Changes in 2 Loan Programs

The U.S. Education Department on Tuesday announced changes to two key student loan programs: the Public Service Loan Forgiveness and income-driven repayment programs.

The changes would “fix long-standing failures” in the programs, department officials said. After the changes are made, 40,000 borrowers will have their debts forgiven under the Public Service Loan Forgiveness program. More than 3.6 million borrowers will also receive at least three years of additional credit toward IDR forgiveness.

“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,” Secretary of Education Miguel Cardona said Tuesday. “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.”

At the same time, the department plans to continue its approach of dealing with loan issues that come up in specific loan programs and not issuing across-the-board loan forgiveness, as many Democrats in Congress are urging.

“We are working really hard where there is clear authority for us to help borrowers,” said Under Secretary of Education James Kvaal.

Specifically, the department is working to end “forbearance steering.”

Department regulations require that borrowers who are facing difficulty making their loan payments get clear information from servicers about their options for staying out of delinquency, including IDR plans, and the financial consequences of choosing short-term options like forbearance. However, recent department reviews “suggest that loan servicers placed borrowers into forbearance in violation of department rules, even when their monthly payment under an IDR plan could have been as low as zero dollars,” the department said.

“These findings are consistent with concerns raised by the Consumer Financial Protection Bureau and state attorneys general. A borrower advised to choose an IDR plan instead of forbearance can get a reduced payment, stay in good standing, and make progress toward loan forgiveness. A borrower advised to choose forbearance—particularly long-term consecutive or serial uses of forbearance—can see their loan balance and monthly payments grow due to interest capitalization and lead to delinquency or default.”

The department “will target forbearance steering by restricting servicers’ ability to enroll borrowers in forbearance by text or email, conducting an external review of patterns of forbearance use and servicers’ practices to identify other potential changes to address steering, and working in partnership with the Consumer Financial Protection Bureau to do regular audits of forbearance use.”

Kvaal said the department will begin work on these changes immediately, but borrowers may not see the effect in their accounts until the last quarter of 2022.

Income-driven repayment plans have much lower monthly payments for most borrowers, and borrowers on most plans are entitled to forgiveness after 20 years of payments.

“However, the department’s review of IDR payment-tracking procedures has revealed significant flaws that suggest borrowers are missing out on progress toward IDR forgiveness,” the department said.

To fix this problem, Cardona has directed the federal student aid office to:

• Conduct a one-time revision of IDR payments to address past inaccuracies. “Any borrower who has made the required number of payments for IDR forgiveness based on this payment-count revision will receive loan cancellation automatically. Additionally, FSA will count months spent in deferment prior to 2013 toward IDR forgiveness (with the exception of in-school deferment) for this same population of borrowers to address concerns that, prior to that date, its data cannot distinguish IDR-eligible deferments from other deferments.”
• Permanently fix IDR payment counting. “FSA will issue new guidance to student loan servicers to ensure accurate and uniform payment counting practices, and it will track payment counts in its own modernized data systems. In 2023, FSA will begin displaying IDR payment counts on StudentAid.gov so borrowers can view their progress after logging into their accounts.”

Reactions to the News

Reactions to the announcement varied.

“This is a small step toward rectifying the situation for borrowers who were misled or in the dark about all options available to them,” said Justin Draeger, CEO and president of the National Association of Student Financial Aid Administrators. “We urge the department to continue to evaluate how the federal government and its contracted servicers can make improvements to fairly and effectively administer the federal student loan programs.”

Persis Yu, policy director and managing counsel of the Student Borrower Protection Center, said Tuesday, “Nobody should have to spend their entire life paying off debt accrued simply from seeking an education. Income-driven repayment promised that borrowers would not face a lifetime of unaffordable debt. Today, the Education Department took action to start making that a reality—but they’re not done yet. By failing to include time that borrowers have spent in default, they’re still leaving out millions of borrowers for whom income-driven repayment has failed the most. To ensure that we will not continue to leave millions of borrowers behind, we need widespread student loan cancellation.”

Democrats in Congress were supportive of the move but clearly don’t think the effort of fixing the student loan system is done.

“I pushed hard for the administration to address the harm these failures have caused, and I’m relieved that today they heeded my call,” said Senator Patty Murray of Washington State, chair of the Senate Health, Education, Labor and Pensions Committee. “Next, we’ve got to fix the income-driven repayment system once and for all—so I continue to urge the Biden administration to finalize a new, more generous IDR plan for all borrowers, and to extend the payment pause until 2023 to get this done.”

But Republicans had a different view. Representative Virginia Foxx of North Carolina, Republican leader of the House education and labor committee, said, “In a certainly predictable trend, the Department of Education has blamed everyone except itself for its ineptitude. It is shameful this administration keeps putting politics above the interests of the American people.”