Beginning in November 2022, borrowers who have been paying off their federal student loans for 20 years or more can expect the rest of their loan to be discharged, while millions of others will get pretty close to forgiveness.
Income-driven plans offer lower payments over 20 or 25 years, then waiver of the balance. IDRs were created in the 1990s to protect borrowers from financial hardship; Payments are based on the borrower’s income, not the amount owed.
These changes are the result of a new IDR exemption announced by the Biden administration in April 2022, which tweaks the rules on which payments are calculated. Now, forgiveness will count for every month you’ve ever spent student loan repayments or stopped short of school—for one time only.
The Department of Education estimates that about 40,000 borrowers with older loans will have their balance cleared in November, and more than 3.6 million borrowers are expected to receive at least three additional years of IDR forgiveness. The general consensus among student loan experts is that the impact of a recalculation can be even greater.
Who will see their debts completely cleared?
The most immediate impact will be felt by the thousands of borrowers with the oldest debt – who have spent at least 240 months in repayments – who will see their debt clear up.
Forgiveness through outdated income-driven repayment plans is notoriously difficult, according to a study by the National Consumer Law Center and the Student Borrower Protection Center: As of March 2021, only 32 borrowers had their loans forgiven despite decades of payments.
One-time reforms that address the oldest loans will begin in November, but they are expected to cover all federal loans beginning in July 2023.
“What it’s doing is giving people credits in repayment every year, regardless of whether the payment is based on their income or not,” says Betsy Mayotte, president and founder of the Institute of Student Loan Advisors.
do i have to do something?
Recalculation should be automatic. But some borrowers may still have to act:
FFELP borrowers with commercially held loans must consolidate. To benefit from recalculation, borrowers must have direct credit. That means borrowers with commercially held loans will have to consolidate by October 31, 2022, if possible, and no later than May 1, 2023, according to James Quall, the Department of Education’s under-secretary for higher education. should be included.
Borrowers seeking Public Service Loan Waiver will have to apply for PSLF. Borrowers working in public service who have not already applied by October 31, 2022, will have to submit an employment certification form and PSLF application before May 1, 2023, to see the number of adjustments towards PSLF. If they have balance payments after review, they must enroll in an IDR plan.
Some borrowers may need to enroll in income-driven repayment. Federal borrowers whose loans haven’t cleared in November will have their past payments reviewed in July. If they are already enrolled in the IDR, the number of payments that count for forgiveness will be adjusted. But if they do not do so, they are faced with the decision of whether or not to enroll in the IDR and avail the benefit of recalculation. If they do not enroll, they will not count for payments made after next July.
“If they’re not going to an IDR plan, they’re not going to earn IDR payments,” Mayott says. “Forgiveness isn’t the goal; the goal is to pay off the least amount over time. For some people, aggressively paying off their balance is going to cost them less, rather than continuing with an income-driven plan. Borrowers need to do the math on that.”
Why are payments being recalculated?
The new IDR exemption was inspired by the Education Department’s acceptance that millions of borrowers were unfairly tolerated by their loan servicers, which withholds payments but allows interest to rack up. Many others made payments that were not calculated for technical reasons.
Education Secretary Miguel Cardona says a one-year relaxation of some pay-calculation rules for public service loan forgiveness, which wipes out loan balances after 10 years of underpayment in public service jobs, has so far resulted in more than 236,000 benefitted the borrowers.
The PSLF waiver expires on October 31, 2022, but the IDR payment review is similar in nature and will effectively result in automatic loan cancellation for borrowers who were eligible for the PSLF waiver but did not avail it.
It also moves the needle for borrowers who are not in public service jobs but use IDR plans to qualify for forgiveness after 20 or 25 years. Most won’t qualify for forgiveness until at least 2035 because they’re enrolled in an IDR program called Revised Pay As You Earn, or repayment, which wasn’t available until 2015.
Nevertheless, the IDR exemption is likely to significantly increase their number of eligible payments.
What will count for IDR forgiveness?
The IDR payment review should result in debt redemption for:
Borrowers who have paid 20 or 25 years (240 and 300 monthly payments, respectively) under any payment plan.
Borrowers who submitted a PSLF application before October 31, 2022, and who reach 120 payments as a result of the change in the deferment eligibility mentioned below.
If you’re not sure if this applies to you, here’s what to expect to count as a qualified payment under one-time review:
Any month a borrower was in repayment regardless of partial payment, late payment, loan type or repayment plan.
Any month when loans were in a state of eligible repayment, deferment or forbearance prior to consolidation.
In any month, the debt of the borrower gets spent in forbearance for 12 consecutive months.
The debt of the borrower in any given month is spent in forbearance in at least 36 cumulative months.
Prior to 2013, any month spent in deferment, excluding adjournment at school.
In July 2023, the Department of Education expects the above payment calculation rules to be applied automatically to all federal direct and government-owned Federal Family Education Loan Program loans. Those with a privately held FFELP loan must consolidate their loan into a new direct loan to calculate past payments.
Will Parent PLUS Loan Qualify?
Notably, Basic PLUS borrowers are not included in the PSLF component of the recalculation. But Parent PLUS loans are eligible for IDR recalculation.
Will my serviceman know that I am eligible?
It is unlikely that your servant will have immediate information. Re-counting is being done through the education department.
You can get a ballpark idea of how many months count toward IDR forgiveness by logging into your federal student aid account using your FSA ID. Your account should show all avoidance and tolerance. Postponement of school and grace period will not count.
The Federal Student Aid Office is expected to issue new guidance to servicers to improve income-driven repayment calculation practices and track payment calculations in its own data system.
What if I had a default or student loan in default?
Federal student loan payments have been put on hold until 2022 as part of pandemic relief. Borrowers with delinquent or defaulted student loan debt are expected to be back in good standing when payments resume in January 2023, as part of the “fresh start” opportunity included in earlier student loan payment pause expansions.
However, according to the Department of Education, these income-driven repayment plans will not apply to loan waivers for borrowers with reform loans or those in default.
How does this fit in with other student loan relief?
Borrowers must wade through similar-sounding and sometimes overlapping student loan relief efforts launched since the start of the pandemic in 2020.
He also continued the interest-free pause of federal student loan payments initiated by President Donald Trump. Payments are expected to resume in January 2023. Even those expecting a significant change in the payment calculation would be required to resume payments unless notified otherwise.
The department is also clearing the backlog of waiver applications from borrowers who were duped by their schools, faced school closures before earning degrees, or were permanently disabled. Those with pending claims are still eligible to apply for debt relief while waiting.