions designed to reduce defaults and economic impacts.

When borrowers default, states may feel the economic impact. As home buying stalls, they may lose their tax revenue. If borrowers need to rely on them, they may end up paying more for Medicaid and social services. Students with loan debt may be reluctant to work in lower-paid public sector jobs, resulting in a staff shortage of state agencies.

The borrower's lack of payment to the service company that handles the bill, repayment plan registration and defaults is considered to be arrears.

Damian’s office was established under California’s Student Borrower Rights Act, initially in a narrow sense of legal role, but is now a hub for the Student Loan 101 workshop and escalated complaints to federal agencies.

About 16 states, including Rhode Island, and the District of Columbia, followed suit, creating offices of grievance experts to guide borrowers to confuse paperwork and misinformation. Damian believes that the offices of these complaint experts should be in every state, as borrowers across the country may have similar problems and little help at the federal level.

“If you don't have an ombudsman, not even a state-level person that can educate borrowers, that's going to make a difference,” Damian told stateline. “These borrowers are trying to pay, but the system is broken. No other financial products work in this way.”

Student loans became a key issue in last year’s election competition, with President Joe Biden blocking by the U.S. Supreme Court in an effort to provide relief to 40 million Americans. During the days of decline, his government provided loans to about 150,000 borrowers under previous plans.

But President Donald Trump opposes most loan forgiveness programs, and in May, the U.S. Department of Education sent a “Dear Colleague” letter to higher education institutions reminding them of their legal obligations to help former students understand repayment responsibilities and gain support.

These borrowers tried to pay, but the system was corrupted. No other financial products work this way.

– Celina Damian of the California Student Loan Services Ombudsman

Some conservative economists say federal loan forgiveness and financial aid hurt all students, providing colleges with motivation to raise tuition fees or reduce their institutional aid.

Winston Berkman-Breen, legal director of the Center for Student Borrower Protection, a nonprofit organization that aims to protect borrowers and improve repayment systems, said more than 2 million borrowers are trapped in an income-driven repayment program (IDR) program (IDR) program in unprocessed unprocessed applications – a paid structure that calculates a payment structure that can be used to pay, payable, and payable.

Other borrowers have called on federal agencies to seek help, only to find that U.S. education staff, including the service staff’s sight team, have been fired as the Trump administration works to completely remove the department.

“Expect to repay,” Berkman-Breen said. “But there are also expectations that people can use affordable plans. That promise has collapsed.”

Berkman-Breen said states now have three main tools to address student loan debt: law enforcement actions that protect consumers, such as 39-state lawsuits against Servicer Navient; legal oversight of lawsuits or challenge federal policy; and direct publicity to help civil servants obtain public service loan forgiveness and similar programs.

He said there are now 19 states that need to register for companies serving student loans. More than a dozen states are aligned with federal policies to exempt state income taxes that forgive loan balances.

“Can't wait for Washington”

Rep. Eleni Kavros DeGraw, a Democrat, called student debt a “drag on the economy” and said states were unable to wait for Congress (a stumbling trapped in student loan forgiveness amid a partisan deadlock) to find common ground.

“[Student debt] She told Stateline that it is preventing people from buying houses, starting families and fully participating in the economy, which makes us a state, a city, and we can’t wait to Washington figure it out. ”

Last year, Connecticut developed a bipartisan reimbursement program that provides up to $20,000 in payments and complete community services to graduates from local colleges. To date, the state has allocated more than $2 million.

Kavros DeGraw hopes the plan can be used as a model and has been negotiated with lawmakers in other states to develop its own version.

“These people are already paying for it,” Kavros DeGraw said. “It makes a lot of sense. I think this is something other states can explore this session, and it will provide a huge relief.”

Members of other states have also considered student loan legislation. This year, New Jersey filed a bill to register for educational lenders and cap interest rates. Legislators in New Mexico, New York and North Carolina introduced the Borrowing Human Rights Act legislation. Arizona has a registration bill for private service personnel. None of these measures has made progress.

