Education Department Eases Rules for Student Loan Forgiveness

On Tuesday, April 19, 2022, the United States Department of Education announced several changes to the federal student loan programs that will bring borrowers closer to public service loan and income-driven repayment (IDR) forgiveness. Over 3.6 million borrowers be given a minimum of three years of credit toward IDR forgiveness, while Federal Student Aid (FSA) expects at least 40,000 will be immediately eligible for debt cancellation under the Public Service Loan Forgiveness (PSLF) Program. Additionally, several thousand borrowers with older loans will also receive forgiveness through IDR.

These change are part of the U.S. Education Department’s commitment to support student loan borrowers impacted by the ongoing COVID-19 pandemic, particularly those with lower incomes and higher debt loads, and to correct administrative issues that have plagued the federal student loan program for years. In addition to these immediate changes intended to provide relief to previously harmed borrowers, FSA will work to ensure that these benefits remain available for future borrowers as well.

The Three Big Changes

Below are the three actions the U.S. Education Department are taking to address the aforementioned issues:

• Ending “Forbearance Steering”: Current regulations require that borrowers who are facing difficulty making their loan payments get clear and accurate information from loan servicers about their options for staying out of delinquency and the financial consequences of choosing short-term options like forbearance, which could result in their loan balance and monthly payments growing due to interest capitalization. Conversely, IDR plans could result in reduced payments and steady progress toward loan forgiveness. Yet FSA found that servicers would often "steer" borrowers into forbearance, despite the possibility that their monthly IDR plan payments would have been as low as zero dollars. Both the Consumer Financial Protection Bureau (CFPB) and state attorneys general have raised similar concerns in the past. The U.S. Education Department plans to counteract forbearance steering by conducting a one-time account adjustment so that certain long-term forbearances count toward IDR and PSLF plans, in addition to increasing their oversight of servicers’ forbearance use.
• Tracking Progress Toward IDR Forgiveness: As previously mentioned, IDR plans have the potential to substantially lower most borrowers' monthly payments, in addition to eventually resulting in debt cancellation after no more than 25 years of payments. As such, lendees are dependent on FSA and loan servicers to accurately track their progress toward forgiveness. However, a review of IDR payment-tracking procedures by the U.S. Education Department found significant flaws, such as data problems and implementation inaccuracies, that have resulted in borrowers missing out on progress toward IDR forgiveness. The FSA has been directed to correct this problem by conducting a one-time revision of IDR payments to address any past inaccuracies, in addition to permanently fixing IDR payment counting by reforming its IDR tracking.
• Tackling Student Debt: All of the above changes are in line with the recent steps taken by the Biden-Harris Administration, such as forgiving over $17 billion in debt for 725,000 borrowers as well as extending the student loan payment pause, to make student loan relief programs work for all borrowers. To further tackle student loan debt, the U.S. Education Department has approved roughly $6.8 billion for over 113,000 public servants through improvements to PSLF, $7.8 billion for over 400,000 borrowers with a total and permanent disability, $1.2 billion for borrowers who attended ITT Technical Institutes prior to it closing, and nearly $2 billion to 105,000 borrowers who were defrauded by their school.

Additionally, the U.S. Education Department has also announced the restoration the FSA Office of Enforcement and begun strengthening key rules, such as borrower defense to repayment and gainful employment, in order to safeguard both students and taxpayers from predatory or low-value colleges.

The Prior Difficulties

IDR plans take into account a borrower's income and family size when setting their monthly student loan payment in order to ensure it's affordable. FSA offers four plans: the Revised Pay As You Earn Repayment (REPAYE) Plan, the Pay As You Earn Repayment (PAYE) Plan, the Income-Based Repayment (IBR) Plan, and the Income-Contingent Repayment (ICR) Plan. PAYE, REPAYE (if all loans under the plan were received for undergraduate study), and IBR (if the lendee is a new borrower on or after July 1, 2014) plans have repayment periods of 20 years. Meanwhile, ICR, REPAYE (if all loans under the plan were received for graduate or professional study), and IBR (if the lendee is not a new borrower on or after July 1, 2014) have repayment periods of 25 years. At the end of the repayment period, any remaining loan balance is forgiven, even if the loans aren't fully repaid.

However, as previously mentioned, many borrowers were steered into forbearance, causing them to miss out on a substantial amount of progress towards student loan forgiveness, since periods of forbearance don't count toward an IDR loan's repayment period. There is a maximum allowable amount of 36 months of discretionary forbearance that a borrower can use towards a particular loan as part of current regulations and loan servicer contracts. According to the U.S. Education Department, over 13% of all Direct Loan borrowers between July 2009 and March 2020 used forbearance for at least 36 months cumulatively.

Additionally, the PSLF program offer borrowers the chance to receive debt cancellation in just 10 years, so long as they are full-time qualifying public service workers. Unfortunately, it suffers from the same limitation as IDR plans, in that time spent in forbearance doesn't count toward debt cancellation under the PSLF program. FSA plans to begin implementing the previously mentioned changes immediately to address the harm these limitations have caused, though borrowers may not see the effect in their accounts until the last quarter of 2022.

“Student loans were never meant to be a life sentence, but it’s certainly felt that way for borrowers locked out of debt relief they’re eligible for,” said U.S. Secretary of Education Miguel Cardona. “Today, the Department of Education will begin to remedy years of administrative failures that effectively denied the promise of loan forgiveness to certain borrowers enrolled in IDR plans. These actions once again demonstrate the Biden-Harris administration’s commitment to delivering meaningful debt relief and ensuring federal student loan programs are administered fairly and effectively.”