New Federal Student Loan Program Will Move Millions Towards Forgiveness

It’s unclear whether President Biden’s student loan forgiveness plan will survive a legal challenge now in the Supreme Court, but a different federal program may still offer relief to many borrowers. Some are already seeing relief under the scheme, and the government has just extended a key deadline for some borrowers who must take special steps to qualify.

The aid will come in the form of a one-time adjustment to the accounts of borrowers, some of whom have been making payments for decades. The adjustment will revise their accounts so that more of their payments count towards the required number of payments needed to qualify for loan forgiveness.

The adjustment could benefit millions of borrowers, eliminating outstanding balances for some and bringing many closer to canceling their remaining debt, the Department for Education said when it announced the plan a while ago. almost a year.

A bit of background: Income-driven repayment plans allow student borrowers to make lower monthly payments — in some cases, as low as zero dollars — based on their income and family size. Because the payments are low, they often don’t affect the loan balance. But after making payments for 240 or 300 months (20 or 25 years), depending on the specific plan, the remaining debt is eligible for cancellation.

Now, under the new program, borrowers’ accounts will be reviewed and updated, and credit will be given for months that did not previously count towards the maximum repayment period – such as certain forbearance or deferment periods. , when borrowers interrupt payments due to financial difficulties. reverse. (Periods during which a loan was in default will not count.)

After the adjustment, some borrowers who reached the necessary threshold have already been notified that their loans have been cancelled, an Education Ministry spokesperson said in an email on Thursday. More than 3.6 million borrowers will receive at least three years of forgiveness credit, the federal student aid office said.

The adjustment will apply even to borrowers who were not enrolled in income-oriented plans, in recognition that many were not told of their options or were unduly misled by their loan officers, a said the Ministry of Education. In addition to correcting “historical inaccuracies,” the department said, it will create a new process for counting payments to prevent future issues. An online tracker should be available this year.

The one-time review will apply to all student loans held by the federal government, including PLUS loans, which are available to graduate students and parents to help pay for their children’s college education.

Most account adjustments will happen automatically, according to the Department of Education, but there are a few exceptions. Older commercial loans, such as Perkins loans and some under the federal Family Education Loans program, may qualify for the one-time adjustment, but borrowers must first apply to consolidate them into one. new direct federal loan. These borrowers can now apply for a consolidation loan until the end of the year, the department’s spokesperson said; previously, the deadline was May 1.

Borrowers with one-time payment adjustments that make them eligible for automatic loan forgiveness under the Public Service Loan Forgiveness Program are notified first, the spokesperson said. After adjusting these accounts, the ministry plans to then adjust the accounts of borrowers eligible for forgiveness under the income-contingent repayment rules. The federal aid office said adjustments will take place this summer.

“Borrowers eligible for forgiveness will continue to receive discharges when they reach the required months of payments,” he said, “and will not be forgiven for repayment.”

Ashley Harrington, a senior adviser at the federal student aid office, asked borrowers to be patient and she suggested checking the government’s income-based repayment website for news. (The site doesn’t necessarily flag updates, so borrowers should read carefully.) Ms. Harrington made her remarks March 7 during a webinar hosted by Betsy Mayotte, the founder of the Institute of Student Loan Counselors. , a non-profit group that provides student loan advice.

The recent spate of student loan relief offers, while welcome, has been hard for people to follow, Ms Mayotte said, adding: “It’s really caused a lot of confusion among borrowers.”

Here are some questions and answers about adjusting payments based on income:

If the U.S. Supreme Court strikes down Mr. Biden’s loan forgiveness program, will the income-based adjustment program continue?

Yes, according to Student Loan Advisors; the programs are separated. The plan being reviewed by the Supreme Court would forgive up to $20,000 of student debt for eligible borrowers. If the judges reject this plan, the loan adjustment plan will remain available, Ms. Mayotte said. And if the court lets the president’s cancellation plan continue, she said, borrowers could potentially benefit from both programs.

Is there a new income-driven repayment plan coming?

Yes. The Biden administration has proposed a new, more generous plan to replace the current income-focused plans, to make things easier for borrowers. The administration said it intends to start making parts of the new plan available this year.

If I consolidate my loans to get the adjustment, won’t the loan forgiveness clock be reset?

No. Normally, a risk with consolidating student loans is that the remittance clock resets and borrowers have to start building credit again in order to write off their balance. But that won’t happen as part of the adjustment plan, Ms Harrington said during the webinar.

There are other important factors to consider, however, before consolidating. For example, the interest rate on your new loan may be different and your monthly payment may change.

Equally important, borrowers who consolidate federally held loans with non-federally held loans in order to qualify for the adjustment may lose their eligibility for the one-time debt relief plan contemplated by the Supreme Court, said Abby Shafroth, an attorney at the National Consumer Law Center and an expert on federal student loans.

Borrowers who only have loans that are not federally held should “strongly consider” consolidating into a new federal loan before the one-time adjustment deadline, she said, because they are not eligible for the $20,000 debt relief plan anyway.

For a small group of borrowers who have both types of loans (federal and commercial), the decision is more complex. One approach, Ms. Shafroth suggested, could be to leave their federally-held loans alone and consolidate only their business-held loans into a new federal consolidation loan. With the consolidation deadline now extended, borrowers have more time to weigh their options and perhaps consider the impact of the Supreme Court’s decision, which is expected in the coming months.

How do I know if my loans are potentially eligible for the special adjustment?

One way to tell, Ms Shafroth said, is to confirm whether your loan repayments have been suspended as part of the Covid-related pause that began in March 2020. If so, your loans are most likely eligible. If you are still being charged by your loan officer, your loans are not federally held and you may need to apply for a consolidation loan.

Will adjusted loan repayments also be considered under the Civil Service Loan Cancellation Scheme?

Yes. Many borrowers in the fall submitted applications for temporary exemption under the public service program, which cancels student debt after 10 years of repayment for borrowers working in government or nonprofit jobs. But if they missed that window to get payments that normally wouldn’t qualify toward the included forgiveness, they could qualify for the income adjustment, Ms. Mayotte said, as long as borrowers were in eligible employment at the time of those payments.