People who have been paying down their student loans for decades will get a better chance at debt cancellation, as the Biden administration temporarily relaxes the rules of certain repayment plans.
About half of the more than $1 trillion in outstanding student loans made directly by the federal government is being repaid through one of the four income-driven plans. The plans cap monthly payments at a given percentage of earnings, with the promise that the balance will be forgiven after 20 or 25 years of payments.
The trouble is that decades of poor communication between the Education Department, its loan servicers and borrowers have made the program difficult to navigate. Now, Education Secretary Miguel Cardona says the agency will remedy years of administrative failures that effectively denied loan forgiveness to some borrowers enrolled in income-driven plans.
“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,” Cardona said Tuesday.
Congress created the first income-driven plan in the 1990s, but few people took advantage until the Obama administration expanded eligibility, lowered monthly payments and shaved years off the path to forgiveness. The goal was to help more people manage their debt and avoid default.
Despite fine-tuning over the years, government audits show the Education Department has provided insufficient instructions to contractors managing its loan portfolio. That oversight has resulted in inconsistent loan servicing to the detriment of borrowers.
A recent NPR investigation found inconsistencies in the way servicers treat and track payments made through income-driven plans. It also discovered that early versions of the file system the department uses to transfer borrower accounts between servicers did not track payment counts for some of the plans, and some records lacked information about the correct payment amount. That means people could wind up repaying their loans for much longer than needed.
To address past problems, the Biden administration said Tuesday that any month in which borrowers made payments will retroactively count toward forgiveness, even if they were not enrolled in an income-driven plan. Anyone who has made the required number of payments for forgiveness based on this one-time revision will receive automatic loan cancellation.
Borrowers do not need to be currently enrolled in an income-driven plan to benefit from the waiver. If they later enroll in the plans, any payments they’ve already made will count toward forgiveness.
The changes will be reflected in borrowers’ accounts by the end of the year. The department anticipates the waiver will give 3.6 million people at least three additional years of credit.
“We wanted to act as quickly as possible to address these problems, but we expect these figures to only grow as we continue to analyze and implement these solutions,” Undersecretary of Education James Kvaal said on a call with reporters Tuesday.
The department will also grant a one-time account adjustment to count the months borrowers postponed their payments through forbearance if they remained in that status for years. Months in which borrowers are delinquent, in default or postponing payments through forbearance do not count toward the forgiveness threshold.
Echoing past complaints from the Consumer Financial Protection Bureau, the Education Department said servicers routinely steered borrowers into long-term forbearance to avoid the added paperwork of enrolling them in an income-driven plan.
A review of past forbearance use shows that more than 13 percent of all Direct Loan borrowers between July 2009 and March 2020 have used forbearance for at least 36 months cumulatively, according to the department. The department’s Federal Student Aid office will restrict servicers’ ability to enroll borrowers in forbearance by text or email, and conduct a review of forbearance use.
Servicers have disputed the steering allegations, arguing they are paid more for accounts that are in repayment, so there is no profit motive.
In a joint statement, the Education Finance Council, National Council of Higher Education Resources and the Student Loan Servicing Alliance — groups that represent servicers — said, “The suggestion of servicers steering borrowers is without merit and is clearly an attempt by the Department to steer the conversation away from the root cause that FSA has failed to fix the federal student loan repayment system for years.”
The groups called the waiver a “quick fix, Band-Aid approach” to long-standing problems the department failed to address in collaboration with its own loan servicers. The groups referenced an attempt federal loan servicers made in 2016 to make wholesale changes to record-keeping and payment counts, which the department initially agreed to but later canceled out of concern about the costs.
The shortcomings of income-driven plans have raised the ire of congressional Democrats. Last week, Sens. Elizabeth Warren (D-Mass.), Sherrod Brown (D-Ohio) and Richard J. Durbin (D-Ill.) urged the department and Consumer Financial Protection Bureau to investigate the mismanagement of the program. House Education and Labor Chairman Robert C. “Bobby” Scott (D-Va.) has requested a U.S. Government Accountability Office investigation into the program, which is due out this week.
While liberal lawmakers and consumer advocates praised the waiver, many continued to press President Biden for widespread debt cancellation through executive action. Others expressed disappointment that the waiver does not include borrowers whose loans went into default due to the failures of the repayment system.
“The Education Department left out the borrowers most harmed by past failures: borrowers who, unable to access an affordable payment option, went into default,” said Abby Shafroth, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project. “This oversight significantly reduces the number of borrowers who will receive immediate loan forgiveness through today’s action, as over 2 million of the 4.4 million borrowers who have been in repayment for over 20 years are in default.”
Shafroth also worries that few borrowers will be able to understand how they are benefiting from the waiver, and few will know what to do if they’re initially left out. The department said it is working to fix how it tracks qualifying payments, with plans to display a payment count allowing borrowers to track their progress toward forgiveness starting in 2023.
Tuesday’s waiver arrives as the Education Department is hammering out the details of a new plan, dubbed Expanded Income-Contingent Repayment, that would lower monthly payments and forgive unpaid interest for borrowers with income so low they cannot come up with a payment.
It applied only to undergraduate loans, not the federal debt that parents or graduate students amass, and kept in place a lengthy timeline to forgiveness. The initial proposal was tabled in December by a panel of higher-education experts who could not reach a consensus during the rulemaking negotiations, leaving it up to the department to move forward.
