Department of Education Takes Steps Toward Student Loan Debt Forgiveness

While the White House continues to study an across-the-board debt cancellation for student loan borrowers, the U.S. Department of Education has announced a targeted loan forgiveness policy.

On April 19, 2022, the Department announced changes to federal student loan payment plans in an effort to correct and streamline the process for borrowers to have their debts forgiven and to expand the pool of borrowers who qualify for student loan forgiveness.

In the announcement, U.S. Secretary of Education Miguel Cardona underscored that these steps were being taken after “years of administrative failures that effectively denied the promise of loan forgiveness” to certain borrowers enrolled in income-driven plans.

However, a March 2022 report by the United States Government Accountability Office found that thousands of borrowers potentially had enough qualifying payments to be eligible for forgiveness, but the vast majority of these loans were inexplicably not forgiven.

Income-Driven Repayment Forgiveness

Roughly 9 million borrowers with more than $500 billion in outstanding federal student loans are currently enrolled in an income-driven repayment (IDR) plan to pay off their debt. The IDR plans include the Income Based Repayment plan and the Pay As You Earn plan, among others. The IDR plans offer lower monthly payments for most borrowers based on their income and family size and are designed to provide borrowers with loan forgiveness after 20 or 25 years of payments, depending on the plan. However, a March 2022 report by the United States Government Accountability Office found that thousands of borrowers potentially had enough qualifying payments to be eligible for forgiveness, but the vast majority of these loans were inexplicably not forgiven. The Department found “significant flaws” in the way its office of Federal Student Aid (FSA) and loan servicers track borrowers’ payment progress in IDR plans, resulting in some borrowers making more qualifying payments than they were getting credit for.

The Department’s announced solution includes:

  • A one-time adjustment to borrower accounts to provide credit toward loan forgiveness under IDR for any month in which a borrower made a payment. Any borrower who has made payments will be credited toward the IDR forgiveness regardless of whether they were enrolled in an IDR plan.
  • FSA will begin displaying IDR payment counts on StudentAid.gov so borrowers can view their progress after logging into their accounts.

The Department said the changes lead to “immediate debt cancellation” for at least 40,000 borrowers under the Public Service Loan Forgiveness program and “several thousand” borrowers under income-based repayment programs.

A further 3.6 million borrowers will receive at least three years of retroactive credit toward loan forgiveness under the IDR.

End of “Forbearance Steering”

The changes announced by the Department will also seek to correct the practice of borrowers being steered into forbearance―a temporary stop in payments―rather than being enrolled in an IDR plan.

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. According to the Department, 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.

A Department of Education review suggests that loan servicers placed some borrowers into forbearance in violation of Department rules, including placing borrowers into forbearance when their monthly payment under an IDR plan could have been as low as zero dollars. Forbearance cannot be granted for more than 12 months at a time or for more than 36 months cumulatively, however, the Department found 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.

The Department’s announced solution includes:

  • Conducting a one-time account adjustment for borrowers that will count forbearances of more than 12 months consecutive and more than 36 months cumulative toward forgiveness under IDR.
  • Restricting servicers’ ability to enroll borrowers in forbearance by text or email.
  • Working with the Consumer Financial Protection Bureau to do regular audits of forbearance use.

These changes will begin immediately upon implementation, but borrowers may not see the effect in their accounts until the last quarter of 2022.

For More Information

If you have any questions about this Alert, please contact Katherine D. BrodieChristopher A. Brown, any of the attorneys in the Higher Education Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm’s full disclaimer.

Contributing Advisors