The Education Department has released a long-awaited detailed update on a major Biden administration initiative that could incentivize student loan forgiveness for millions of borrowers.
Here is the latest.
Student loan forgiveness under IDR account settlement
The Biden administration announced the IDR recalculation adjustment last year, touting it as a much-needed solution to address longstanding problems with income-driven repayment plans, or IDRs. IDR plans allow borrowers to repay their federal student loans based on a formula applied to their income and family size. The plans can result in student loan forgiveness after 20 or 25 years, depending on the specific plan and the borrower’s student loan composition.
Under the original program framework, only periods in which a borrower was actually enrolled in an IDR plan can be counted towards the student loan forgiveness repayment period. Periods during which the borrower was on a different payment plan or did not make any payments at all (such as during a deferment or forbearance) will not be counted. Furthermore, consolidation can erase all progress toward student loan forgiveness, effectively resetting the borrower’s IDR term.
But for years, the Department of Education and loan servicing companies did not adequately inform borrowers of IDR options. Consumer rights groups have accused some loan companies of improperly directing borrowers into costly forbearance periods, resulting in accrual of interest and no progress toward student loan forgiveness. Recent survey reports indicate that neither the government nor loan providers adequately track borrowers’ progress under IDR programmes.
In response to these problems, the Biden administration created the IDR Account Settlement last year. Under the one-time program, the DOE will provide borrowers with credit for the borrower’s 20- or 25-year IDR student loan forgiveness period for periods not otherwise accounted for, even for borrowers not currently enrolled in the IDR program. According to the Department of Education, most prior repayment periods, as well as certain periods of deferment and forbearance, can be accounted for as well as prior periods of loan consolidation. Importantly, the credit can also be applied to Public Service Loan Forgiveness (PSLF) for borrowers who were employed by eligible nonprofits or government employers after October 2007 and meet all other PSLF requirements.
Millions of borrowers are expected to benefit from the IDR Account Adjustment. But the directives have been broad and limited so far. Today, the Ministry of Education issued More detailed instructions On the initiative and provided answers to the borrower’s common questions.
Timing of student loan forgiveness under IDR account settlement
According to the Department of Education, borrowers who qualify for forgiveness and reach the 20- or 25-year threshold for student loan forgiveness as a result of retroactive credit under an IDR account settlement will see their balances discharged. When implementing the amendment, management will give priority to these borrowers first.
The new guidance indicates that the timing of student loan forgiveness forgiveness will depend on when, exactly, the borrower reaches the threshold:
- Borrowers who reach the age 2 or 25 threshold by August 1, 2023 must receive full student loan forgiveness before resuming payments when the student loan pause ends this summer.
- Borrowers who have reached the student loan forgiveness threshold after August 1, 2023 will receive a release after resuming payments. These borrowers, along with other borrowers who receive credit under the amendment but fall below the Loan Forgiveness Threshold, will receive credit on a revolving basis through 2024.
Some periods of default may count toward the student’s loan forgiveness
Previously, the Department of Education indicated that periods of default would not count toward student loan forgiveness under the IDR Account Reconciliation. However, under new guidance published today, the Department of Education notes that borrowers may be able to obtain IDR credit for periods of default during the Covid-19 pandemic, provided they exit default before the “fresh start” period (which is a period of Discrete temporary benefit that provides borrowers with a new path out of default).
“Borrowers who exit default before the end of the new starting period will receive the full account adjustment interest and will receive credit for default periods from March 2020 through the month they exit default,” according to the Department of Education.
Who qualifies for student loan forgiveness for 20 and 25 years
Borrowers can be eligible for student loan forgiveness after receiving 20 or 25 years of IDR credit. But until now, the Department of Education has not been clear about who qualifies for 20-year student loan forgiveness versus 25-year student loan forgiveness.
According to the new guidance, borrowers who have Just Undergraduate student loans are eligible for a 20-year student loan forgiveness period. In addition, borrowers currently enrolled in the Pay As You Earn (PAYE) plan will also be eligible for 20 years. To qualify for a PAYE plan, undergraduate and graduate student loan borrowers must not have an outstanding federal student loan balance as of October 1, 2007 and must also have taken out a new federal student loan on or after October 1, 2011.
All other borrowers, including borrowers with loans for graduate school not enrolled in a PAYE plan, as well as Parent PLUS borrowers, will be in student loan forgiveness for 25 years.
The retrospective history of forgiveness for a student loan under adjusting account
Under previous IDR Calculation Adjustment Directives, there was no specific limit set to how far the Department of Education could go in granting credit to a borrower with time into the IDR student loan forgiveness period. However, the updated guidelines provide a retroactive date limit.
According to the directive, “The amendment will restore periods to the beginning of the IDR program, July 1, 1994, as eligible for an IDR exemption.” This is the key date, as the first IDR plan called the Emergency Income Repayment was put in place at that time. The Department of Education says that it will not be able to count loan periods prior to this date into the borrower’s IDR student loan forgiveness period.
However, the periods prior to July 1, 1994 can be used to determine if the borrower has extended forbearance periods that can be counted. The Department of Education can grant tolerances toward the term IDR to a borrower if the borrower has a cumulative 36 months of forbearance; Periods leading up to July 1, 1994, can be used to determine if the borrower has enough patience, although the periods of patience themselves can only be given if they occurred after July 1, 1994.
PSLF credit can only be awarded from October 1, 2007 onwards, when the PSLF program was first created.
PLUS parent loans are eligible for student loan forgiveness under modification
The Department of Education confirmed in its updated guidance that Parent PLUS loans can benefit from an IDR account adjustment, even though non-cumulative Parent PLUS loans technically do not qualify for IDR plans. This was a recent change that was quietly announced earlier this year.
“Direct PLUS loans to parents typically do not qualify for an IDR plan unless they are consolidated,” according to the new guidelines. “We will forgive all PLUS parent loans (consolidated or non-consolidated) that have accumulated 25 years (300 months) or more of time in repayment. We will also extend PSLF credit to PLUS parent borrowers for the months deemed eligible under the adjustment during which the borrower was employed by Qualified Employer.
Clarify the processing of consolidation loans under modification
The new guidance states that consolidation loans that include loans with different repayment dates will be added to the maximum IDR credit amount based on the underlying loans. This mirrors the way the DOE handled consolidation loans under the PSLF limited waiver, which expired last fall and should address borrowers’ concerns about the effects of consolidation (historically, consolidation would erase a borrower’s progress toward student loan forgiveness).
“If you apply for consolidation before the end of 2023, the amendment will count repayment periods on your pre-consolidation loans toward IDR and PSLF relief (for eligible borrowers), the directive.” This differs from the previous approach, where consolidation of your direct loans resets your payment count to Zero.”
Assuming your repayment history overlaps with each loan, the consolidation loan will be credited with the longest repayment period for the loans that have been consolidated. For example, say you have 50 months of repayment for a subsidized Stafford loan and 100 months of repayment for a subsidized Stafford loan Else. If you combine these loans, you will receive a credit for 100 months of payments on your new Direct Consolidation Loan.”
Borrowers should review the Student Loan Forgiveness Guidelines carefully
While much of IDR account reconciliation will be done automatically, some borrowers will need to take certain steps to qualify or maximize their benefits, such as getting out of default, consolidating their loans, or changing their payment plan. Borrowers must review New guidelines For more clarity on what, if any, they must do to receive student loan forgiveness credit under the initiative.
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453,000 borrowers have been approved for student loan forgiveness under the waiver with continued processing