The Biden administration continued its student loan cancellation effort on Tuesday by announcing that 40,000 borrowers would see their student loans become eligible for discharge under the Public Service Loan Forgiveness program and 3.6 million more will move closer towards forgiveness.
The Education Department will give borrowers retroactive credit for “forbearance steering,” where student loan servicers have pushed borrowers into unnecessary interest-accruing forbearance. In another move that could help many other borrowers, the department will also take greater care to accurately track monthly payments for borrowers on income-driven repayment — which allows people who make less money to make smaller payments.
The two moves bring millions of borrowers closer to forgiveness on government repayment programs.
“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 said in a press release.
“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,” Education Undersecretary James Kvaal said on a call with reporters.
Recent report of systemic problems with IDR
A former Obama-era Education Department official last week highlighted the problematic income-driven repayment program as one reason for broad-based student debt forgiveness.
“We … were very focused on trying to improve income-driven repayment plans and our hope was in the Obama administration that income-driven repayment would help address the student debt crisis,” former Education Secretary John King, who is running for governor in Maryland, said. “But the reality is, it hasn’t.”
A recent investigation by NPR revealed how over the years, loan servicers struggled to implement income-driven repayment, and ended up systematically mismanaging the portfolio. Some providers were not clearly tracking payments and did not know when borrowers qualified for forgiveness.
The mismanagement caused many to miss out on debt relief.
According to past research from the National Consumer Law Center, despite millions of student debtors qualifying for forgiveness under income-driven repayment terms stipulating that borrowers who pay for 20-25 years can their debt forgiven, only 32 borrowers have actually had their debt cancelled.
The government’s efforts to reform the system piece by piece instead of broad-based forgiveness has chipped away at the $1.7 trillion in outstanding student loan debt held by 41 million Americans.
Overall, the Biden administration has cancelled more than $17 billion in debt for 725,000 borrowers, from fixing Public Service Loan Forgiveness Program to addressing the borrower defense backlog.
According to the announcement on Tuesday, the Education Department is addressing two major problems. It’s acknowledging people who have loans in forbearance and accrued huge levels of interest payments, and it’s also helping borrowers who have had their income-driven payments miscounted.
On forbearance, the department noted that loan servicers have in the past placed borrowers into forbearance even when debtors could have qualified for an income-driven repayment plan that would have allowed them to make $0 payments. Forbearance causes borrowers’ interest to capitalize and their debt to grow substantially.
The department will address this by conducting a one-time adjustment where it will count forbearance of more than 12 consecutive months and more than 36 months cumulative towards forgiveness under income-driven repayment or Public Student Loan Forgiveness.
It will also increase oversight of servicers’ usage of forbearance.
The Education Department will also conduct a one-time revision of income-riven payment counts for all Direct Loans and federally managed Federal Family Education Loan Program loans. Any months where debtors have made payments will count towards income-driven repayment, regardless of payment plan, and consolidation status.
And importantly, any borrower who hits the 20- or 25-year mark for monthly payments after this revision will have their loans canceled automatically, the department stated.