After the Supreme Court rejected the Biden administration's plan to forgive as much as $20,000 in student loan debt per borrower, the White House was quick to roll out several backup student loan relief plans. These included the finalization of the SAVE income-driven repayment plan, which should reduce student loan payments by hundreds or thousands of dollars for most federal loan borrowers, as well as a 12-month "on-ramp" to resuming payments.
Another recent effort is the announcement of $39 billion in student loan forgiveness for 804,000 borrowers, many of whom will have their debts wiped out completely. Not surprisingly, this forgiveness plan was also challenged in court, but borrowers just got some good news: The lawsuit was tossed, and forgiveness is allowed to proceed.
Even if you aren't in this group of 804,000 borrowers, this student loan relief program could result in eventual forgiveness for you -- so it's important to know what it involves.
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A "one-time adjustment" could lead to widespread loan forgiveness
Why are 804,000 federal student loan borrowers getting $39 billion in loan forgiveness? The answer is an initiative to fix flaws in the income-driven repayment plan system, which is used by millions of student loan borrowers.
Income-driven repayment (IDR) plans not only limit a borrower's required monthly payment to a certain percentage of their discretionary income, but they also forgive any remaining balance after either 20 or 25 years of repayment.
The problem is that for a variety of reasons, certain payments weren't counted in the past that should have been. So the Department of Education is doing a one-time adjustment of the qualifying payments credited to income-driven repayment plan enrollees.
Specifically, accounts will be adjusted to reflect:
- Any months in any repayment status, regardless of the repayment plan the borrower was enrolled in or any other factors.
- Period of 12 or more months of forbearance, or 36 or more months of total forbearance.
- Any months in hardship or military deferment (2013 or later).
- Any months in any deferment (before 2013).
- Any time in repayment before loans were consolidated.
The time spent in the COVID-19 payment pause will also count for loan forgiveness purposes. Since the repayment pause started in March 2020 and is set to end after August 2023, this should provide an additional 41 months of qualifying repayment credit for IDR borrowers.
To be fair, this initiative was announced in April 2022, so this isn't technically a "backup plan" to the broad forgiveness effort. However, the initial press release announcing the action mentioned that "at least 40,000 borrowers" could qualify for immediate debt cancellation -- while just the initial wave has resulted in more than 20 times that amount.
How could it help you?
Let's say that you have undergraduate student loans and are enrolled in an income-driven repayment (IDR) plan that forgives any remaining balance after 20 years (240 months) of qualifying payments. And you've sent your student loan servicer a total of 70 monthly payments to date. However, you also had a 12-month forbearance soon after you graduated, a 12-month hardship deferment during a period of unemployment, and a 42-month forbearance during the COVID-19 repayment pause.
Adding these together will increase your total by 68 months, nearly doubling your payment credit and putting you almost six years closer to having any remaining balance wiped out.
Although many borrowers are understandably disappointed that the president's initial student loan forgiveness plan was rejected, the combination of "backup" plans could result in easier student loan repayment and faster forgiveness for you.
For one thing, if you are having a difficult time fitting student loan payments into your budget, the 12-month on-ramp effectively gives you until fall 2024 before you have to start. The SAVE Plan could cut your required monthly payments in half on undergraduate loans. And these one-time adjustments to payment counts could mean your loans are years closer to being forgiven entirely.
