Biden aims to expand access to stud-loan debt forgiveness for millions of people

The program, referred to as income-driven repayment plans, permits borrowers to pay a certain percentage of their income on loans for 20 to 25 years and have the rest of their balances forgiven (Photo: Reuters)
The program, referred to as income-driven repayment plans, permits borrowers to pay a certain percentage of their income on loans for 20 to 25 years and have the rest of their balances forgiven (Photo: Reuters)

Summary

Move by Education Department would overhaul program aimed at helping lower-income borrowers

The Biden administration said it plans to make it easier for lower-income student-loan borrowers to get debt forgiveness through an existing program that has enrolled millions of people, but provided few with relief.

The move, announced by the Education Department on Tuesday, is part of a politically sensitive debate on the forgiveness of student-loan debt and attempts to more broadly overhaul how the student-loan repayment system works. President Biden earlier this month extended to Aug. 31 a pandemic-related pause on payments of federal student loans and faces pressure from progressive members of his own party to forgive debt on a larger scale.

The changes would apply to an income-based program for repaying student loans, allowing around 3.6 million people—nearly 10% of all student-loan borrowers—to receive at least three years of credit toward eventual debt forgiveness.

The program, referred to as income-driven repayment plans, permits borrowers to pay a certain percentage of their income on loans for 20 to 25 years and have the rest of their balances forgiven. Loan servicers play a key role in how borrowers navigate their repayment options.

Borrowers and members of both parties in Congress have criticized the program as broken. A 2021 study of government data found that just 32 borrowers out of eight million enrolled in the program successfully had their debt forgiven after decades of payments. The program has existed since 1992.

“Today, the Department of Education will begin to remedy years of administrative failures that effectively denied the promise of loan forgiveness to certain borrowers," Education Secretary Miguel Cardona said in a statement.

More than 40 million people owe around $1.6 trillion in federal student debt, a sum bigger than national totals for credit-card or auto-loan debt. Federal loans make up more than 90% of outstanding student debt.

Senate Democrats—including Banking Committee Chairman Sherrod Brown of Ohio and Judiciary Committee Chairman Dick Durbin of Illinois—recently wrote to the Education Department to complain that the income-based programs “as they currently stand, are not fulfilling their original promise." They praised the Education Department’s move on Tuesday, saying it would allow low-income borrowers to “fully participate in the economy."

Republicans have also pressed the administration to improve income-based forgiveness. They see it as a preferred alternative to broad debt forgiveness or the pandemic-related pause on loan repayments.

“Existing federal student-loan repayment options, including income-driven repayment plans, are a sufficient safety net for borrowers in financial distress," the top Republicans of the House and Senate education committees, Rep. Virginia Foxx and Sen. Richard Burr, both of North Carolina, wrote to Mr. Cardona last year.

The program overhaul will try to improve how the federal government and the private contractors who service federal student loans track borrower payments. The Education Department said it would fix a longstanding problem where loan payments made to different servicers weren’t counted together, which can lead to undercounting of payments that qualify for eventual forgiveness. “In a certainly predictable trend, the Department of Education has blamed everyone except itself for its ineptitude," Ms. Foxx said in a Tuesday statement.

To do so, the Education Department said it would issue guidance to servicers about how to accurately track payments and would revamp its own data systems to track payments in-house.

Starting in 2023, borrowers in the program will be able to check their progress toward forgiveness on the main federal student aid website.

The people who will receive at least three years of payment credit are borrowers who went into forbearance—a temporary payment freeze where interest continues to build up—for at least 36 months between July 2009 and March 2020. The Education Department has found that servicers steering borrowers into forbearance has been a widespread practice, even when some of those borrowers could likely have qualified to pay nothing on their loans or receive an economic hardship deferral.

“Forbearances may be quick and easy for servicers, but they are often not the best option for borrowers," said James Kvaal, undersecretary at the Education Department.

“The suggestion of servicers steering borrowers is without merit and is clearly an attempt by the Department to steer the conversation away from the root cause that FSA has failed to fix the federal student-loan repayment system for years," a group of servicers said in a statement, referring to Federal Student Aid, part of the Education Department, which is the largest provider of student financial aid in the U.S.

The department said it would also impose new restrictions on servicers pushing borrowers into forbearance and would review the practice alongside the Consumer Financial Protection Bureau.

Borrowers already enrolled in income-driven repayment will be automatically credited, and those who are not can still qualify if they choose to enroll in the program.

As a result of the changes, 40,000 borrowers who are enrolled in the Public Service Loan Forgiveness program, for those who work as qualifying government employees, will qualify for immediate debt cancellation.

Federal student-loan payments and interest accrual have been suspended for borrowers since March 13, 2020, at the start of the Covid-19 pandemic. The government has extended the program six times. Borrowers with private loans aren’t eligible for the pause in payments, although some lenders and servicers have offered flexibility to borrowers who asked to suspend payments.

When Mr. Biden announced the most recent extension of the payment pause, he cited the risks of financial harm to borrowers if payments were to resume immediately. A recent analysis from the Federal Reserve said millions of borrowers could face delinquency and default if payments resumed in May, which had been the deadline before the most recent extension. Mr. Biden said the extension of the pause will help borrowers prepare to resume paying their loans and give the Education Department more time to improve student-loan programs.

Although the economy has improved in recent months, Mr. Biden said, “We are still recovering from the pandemic and the unprecedented economic disruption it caused."

In conjunction with the latest freeze extension, the Education Department said that more than seven million borrowers with defaulted federal loans will get the default removed from their credit report and be given a second chance to get back on track making payments.

Through a piecemeal approach focused on borrowers who have been defrauded, disabled borrowers, and those who work in public service, the administration has forgiven over $17 billion in loans held by more than 725,000 borrowers, the Education Department said Tuesday.

Congress has made little progress in pursuing student debt forgiveness measures that are favored by many progressive Democrats and Senate Majority Leader Chuck Schumer (D., N.Y.). Democrats are ratcheting up pressure on Mr. Biden to take executive action, calling on him to cancel up to $50,000 in debt per borrower.

Mr. Schumer expressed optimism about the possibility of the administration canceling some debt in the coming months, telling a student borrower advocacy group last week that “we’re making progress" and “the White House seems more open to it than ever before."

The White House appeared to confirm that on Thursday. In a podcast, press secretary Jen Psaki said that by Aug. 31, administration officials would either extend the pause on student-loan payments or “we’re going to make a decision" about canceling student debt.

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