According to the National State Assembly, more than 20 states have enacted laws in recent years that have expanded oversight of loan forgiveness, repayment plans and service providers.

Several states also invest directly in workforce consistent loan forgiveness: Georgia has expanded its service loan program to cover dental students working in rural areas. Idaho creates loan repayment incentives for rural nurses. Kentucky now offers a $5,000 stipend to attract new teachers. Maryland authorizes Anne Arundel County to launch a local forgiveness program for public school educators.

Repayment

Student loan pressure is not evenly distributed. Seven states have reported reports from the Republican-controlled legislature, with reported violations of more than 30% and borrowers who need to pay.

Mississippi leads the country with a conditional crime rate of nearly 45%, which means borrowers who should pay are late. This is the leading position in Alabama, West Virginia, Kentucky, Oklahoma, Arkansas and Louisiana, all of which are above 31%.

By comparison, crime rates in Illinois, Massachusetts, Connecticut, Vermont and New Hampshire are below 15%.

Experts say this divide reflects deeper systemic differences, such as median income in higher crime countries, weaker consumer protection and a higher share of students in for-profit institutions, or leaving college without a degree.

The states also promoted the federal Public Service Loan Forgiveness Program, which was established in 2007, to help public service professionals. New Mexico hosts an outreach event that includes potential teachers and health care workers. Maine has provided guidance to public defenders on how to leverage public services loan forgiveness programs and promotes relevant state tax credits on marketing websites to attract new residents.

“States can regulate and enforce, but they cannot address the structural issues of how they repay,” said Michele Zampini, senior director of senior university affordability at the Institute for College Visits and Success, a research organization that advocates students. “They are helping the edge, but the core system is still broken.”

The Consumer Financial Protection Agency's November report found that at least 3.9 million borrowers received misleading or inaccurate bills from service companies.

“The repayment system is not a good place to provide services and repayment option borrowers,” Zampini said.

A student loan borrower survey conducted between October 2023 and January 2024 found that 61% of borrowers who received debt relief had changed their beneficial lives earlier than before. However, borrowers’ awareness remains low: Nearly 42% of federal borrowers only follow standard repayment plans, with 31% not aware of other options, such as income-based plans.

In California, a major part of Damian’s work in the past few months has been helping borrowers access to existing forgiveness programs.

Meanwhile, new federal policy recommendations can completely reshape repayments. A large bill supported by Trump will consolidate existing IDR plans into a single stratified structure, with low-income borrowers paying flat monthly rates each month, while higher-income earners account for 8% of their income. The bill also proposes to extend the standard repayment clause to 30 years – raising concerns that could delay forgiveness and inflate the total interest cost.

The bill passed the U.S. House of Representatives and is being heard in the Senate.

“Incentive Price”

Cato Institute Fellow Andrew Gillen, who recently testified before Congress, argued that any meaningful solution must address incentives that drive increasing tuition fees — i.e. federal aid is directly linked to university label prices.

“The link between driving Bennett’s hypothetical tuition and increased aid is that federal student aid in the form of loans can lead to higher tuition for colleges and universities,” Gillen said in an interview. “In contrast, if we use the median attendance cost to calculate aid eligibility, we will remove the college’s motivation to raise prices just to get more aid.”

Even if they disagree with the blanket’s forgiveness, experts agree with smaller bipartisan steps: simplified repayment, stronger service provider oversight and targeted help for borrowers who need it most.

“We don't want people to default. We don't want people who just finished school to pay too high. This should be the starting point for both parties,” Zampini said.

Statistics reporter Robbie Sequeira can be contacted at rssequeira@stateline.org.

Stateline is part of the National Newsroom, a nonprofit news network supported by a coalition of grants and donors as a 501C(3) public charity. Stateline maintains editorial independence. Please contact editor Scott S. Greenberger for the question: info@stateline.org.

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