Forgiveness Gets Closer for Some Federal Student Loans

Changes to federal student loan programs have brought forgiveness closer for millions of borrowers.

The changes mean that more than 3.6 million borrowers pursuing forgiveness through so-called income-driven repayment plans will attain it months or years sooner than they otherwise would have, and at least 40,000 enrolled in the Public Service Loan Forgiveness (PSLF) program will immediately become eligible, the Department of Education said this week. (There are an estimated 43 million borrowers with federal student loans.)

The one-time changes to the programs affect how the department will handle past periods of forbearance—periods when borrowers were relieved from making their monthly payments due to financial hardship or other circumstances—by adjusting their records so that the time some borrowers spent in forbearance will count toward loan forgiveness.

The latest moves, similar to other recent changes to student loan forgiveness programs, are aimed at making it easier for borrowers to jump through the various hoops needed to obtain forgiveness. Taken together, the changes mean that the student loan landscape will be friendlier for borrowers on these specific kinds of repayment plans when the current pandemic pause on interest and required payments ends in August. That’s assuming the freeze is not extended again and that there’s no broad-based loan forgiveness from President Joe Biden’s administration, as many advocates would prefer.

“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,” Education Secretary Miguel Cardona said in a statement.

In income-driven repayment programs, which are aimed at borrowers whose student loan payments are high compared to their income, borrowers pay a percentage of their income rather than a fixed amount. If they pay regularly, whatever they owe at the end of their repayment period—20 to 25 years, depending on which program is being used—is forgiven. Public Service Loan Forgiveness is similar, but participants must work in a government or nonprofit job, and forgiveness is granted after 10 years. (A temporary change to this program in October made the program much easier to qualify for, and granted forgiveness to tens of thousands of public servants.) 

‘Steered’ Inappropriately Into Forbearance

Borrowers usually are only counted as making progress toward these goals as long as they are paying their loans. If they are in forbearance or deferment, their progress toward forgiveness sometimes also is stuck in limbo—with the exception of the current pandemic pause. (The difference between deferment and forbearance is that loans in forbearance continue to rack up interest, while those in deferment typically do not.) Forbearance periods are only supposed to be temporary, lasting up to a year at a time, or three years over the life of the loan.

However, the Education Department said this week that more than 13% of borrowers with direct loans (student loans made directly by the department) had been in forbearance longer than necessary between 2009 and 2013 because they’d been inappropriately “steered” there by the private companies that manage student loans on behalf of the government. In some cases, students who would have been able to make zero-dollar monthly payments under income-driven plans—while still being counted as making progress toward forgiveness—instead were given forbearance, which saddled them with growing loan balances and monthly payments and possible delinquency or default, the department said.

To make up for these lapses, borrowers whose forbearance exceeded a year at a time or three years in total will have the period they were in forbearance counted toward their repayment schedules, the department said. That’s enough to put at least 40,000 PSLF borrowers and a few thousand borrowers on income-driven plans over the top immediately.

In addition, all borrowers with two types of loans—direct loans and Federal Family Education Loans—will have any month they made a payment before 2013, and any time they spent in deferment before then, count toward forgiveness. This is because data problems and other inaccuracies have made it hard to tell whether payments made during that time actually qualify for income-driven repayment forgiveness, the Education Department said.

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