Last week, the U.S. Department of Education released long-awaited guidelines regarding its beleaguered Income-Driven Repayment (IDR) program, an initiative designed to help lower-income people pay off student loans faster and with less impact on their monthly budget.
“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.”
The issues with the Income-Driven Repayment Program, explained
At its core, IDR bases student loan payments on income and family size and provides a path to loan forgiveness after 20-25 years of qualifying payments. Since its infancy, however, the program has been mishandled. Loans that should have qualified for forgiveness were not counted due to clerical and accounting errors, and consumers were not informed by their loan servicers that periods of forbearance or deferral did not count toward the forgiveness period. Similarly, loan consolidation loopholes that resulted in IDR qualifying periods essentially being reset at zero were not communicated clearly with borrowers.
Consumer advocates accused loan servicing companies of intentionally misleading borrowers into consolidating loans or otherwise taking steps that would count against their loan forgiveness. And there is evidence that neither the government nor loan servicing contractors hired by the government accurately recorded payments that should have gone toward meeting that forgiveness quota.
Last year, President Biden and the Department of Education announced an overhaul of the IDR program, including a one-time credit toward loans that were mishandled. Detailed information has finally been announced regarding this credit, who can expect it, and how much it will be.
For qualifying loans, the Education Department will provide an adjustment credit to any IDR-qualifying Federal Direct Loan or Federal Family Education Loan (FFEL), laid out below.
According to StudentAid.gov, “the account adjustment will count time toward IDR forgiveness, including”:
- “any months in a repayment status, regardless of the payments made, loan type, or repayment plan;
- “12 or more months of consecutive forbearance or 36 or more months of cumulative forbearance;
- “any months spent in economic hardship or military deferments in 2013 or later;
- “any months spent in any deferment (with the exception of in-school deferment) prior to 2013;” and
- “any time in repayment (or deferment or forbearance, if applicable) on earlier loans before the consolidation of those loans into a consolidation loan.”
Perhaps most importantly, the Education Department also noted that most qualifying borrowers will receive around three years' worth of credit toward forgiveness — while several thousand borrowers with older loans, those who have been paying for 20-25 years, will likely see complete forgiveness of their remaining balances.
Borrowers who are enrolled in the Public Service Loan Forgiveness (PSLF) program, another troubled and mishandled loan service that promised forgiveness to borrowers who worked in public service or the non-profit sector for a set amount of time, will also benefit from the new rule. According to the Federal Student Aid agency, all payments credited to IDR loans will also be credited to qualifying PSLF loans as long as employment conditions are met. The Education Department estimates that these account adjustments will result in complete forgiveness for around 40,000 PSLF borrowers.
For many borrowers, the adjustments will be applied automatically. But for others, some steps may be necessary to qualify or to maximize the benefit:
- Borrowers with Federal Direct Loans and government-backed FFEL loans should see an automatic adjustment. No steps are needed.
- Borrowers with commercially held FFEL loans, Perkins loans serviced by their educational institution, or Health Education Assistance Loans (HEAL) should consolidate those loans into a Federal Direct Loan to qualify.
- FFEL borrowers who wish to qualify for PSLF should consolidate into a Federal Direct loan as FFEL loans do not qualify for the PSLF program.
- Borrowers with multiple loans and different repayment histories should consider consolidating as the adjustment would also be consolidated and provide a more significant credit than if it were split between multiple loans.
The Education Department estimates that adjustments will roll out through 2024, but borrowers who need consolidation must complete the process by the end of 2023. For more information on loan consolidation, visit StudentAid.gov.