New reforms estimated to erase student debt for 40,000

WASHINGTON (CN) — The Department of Education announced changes Tuesday to federal student loan programs, revisions that it says will cancel the debt of 40,000 borrowers and help another 3.6 million get closer to the payment finish line.

The new department rules will provide closer tracking of payments by borrowers on income-driven repayment plans, which allow people to lower their monthly loan payments based on their financial situation instead of defaulting on a loan entirely.

In another change, the department said it will end the practice of forbearance steering, a process where loan-service companies encourage borrowers to pause student loan payments and rack up high interest in return, making it more likely they will default on future payments. The department acknowledged that loan servicers had a history of pushing borrowers into forbearance without informing them that they qualified for other options, including income-driven repayment plans.

Borrowers who ended up on forbearance will receive credits for any payments they made, and the department will count forbearances of more than 12 months straight or more than 36 months total toward forgiveness plans.

“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,” U.S. Secretary of Education 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 enrolled in IDR plans. 

After the new rules are implemented, anyone who has made payments for 20 to 25 years will automatically have their loans canceled, according to the department.

Critiques of the federal student loan programs have made headlines in recent weeks after an NPR investigation revealed that some student-loan service providers have failed to track borrowers' payments in detail over the years, with some providers not knowing who was eligible for loan forgiveness.

The Federal Student Aid Office estimates the new revisions to department policy will cancel the debt of at least 40,000 borrowers who will now get credit for their completed payments and bring more than 3.6 million borrowers at least three years closer to debt forgiveness.

The new department reforms come amid mounting political pressure for the Biden administration to take more sweeping steps to cancel student debt. Earlier this month, President Joe Biden extended the pandemic pause on federal student loan payments through the end of August, but some Democratic lawmakers on the Hill have been pushing for more permanent remedies, including canceling up to $50,000 of debt per borrower. During his campaign, Biden pledged to cancel $10,000 of debt per borrower, a move he said demands congressional action.

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