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 Education Department announced last year will count certain months toward student loan forgiveness that were previously ineligible under income-driven repayment plans, or IDRs. Around 3.6 million borrowers would receive at least three years of credit toward forgiveness as a result, according to Federal Student Aid.
The adjustments, which just got underway, are separate from Biden’s up to $20,000 in student loan forgiveness and aren’t contingent on the outcome of the Supreme Court cases heard this week.
“The one-time adjustment hasn’t gotten the attention it deserves, as it remedies decades of a broken system due to forbearance steering on behalf of loan servicers,” Persis S. Yu, deputy executive director of Student Borrower Protection Center (SBPC), told Yahoo Finance. “Millions of borrowers will benefit.”
‘4.4 million people who should have gotten their debts canceled’
In April 2022, the Education Department announced the one-time payment adjustment for all Direct Loans and federally owned Federal Family Education Loans (FFELs). The adjustment to student loan accounts would go toward helping borrowers get closer to forgiveness under income-driven repayment plans, which offer cancellation 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 repayment status, regardless of the payments made, loan type, or repayment plan;
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12 or more straight months of forbearance or 36 or more months of total forbearance;
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Months in an economic hardship or military deferments after 2013;
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Months in any deferment (except in-school deferment) before 2013; and
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Any months in repayment on earlier loans before loans were consolidated.
After the adjustment, borrowers with 20 or 25 years of repayment history automatically get forgiveness even if they aren’t enrolled in an income-driven repayment plan. FFEL borrowers with commercially-held loans can benefit from the adjustment, too, if they consolidate their loans with Federal Student Aid by May 1, 2023.
The one-time payment adjustment helps to reverse some of the damage caused by loan servicers that did not properly track deferments or steered borrowers to forbearance instead of income-driven repayment plans that would have counted toward years of payment.
“Of the 4.4 million people who should have gotten their debts canceled if IDR worked, fewer than 200 ever have,” Thomas Gokey, policy director at the Debt Collective, told Yahoo Finance. “The IDR [one-time] 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 was done.”
Many borrowers may be unaware of the adjustment and how it may help them — especially as the student loan forgiveness case in front of the Supreme Court takes the limelight. That’s because some loan servicers and the Education Department have not done a good job of informing borrowers about the one-time payment adjustment, according to Katherine McKay, associate director of insights and evidence at the Aspen Institute Financial Security Program.
“ED should do everything in its power to address administrative shortcomings like these while everyone waits for the SCOTUS ruling,” McKay told Yahoo Finance. “Doing the one-time adjustment should be a top priority because they are aware that servicers under-counted millions of peoples’ payments [and] it makes sense for them to make adjustments, especially for people who have been paying the longest.”
Originally, the Education Department was to begin discharging loans for certain borrowers in November 2022, with the remaining following in July 2023. That timeline has since been adjusted, according to the Federal Student Aid.
Borrowers with 240 or 300 months of payments for income-driven repayment forgiveness or 120 months toward Public Service Loan Forgiveness will start to see their loans forgiven in spring 2023. All other borrowers will see their accounts update in the summer.
“The Department is already making one-time adjustments to borrower accounts, starting with borrowers who are close to reaching 120 months of Public Service Loan Forgiveness (PSLF),” an Education Department spokesperson told Yahoo Finance. “This year, we expect to begin adjusting accounts for borrowers who reach 240 or 300 months’ worth of payments for IDR forgiveness.”
Some borrowers in the public service loan forgiveness program have already seen payment adjustments to their accounts. One borrower who asked her name to not be used because she previously filed for personal bankruptcy during the Great Recession found 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 payments they had made during bankruptcy didn’t count on their account history — even though they had been paying on their student loans since 1995.
The one-time adjustment underway changed all that.
“I still check to see that zero balance,” she said. “Now we can actually start to save for retirement.”
