If the Supreme Court strikes down the Biden administration’s student loan forgiveness initiative, then another relief measure the president promised last year becomes an even more important lifeline for struggling borrowers.
The one-time payment adjustment the Department of Education announced last year will count certain months toward forgiveness of student loans that were previously ineligible under income-driven repayment plans, or IDRs. As a result, about 3.6 million borrowers would receive at least three years of credit toward forgiveness, according to Federal Student Aid.
The adjustments, which have just begun, are separate from Biden’s student loan forgiveness of up to $20,000 and are not contingent on the outcome of the Supreme Court cases heard this week.
“The one-off adjustment hasn’t gotten the attention it deserves, fixing decades of a broken system due to driving leniency on behalf of loan servicers,” Persis S. Yu, deputy executive director, Center for Student Borrower Protection (SBPC), he told Yahoo Finance. “Millions of borrowers will benefit.”
‘4.4 million people who should have canceled their debts’
In April 2022, the Department of Education announced the one-time payment adjustment for all Federally owned Direct Loans and Federal Family Education Loans (FFELs). Adjustment to student loan accounts would help borrowers move closer to forgiveness under income-based repayment plans, which offer repayment after 20 or 25 years, depending on the particular plan.
Under the initiative, the department would add the following months to an account’s payment history:
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Months in payment status, regardless of payments made, loan type, or payment plan;
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12 or more consecutive months of forbearance or 36 or more months of full forbearance;
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Hardship months or military deferrals after 2013;
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Months in any deferral (except deferral in school) before 2013; and
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Any previous loan payment months before the loans were consolidated.
After the adjustment, borrowers with 20 or 25 years of payment history automatically get forgiveness even if they are not enrolled in an income-driven repayment plan. FFEL borrowers with business loans can also benefit from the match if they consolidate their loans with Federal Student Aid by May 1, 2023.
The one-time payment adjustment helps reverse some of the damage done by loan servicers who failed to properly track deferments or steer borrowers into forbearance instead of income-based repayment plans that would have counted toward the years of payment.
“Of the 4.4 million people who should have paid off their debts if IDR worked, fewer than 200 have,” Thomas Gokey, director of policy at Debt Collective, told Yahoo Finance. “The RDI [one-time] The adjustment should address some of that, but let’s be honest about what that means: IDR was a broken promise and people are being let out after an enormous amount of damage has been done.”
Many borrowers may be unaware of the adjustment and how it can help them, especially when the student loan forgiveness case in front of the Supreme Court takes center stage. That’s because some loan servicers and the Department of Education haven’t done a good job of informing borrowers about the one-time payment adjustment, according to Katherine McKay, associate director of information and evidence for the Aspen Institute’s Financial Security Program. .
“ED must do everything in its power to address administrative deficiencies like these while everyone awaits the SCOTUS ruling,” McKay told Yahoo Finance. “Making the one-time adjustment should be a top priority because they are aware that administrators underestimated the payments of millions of people. [and] it makes sense for them to make adjustments, especially for people who have been paying longer.”
The Department of Education was originally supposed to start paying off loans for certain borrowers in November 2022, with the rest to follow in July 2023. That schedule has since been adjusted, according to Federal Student Aid.
Borrowers with 240 or 300 months of payments for income-based forgiveness or 120 months for utility loan forgiveness will begin to see their loans forgiven in spring 2023. All other borrowers will see their accounts updated in the summer.
“The Department is already making one-time adjustments to borrower accounts, beginning with borrowers who are close to reaching 120 months of Public Service Loan Forgiveness (PSLF),” a Department of Education spokesperson told Yahoo Finance. “This year, we expect to begin adjusting the accounts of borrowers who reach 240 or 300 months’ payments for IDR forgiveness.”
Some borrowers in the Public Service Loan Forgiveness Program have already seen payment adjustments on their accounts. A borrower who asked that her name not be used because she previously filed for personal bankruptcy during the Great Recession discovered that her student debt had finally been wiped out.
“My husband and I are high school teachers, and our student loan debt has been a weight around our ankles since 1995,” she told Yahoo Finance. “On December 31, 2022, I checked my loan balance and it said zero, I couldn’t believe it, and a few days later my husband’s balance was also zero.”
The couple, who enrolled in the Public Service Loan Forgiveness program, still had 10 more years until loan forgiveness because the payments they had made during bankruptcy did not count in their account history, even though they had been paying off his student loans since 1995.
The unique adjustment underway changed all that.
“I still check to see that zero balance,” he said. “Now we can start saving for retirement.”
Ronda is a senior personal finance reporter for Yahoo Finance and an attorney with experience in law, insurance, education, and government. Follow her on Twitter @escriberonda
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