More than 800,000 borrowers will be cleared of $39 billion in federal student loan debt in a government effort to right long-standing mistakes by loan servicers collecting payments on behalf of the government.
Millions more will receive loan adjustments as part of the program.
Eligible for the relief are those who take out federal loans that are directly owned by the Department of Education and are enrolled in an income-based repayment plan. These plans limit the payments a borrower has to pay to a fixed percentage of their income. These plans typically require borrowers to make payments over a period of 20 or 25 years. At the end of that period, any remaining balance will be forgiven.
More than 8 million people use income-based repayment plans, but for decades, many of the companies that charge borrowers have made big mistakes tracking payments and guiding borrowers through the payment process. . These mistakes will cause millions of borrowers to delay their loan repayments for years.
“For too long, borrowers have slumped through the cracks of a broken system,” Education Secretary Miguel Cardona said Friday.
The planned move comes two weeks after the Supreme Court overturned President Biden’s plan to eliminate $400 billion in student loan debt to tens of millions of borrowers. The court ruled that the president does not have the power to forgive debts so broadly without the express approval of Congress.
But a much smaller adjustment made on Friday was separate and did not lead to a court challenge, but more directly to the education secretary, who manages the loan repayment program. Be within your authority.
Debt relief is set to take place in the coming weeks, the Department of Education said, part of a plan the Biden administration announced last year to address the issue of servicer errors. The ministry has decided to automatically and retroactively apply credits to millions of borrowers who have made late or partial payments, or who have withheld payments for long periods of time before the pandemic.
The 804,000 borrowers whose balances will be cleared are those who have made the 240 or 300 monthly payments (depending on their payment plan) required to have their remaining debt forgiven after adjustment.
Last year, the ministry announced that so-called “tolerant steering” was a particularly salient problem. Low-income borrowers can get their monthly bills to zero by using an income-based payment plan, but loan servicers often impose repayment deferrals on distressed borrowers, which Even though the loans were in good shape, they continued to accrue interest and ballooned borrowers’ balances.
In 2017, the Consumer Financial Protection Bureau sued Navient, then one of the government’s largest student loan servicers, for these tactics. The lawsuit is still ongoing, but Navient has finished servicing federal loans and will be out of business in 2021.
Borrowers who qualify for relief do not need to apply and their debts are automatically discharged. “By correcting past administrative missteps, we are making sure everyone gets the forgiveness they deserve,” Cardona said.
Some 45 million borrowers owe a total of $1.6 trillion from the government, the largest lender of higher education to Americans. Loan payments to them have been suspended since March 2020, a measure initiated as a pandemic relief measure under President Donald J. Trump and extended multiple times by Biden, but this suspension will end soon. Borrowers will have to start making payments again in October.