The Education Department announced a slate of changes to its federal student loan repayment programs on Tuesday to correct harmful practices by its loan servicers, which investigations found steered borrowers into forbearance without outlining their other options and hindered their progress toward loan forgiveness by inaccurately tracking their monthly payments.
The changes are set to result in immediate debt cancellation for 40,000 borrowers enrolled in the Public Service Loan Forgiveness program and help 3.6 million borrowers recoup at least three years worth of credit toward forgiveness under the income-driven repayment plan, which caps monthly payments at 10% to 20% of a borrower’s income and entitles them to loan forgiveness after 20 years of payments.
“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.
“Today, the Department of Education will begin to remedy years of administrative failures that effectively denied the promise of loan forgiveness to certain borrowers,” he said.
A review by the department’s federal student aid office found that loan servicers placed borrowers into forbearance – a process that allows borrowers to temporarily halt payments on their principal loan while interest continues to accrue – in violation of department rules that require servicers to outline all options to borrowers who are facing difficulty making payments. The findings were also bolstered by investigations from state attorneys general and the Consumer Financial Protection Bureau.
As it stands, the Education Department’s regulations and servicer contracts have safeguards, including a 12-month limit for any single use of forbearance and a 36-month cumulative limit on discretionary forbearance. But a review of past forbearance use shows that long-term use of forbearance was remarkably widespread – more than 13% of all direct loan borrowers between July 2009 and March 2020 have used forbearance for at least 36 months cumulatively – suggesting that in many cases servicers steered them into it without explaining their other options.
“Forbearance may be quick and easy for services, but they are often not the best option for borrowers, particularly when the borrower would be eligible for an economic hardship deferment or a low or zero payment on an [income-driven repayment] plan,” James Kvaal, Undersecretary of Education, said on a call with reporters Tuesday.
To correct the harm incurred by pushing borrowers into forbearance, the department will conduct one-time account adjustments that will count forbearances of more than 12 months consecutive and more than 36 months cumulative toward forgiveness under the Public Service Loan Forgiveness Program or the income-driven plan.
Going forward, department officials said, the federal student aid office will increase oversight on servicers and restrict their ability to enroll borrowers into forbearance by text or email, as well as work with the Consumer Financial Protection Bureau to conduct regular audits of servicers’ forbearance use.
A separate review by the Federal Student Aid office revealed “significant flaws” with Income-driven repayment plans, including difficulty tracking payments, paperwork errors and past implementation inaccuracies, which suggest millions of borrowers potentially lost ground on their progress toward forgiveness.
A recent NPR investigation showed how the income-driven repayment system is failing more than 9 million borrowers by failing to ensure qualifying payments they made are counted towards forgiveness.
To correct the problems, the federal student aid office will count any months in which borrowers made payments toward their income-driven plan, regardless of the payment plan they were enrolled in at the time and regardless of whether they were made prior to consolidating loans. The federal student aid office is also set to issue new guidance to student loan servicers to ensure accurate and uniform payment counting practices, department officials said.
“We wanted to act as quickly as possible to address these problems but we expect these figures to only grow,” Kvaal said. “Growing levels of student loan debt have burdened young people just as they are starting their lives. And what’s worse is that they have left many students worse off than if they had never attended colleges at all and they exacerbate the racial wealth gap.”
The announcement comes as the White House is getting hammered on its handling of federal student loans from both sides of the aisle, including by some of its closest Democratic allies.
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On Monday, Sen. Patty Murray, Washington state Democrat and chairwoman of the Health, Education, Labor and Pensions Committee, and Rep. Bobby Scott, Virginia Democrat and chairman of the Education and Labor Committee, urged Cardona to extend the student loan payment pause until 2023 and use the intervening time to make serious overhauls to the income-driven repayment system, correct past harms and make the repayment program available to all borrowers.
Cardona announced earlier this month that the administration would freeze federal student loan payments through the end of the summer.
