The move, announced Tuesday by the Department of Education, is part of a politically sensitive debate over student-loan loan waivers and seeks to more broadly change the way the student-loan repayment system works. President Biden earlier this month extended a pandemic-related pause on payments of federal student loans until August 31 and faced pressure from progressive members of his own party to largely forgive the loans.
The changes will apply to an income-based program for student loan repayments, allowing approximately 3.6 million people—about 10% of all student-loan borrowers—to receive at least three years of credit for eventual loan forgiveness. .
Programs, referred to as income-driven repayment plans, allow borrowers to pay a certain percentage of their income on the loan for 20 to 25 years and have their balance forgiven. Loan servicers play an important 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 of the eight million borrowers enrolled in the program had successfully forgiven their loans after decades of payments. The program has been in existence since 1992.
“Today, the Department of Education will begin to address years of administrative failures that effectively negated the promise of loan forgiveness to some borrowers,” Education Secretary Miguel Cardona said in a statement.
More than 40 million people owe nearly $1.6 trillion in federal student loans, an amount larger than the national total for credit-card or auto-loan debt. Federal loans make up more than 90% of outstanding student loans.
Senate Democrats—which include Ohio’s Banking Committee Chairman Sherrod Brown and Illinois’ Judiciary Committee Chairman Dick Durbin—recently wrote to the Department of Education complaining that income-based programs are “as they currently stand.” , are not fulfilling their original promise.” He praised the Education Department’s move, saying on Tuesday it would allow low-income borrowers to “participate fully in the economy”.
Republicans have also pressured the administration to reform income-based pardons. They see it as a preferred alternative to a comprehensive loan waiver or a pandemic-related pause on loan repayments.
“Current federal student-loan repayment options, including income-driven repayment plans, are a substantial safety net for borrowers in financial trouble,” said Representatives Virginia Fox and Sen. Richard Burr, both of North Carolina, the top Republican on the House and Senate education committees. K, wrote to Mr. Cardona last year.
The program overhaul will attempt to improve the way the federal government and private contractors servicing federal student loans track borrower payments. The education department said it would fix a long-standing problem where loan payments made to different servitors are not counted together, which can lead to undercounting of payments that ultimately deserve forgiveness. “In a decidedly 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 officials on how to track payments properly and improve its own data system to track payments in-house.
Beginning in 2023, borrowers in the program will be able to check their progress toward forgiveness on the main Federal Student Aid website.
Those who will receive a payment credit of at least three years are borrowers who went into forbearance for at least 36 months between July 2009 and March 2020 – a temporary payment freeze where interest continues to build up. The Department of Education has found that service-steering loan borrowers has been a widespread practice of forbearance, even when some of those borrowers may not be able to pay anything on their loans or receive an economic hardship deferment. Huh.
“Forbearances can be quick and easy to service, but they are often not the best option for borrowers,” said James Quall, undersecretary of the Department of Education.
“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 the FSA has failed to fix the federal student-loan repayment system for years,” said a group of servicers. he said. A statement referring to Federal Student Aid, part of the Department of Education, which is the largest provider of student financial aid in the US
The department said it would also impose new restrictions on servants pushing borrowers into forbearance and would review the practice with the Consumer Financial Protection Bureau.
The income-driven repayment will automatically be credited to borrowers already enrolled, and those who still may not qualify if they choose to enroll in the program.
As a result of the changes, 40,000 borrowers enrolled in the Public Service Loan Waiver Program will qualify for immediate loan cancellation, for those working as eligible government employees.
At the start of the COVID-19 pandemic, federal student-loan payments and interest accruals for borrowers have been suspended since March 13, 2020. The government has extended this program six times. Borrowers with private loans are not eligible for a 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 risks of financial loss to borrowers if payments were resumed immediately. A recent analysis by the Federal Reserve said millions of borrowers could face delinquency and default if payments resume in May, the deadline before the most recent extension. Mr Biden said the extension of the pause would help prepare borrowers to resume paying their loans and give the Education Department more time to improve student-loan programs.
Although the economy has recovered in recent months, Mr Biden said, “we are still recovering from the pandemic and the unprecedented economic disruption it has caused.”
In conjunction with the latest freeze extension, the Education Department said more than seven million borrowers with defaulted federal loans will have the default removed from their credit reports and given a second chance to get back on track payments.
The Education Department said on Tuesday that through a piecemeal approach that focused on fraudsters, disabled borrowers and those in public service, the administration had cleared more than $17 billion in loans held by more than 725,000 borrowers. Forgiveness more.
Congress has made little progress in advancing student loan forgiveness measures backed by several progressive Democrats and Senate Majority Leader Chuck Schumer (D., NY). Democrats are mounting pressure on Biden to take executive action, calling on him to cancel loans of up to $50,000 per borrower.
Mr Schumer expressed optimism about the possibility of the administration canceling some loans in the coming months, telling a student borrower advocacy group last week that “we are making progress” and that “the White House is more open than ever.” “
The White House appeared to confirm this on Thursday. In a podcast, Press Secretary Jen Psaki said that as of August 31, administration officials will either put a moratorium on student-loan payments or “we’re going to make a decision” about canceling student loans.