On Tuesday, the U.S. Department of Education announced a waiver for income-driven repayment plans that is expected to impact more than 3.6 million borrowers, 40,000 of which are anticipated to receive immediate student loan forgiveness.
Income-driven repayment has been under scrutiny
Income-driven repayment (IDR) plans are a federal program geared toward student loan borrowers who are having trouble making their monthly payments. IDR plans base borrowers’ monthly payments off of annual income and family size, and after 20 to 25 years of qualifying payments, the remaining balance is forgiven.
However, many have criticized the stringent requirements for forgiveness and the failure of servicers to properly implement the program. NPR recently released the results of an investigation showing that servicer mismanagement has caused potentially millions of borrowers to miss out on forgiveness through IDR. The investigation follows a report from the National Consumer Law Center report showing that of the 2 million federal borrowers with at least 20 years of student loan repayment under their belts, only 32 borrowers have actually received forgiveness through IDR.
Millions of borrowers will receive credit toward income-driven repayment
The Education Department announced specific steps to “help restore the promise of IDR plans” and remedy what U.S. Secretary of Education Miguel Cardona referred to as “administrative failures” of the federal forgiveness program.
According to the department’s press release, the changes will automatically give many borrowers progress toward IDR or Public Service Loan Forgiveness (PSLF):
- Several thousand borrowers with older loans are expected to receive immediate forgiveness through IDR.
- At least 40,000 borrowers are anticipated to receive immediate student loan forgiveness through Public Service Loan Forgiveness.
- More than 3.6 million borrowers are expected to receive at least three years of additional IDR credit.
To accomplish this, Federal Student Aid (FSA) plans to remedy issues with forbearance steering and revise the process of tracking IDR payments.
FSA will target forbearance steering
Servicers are required to give borrowers information about all of their federal relief options if they are facing delinquency; however, FSA reviews suggest that servicers have routinely steered borrowers away from federal relief programs like IDR and instead placed them into expensive forbearance periods. Navient, one of the department’s former servicers, recently faced an expensive settlement for such behavior.
To rectify this, FSA will conduct a one-time account adjustment for borrowers placed into long-term forbearance: Forbearance periods longer than 12 consecutive months and longer than 36 cumulative months will be counted as IDR or PSLF credit. Borrowers who were steered into shorter forbearance periods can also contact the FSA Ombudsman to file a complaint and seek an official account review.
Moving forward, FSA will also exercise more oversight in ensuring that servicers do not wrongfully lead borrowers into forbearance. These actions include:
- Restricting servicers’ ability to enroll borrowers in forbearance via text or email.
- Conducting an internal review of servicers’ practices and patterns of forbearance enrollment.
- Working with the Consumer Financial Protection Bureau to conduct regular forbearance use audits.
“This will build upon other FSA efforts to improve oversight of loan servicing activities, including stronger accountability provisions in servicing contracts, renewing partnerships with federal and state regulators and clarifying its position on federal preemption of state oversight of loan servicing,” the press release reads.
FSA will work to improve IDR payment-tracking progress
Borrowers enrolled in IDR rely on the Education Department and loan servicers to track their qualifying payments and credit toward forgiveness. However, the department’s review has found that this process has been riddled with inaccuracies due to the payment-tracking system that’s currently in place.
To rectify past payment counting inaccuracies, FSA will conduct a one-time revision of all qualifying IDR payments. Any months in which payments were made on Direct Loans and FFEL loans, regardless of repayment plan, will count toward IDR relief. This includes payments made on consolidated loans prior to consolidation. Months spent in deferment before 2013 will also count toward IDR forgiveness. The department has hinted that permanent changes along these lines could be coming soon.
FSA will also be holding federal servicers to a higher standard when it comes to tracking payment and forgiveness progress. One big step is a promise to automatically display borrowers’ payment counts on the Federal Student Aid website when they log in. This new feature is expected to launch in 2023.
Borrowers will likely see changes in late 2022
Borrowers who are impacted by this one-time waiver will most likely see these changes reflected in their accounts in the last quarter of 2022. For borrowers who have already made significant progress on an income-driven repayment plan, this could mean the cancellation of their remaining loan balance.
Those enrolled in IDR plans don’t need to do anything to qualify for the revisions, but they should keep an eye out for any new information or account changes from their servicer. Those interested in an IDR plan can apply for one on the FSA website, although they won’t qualify for the retroactive relief measures and payment credit.