“We strongly believe further action is needed,” they wrote. “We urge you to extend this essential relief through at least the end of the year due to the economic fallout of the pandemic, using the intervening time to finalize and implement a comprehensive approach to student loan relief – because no borrower should have to resume payment until you make critical and urgently needed reforms to fix our student loan system. To provide meaningful, lasting relief, this comprehensive approach must include critical changes to income-driven repayment.”
Murray said she’s “relieved” by the slate of announcements made Tuesday but that the administration must make the income-driven plan even more generous and available to borrowers earning 250% of the federal poverty level, or roughly $32,000 for a single individual – not just those in the lowest income brackets.
Led by the progressive flank of the party and some of the most powerful Democrats in Congress, including Senate Majority Leader Chuck Schumer of New York, congressional Democrats had been prodding Biden to extend the pause to federal student loan payments, which he did earlier this month.
The move allows Democrats to tout a significant statistic in the run-up to the midterms to scores of young voters who want to see Biden cancel all federal student loan debt – that since the start of the Biden-Harris administration, no American has had to pay a dime on their federally held student loan.
But for a united coalition of progressives in the House and Senate, it isn’t enough. They’ve been pressuring Biden to cancel $50,000 in federal student loan debt since he was sworn into office, framing it not only as a way to relieve economic stress that disproportionately impacts low-income Black and Hispanic borrowers but also as a responsibility to voters of color who were crucial to his election.
The lawmakers argue that the executive authority Biden is currently using to cancel the interest owed on all federally held student loans and defer payments – Section 432 of the Higher Education Act – is the same authority he could use to provide wide-scale student debt cancellation.
Though the White House has so far refused to release an internal memo detailing whether the president has the authority to do so, Biden has been consistent in saying he does not.
In fact, the president has never backed the wholesale cancellation of federal student loan debt, saying even during his campaign that while he might support canceling up to $10,000 in student loan debt, he didn’t think the president had the authority to do so. Biden has shot down the idea several times since he took office, citing concerns about canceling debt for borrowers who graduated from elite schools like Harvard University – essentially adhering to the idea that wide-scale student loan debt cancelation often benefits wealthier borrowers.
Instead, the administration’s playbook has been carving out loan forgiveness for certain groups of borrowers.
“We are working really, really hard where there is clear authority to help borrowers,” Kvaal said. “Every day we are engaged in conversations about how to make the programs work better and how to get borrowers the relief they’re entitled to.”
“We have a total count of more than 725,000 borrowers that we have helped into different forms of forgiveness and that number will continue to grow,” he said. “So that’s the path we’re on. We’re working as hard as we can where we have clear authority to remedy the past programs.”
In addition to Tuesday’s announcements and the recent extension of the repayment freeze, the Biden administration has also canceled more than $17 billion in federal student loan debt for roughly 725,000 borrowers, including $8 billion for borrowers who have become permanently disabled, $7 billion for borrowers enrolled in the public service loan forgiveness program and more than $3 billion for borrowers who were defrauded by their school or were enrolled in ITT Technical Institutes before it abruptly closed.
“The first step toward permanent change is to face up to the department’s past failures to give students the benefits to which they’re entitled and the lasting damage of years of neglect inflicted on borrowers,” Kvaal said. “We are already making significant progress.”
Meanwhile, Republicans continue to slam Biden for extending the repayment freeze and using his executive authority to grant loan forgiveness.
“The Biden administration wants to have their cake and eat it, too,” Sen. Richard Burr, North Carolina Republican and ranking member of the Health, Education, Labor and Pensions Committee, said earlier this month when the White House announced the most recent pause. “They want to tout America’s return to normal following the pandemic but also want to keep extending emergency relief policies. It’s long past time for student loan repayments to resume as normal.”
The repayment pause was first put in place under the original coronavirus aid package in March 2020 and extended twice under the Trump administration by former Education Secretary Betsy DeVos. Under Biden, the Education Department has extended the repayment pause four times.
Education Department officials said additional announcements are to come regarding its development of a new repayment plan that will “substantially reduce” payments for most borrowers.
“We will make long overdue changes to fix longstanding and frankly inexcusable problems,” Kvaal said.