(NerdWallet) – The Department of Education is reconsidering what counts for the waiver of income-based reimbursement.
Beginning in November 2022, borrowers who have been paying off their federal student loans for 20 years or more can expect to see the rest of their debt paid off, while millions more will come one step closer to forgiveness.
Income-oriented plans offer reduced payments over 20 or 25 years, then cancellation of the remaining balance. The IDR was created in the 1990s to protect borrowers from financial hardship; payments are based on the borrowers’ income, not the balance owing.
These changes are the result of a new IDR waiver, announced by the Biden administration in April 2022, which violates the rules on which payments rely. Now, every month you’ve spent on student loan repayments or on hiatus since leaving school will count toward forgiveness — only once.
About 40,000 borrowers with older loans will have their balances cleared in November, according to Department for Education estimates, and more than 3.6 million borrowers are expected to receive at least three years of additional credit for the cancellation of the IDR. The consensus among student loan experts is that the impact of the recount could be even bigger than that.
Who will see their loans canceled entirely?
The most immediate impact will be felt by thousands of borrowers with the oldest loans – those who have spent at least 240 months in repayment – who will see their debts erased.
Forgiveness through older, income-driven repayment plans is notoriously tricky: As of March 2021, only 32 borrowers had had their debt forgiven despite decades of payments, according to a study by the National Consumer Law Center and the Student Borrower Protection Center.
The one-time fixes will roll out beginning in November, addressing older loans, but are expected to cover all federal loans beginning in July 2023.
“What this does is give people a credit for each year of repayment, whether the payments are based on their income or not,” says Betsy Mayotte, president and founder of the Institute of Student Loan Counselors.
Should I do something?
The recount should be automatic. But some borrowers may still need to act:
FFELP borrowers with business-held loans must consolidate. To qualify for the recount, borrowers must have direct loans. That means borrowers with corporate-held loans must consolidate by Oct. 31, 2022, if possible, and no later than May 1, 2023, to be included, according to James Kvaal, the undersecretary for higher education at the Department of Education.
Borrowers applying for public service loan forgiveness must apply for the PSLF. Borrowers who work in the public service and have not yet applied by October 31, 2022 must submit an employment certification form and PSLF application by May 1, 2023, in order for the adjustment to count for PSLF . If they have any payments left after the exam, they will need to enroll in an IDR plan.
Some borrowers may need to register for income-contingent repayment. Federal borrowers whose debts are not cleared in November will have their previous payments reviewed in July. If they are already registered for IDR, the number of payments considered for cancellation will be adjusted. But if they are not, they must decide whether or not to register for the IDR and take advantage of the recount. Payments they make after next July won’t count if they don’t sign up.
“If they don’t follow an IDR plan, they won’t accrue IDR payouts,” Mayotte says. “Forgiveness is not the goal; the goal is to pay the least over time. For some people, paying their balance aggressively will cost them less than continuing to pursue an income-driven plan. Borrowers need to do the math on this.
Why are payments being recounted?
The new IDR waiver was spurred by the Department for Education’s acknowledgment that millions of borrowers have been improperly pressured by their loan managers into forbearance, which suspends payments but allows interest to accrue. Many others made payments that were not recorded for technical reasons.
A one-year waiver of certain payment counting rules for civil service loan forgiveness, which wipes out loan balances after 10 years of reduced payments by people in civil service jobs, has up to now benefited more than 236,000 borrowers, Education Secretary Miguel Cardona said.
The PSLF waiver ends on October 31, 2022, but the IDR payment review is similar in nature and will effectively result in automatic debt forgiveness for borrowers who were eligible for this PSLF waiver, but did not take advantage of it.
It also moves the needle for borrowers who do not hold government jobs but use IDR plans to receive a discount after 20 or 25 years. Most won’t qualify for the rebate until at least 2035 because they’re enrolled in an IDR program called Revised Pay As You Earn, or REPAYE, which wasn’t available until 2015.
Even so, the IDR waiver is likely to significantly increase their number of qualifying payments.
What will count for IDR cancellation?
The review of IDR payments should result in loan receipts for:
- Borrowers who have made 20 or 25 years of payments (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 changes to the deferment conditions described below.
If you’re not sure if this applies to you, here’s what to expect as an eligible payment under the one-time review:
- Any month a borrower was in repayment, regardless of partial payments, late payments, loan type, or repayment plan.
- Any month that loans were in an eligible state of repayment, deferment, or forbearance prior to consolidation.
- Any month of a borrower’s loan spent in 12 consecutive months of forbearance.
- Any month of a borrower’s loan spent for at least 36 cumulative months in forbearance.
- Any month spent in adjournment, with the exception of school adjournment, before 2013.
In July 2023, the Department of Education plans to automatically apply the above payment tally rules to all direct federal and public loans from the Federal Family Education Loans Program. Those with private FFELP loans must consolidate their debt into a new direct loan so that previous payments are taken into account.
Will Parent PLUS Loans be eligible?
Notably, parent PLUS borrowers are not included in the PSLF component of the recount. But Parent PLUS loans are eligible for IDR recount.
Will my repairer know if I qualify?
Your repairman is unlikely to have immediate information. The recount is being processed by the Department of Education.
You can get a rough idea of how many months may count towards IDR cancellation by logging into your Federal Student Aid account using your FSA ID. Your account must show all adjournments and abstentions. Adjournments in school and in grace period will not count.
The federal office of student aid is expected to issue new guidelines for servicers to improve practices for counting reimbursements based on income and will track the number of payments in its own data systems.
What if I have late payments or a student loan in default?
Federal student loan repayments are suspended through 2022 as part of pandemic relief. As part of a “fresh start” opportunity included in an earlier extension of the suspension of student loan payments, borrowers with delinquent or defaulted student loan debt are expected to be reinstated when payments resume in January 2023.
However, these income-based repayment plan fixes will not apply to forgiveness for borrowers whose loans are past due or in default, according to the Department of Education.
How does this fit in with other student debt relief?
Borrowers have to navigate a slew of similar-sounding and sometimes overlapping student debt relief efforts launched since the pandemic began in 2020.
President Joe Biden’s signature effort is broad federal student loan debt forgiveness of up to $20,000 per borrower, which is now facing a pushback in court. Everyone should apply, just in case.
He also continued an interest-free pause in federal student loan payments started by President Donald Trump. Payments are expected to resume in January 2023. Even those expecting a significant change in the number of payments will need to resume payments until further notice.
The department also clears backlogs of forgiveness applications from borrowers who have been defrauded by their schools, faced school closures before graduating, or have permanent disabilities. Those with pending applications can still apply for debt relief while they wait.