The U.S. Department of Education says it will retroactively help millions of federal student loan borrowers hurt and held back by its troubled income-based repayment (IDR) plans, calling the plans’ longstanding shortcomings and mismanagement “inexcusable.”
Tuesday’s announcement comes after years of complaints and lawsuits, and most recently an NPR investigation that found these IDR plans, which promise affordable monthly payments as low as $0 and loan forgiveness after 20 to 25 years, by the department and the credit service companies he employed were badly managed.
“Today, the Department of Education will begin to correct years of administrative errors that have effectively denied loan forgiveness promises to certain borrowers participating in IDR plans,” U.S. Secretary of Education Miguel Cardona said in a statement.
The department estimates the changes will result in immediate debt relief for at least 40,000 borrowers who now qualify for government loan forgiveness. In addition, several thousand borrowers now qualify for debt relief under the IDR.
This follows a revelation in 2021 that at that time 4.4 million borrowers had been repaying their loans for at least 20 years, but only 32 had been forgiven under the IDR.
As a result of Tuesday’s news, millions more borrowers will also receive months, and in some cases years, of new loans for eventual termination.
Here’s what the department is committed to doing:
Borrowers with long-term forbearance receive a loan for debt relief
The Federal Student Aid (FSA) department and its office commit to conducting a “one-time account adjustment” to credit borrowers for time spent on unjustifiably long forbearances: more than 12 consecutive months or more than 36 cumulative months.
Forbearance allows borrowers in financial difficulties to pause their payments, but interest continues to accrue and capitalize, meaning the interest itself ends up accruing interest. Income-based repayment plans can offer the same or nearly the same deferral of large monthly payments, and unlike forbearance, they offer borrowers a path to foreclosure.
After July 2009, when IDR plans became widely available, forbearance should have been the lender’s last resort for distressed borrowers. Instead, the ministry said, a new review found that service providers’ use of long-term forbearance was “remarkably widespread.”
According to the Department, between July 2009 and March 2020, more than 13% of all direct lending borrowers were on leniency for at least 36 months, suggesting that “credit servicers have granted leniency to borrowers in violation of Department regulations, even when their monthly payment below that, an IDR plan could have been as low as zero dollars.” The department generally limits forbearance to 12 consecutive months, or a total of three years, after which payments should resume.
The department’s appeal means borrowers will be granted loan cancellation credit for some of these long-term forbearances. For example, a borrower who has spent 16 consecutive months in forbearance would be given a credit for 16 qualifying payments for cancellation.
The department estimates that 3.6 million borrowers will receive at least three years of new loans before termination. Many more borrowers will benefit but receive fewer.
The plan excludes a prominent group of borrowers: those who have spent less than 12 consecutive months and less than 36 months in leniency overall, although it promises an “account review” for those who choose to lodge a complaint with the FSA Ombudsman to submit.
Inaccuracies in counting qualifying payments will be corrected
NPR reports earlier this month revealed widespread inaccuracies in credit servicers’ counts of borrowers’ qualifying IDR payments, which the department now acknowledges and pledges to address with a one-time rework of past payments.
“All months in which borrowers have made payments count toward IDR, regardless of repayment schedule,” the department’s press release said. “Payments made on consolidated loans prior to consolidation are also included. This correction is necessary to correct data issues and previous implementation inaccuracies.”
After acquiring internal departmental documents, NPR found a litany of irregularities in how loan servicers counted — or didn’t count — qualifying IDR payments, delaying borrowers’ progress toward forgiveness. For example, $0 monthly payments were not properly tracked, potentially hurting the lowest-income borrowers. Also, borrowers appeared to erroneously lose credit for previous advances toward IDR after emerging from default.
Improving the way borrowers’ progress on loan cancellations is tracked
The department offers two remedies to another serious issue highlighted in NPR’s recent investigation — that loan servicers were not consistently tracking borrowers’ progress toward loan cancellations, and some were not tracking their progress at all.
The FSA now says it will issue new guidance for service providers to ensure companies’ records are accurate and consistent. Perhaps more importantly, in 2023 the department will begin tracking IDR payments on its own system and showing borrowers’ progress on StudentAid.gov.
These changes will be made automatically – but it may take a while
The department says it will make these adjustments to borrower records automatically, but first it needs to update its outdated National Student Loan Data System (NSLDS). Therefore, loan cancellations will not officially begin until autumn of this year.
The overhaul is taking place under increasing political pressure
The department unveiled its overhaul plans amid increasing pressure from lawmakers.
On Monday, House and Senate Education Committee chairs Rep. Bobby Scott, D-Va., and Sen. Patty Murray, D-Wash., citing NPR’s reporting, issued a letter urging Secretary of Education Miguel Cardona to “immediately provide relief and reverse past damage.”
“Borrowers have lived for too long with mounting debt and false promises of loan forgiveness after 20 or 25 years of income-contingent repayment,” the letter reads. “Payments must be retrospectively corrected to provide relief to borrowers who have already been harmed by this broken safety net.”
While the Department’s proposal addresses some of Scott and Murray’s demands, it falls short in at least one area. The top Democrats begged the department to give borrowers retroactive credit for foreclosure Everyone past periods of forbearance, not just longer pauses.
In a statement, Scott said: “Today’s announcement means that borrowers in income-based repayment will finally have reliable access to the forgiveness they have been promised and have worked towards… However, the Department has taken a significant step in assisting borrowers, we know we need to do more to fix our broken student loan system, including the income-based repayment program.”
Last week, leading Senate Democrats Sen. Sherrod Brown of Ohio, Sen. Elizabeth Warren of Massachusetts and Sen. Dick Durbin of Illinois also sent a letter to Consumer Financial Protection Bureau director Rohit Chopra, urging his agency to investigate and “to use”. all of its agencies to ensure borrowers access the benefits of the IDR program and receive the student loan forgiveness they deserve.”
The department’s announcement also comes not long before the US Government Accountability Office is expected to release the results of its own investigation into IDR’s failures.
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