For years, federal loan forgiveness programs have been criticized for their overly-exclusive and often confusing eligibility requirements. This has led to thousands of borrowers being unexpectedly denied the loan forgiveness they had been working towards for years.
But for some borrowers, that relief is finally coming.
On April 19th, the U.S. Department of Education announced a plan to aid public service workers and low-income borrowers that will immediately cancel debt for at least 40,000 borrowers eligible for loan forgiveness, and impact an estimated 3.6 million borrowers. Here’s what you should know about who will benefit from the expanded student loan forgiveness plan and how it might affect your loan repayment situation.
Who Will Benefit from the Income-Driven Repayment Forgiveness ?
There are many groups of people who might benefit from this forgiveness plan. Read below to see who will be impacted.
Those who went into forbearance
The Department of Education shows that more than 13% of borrowers who were on a forbearance program between July 2009 and March 2020 have used forbearance for at least 36 months. If you were on a forbearance plan during that time for more than 12 consecutive months and more than 36 months collectively, the Federal Student Aid (FS) will make a one-time account adjustment toward forgiveness under this forgiveness plan. These changes will be applied automatically to the borrowers’ accounts later this year.
The federal government is doing this because of reports that loan servicers were encouraging borrowers to apply for forbearance instead of encouraging them to switch to an income-driven repayment plan or a deferment program where interest would not accrue. This expansion could put thousands of borrowers over the line for cancellation and put millions of borrowers closer to loan cancellation.
Those working toward Public Service Loan Forgiveness
The Public Service Loan Forgiveness program will forgive your remaining student loan balance on a Direct Loan (or consolidate other federal student loans into a Direct Loan) after you make 120 qualifying payments while working full-time for a qualifying employer, like a non-profit organization or government agency. You’ll also have to be on an income-driven repayment plan to have your payments count toward the 120-payment requirement.
However, in October 2021, the federal government announced a temporary waiver for the PSLF program provision through October 31, 2022. This waiver will allow borrowers who have been working for a qualifying PSLF employer to have their payments count toward PSLF even if they weren’t on an IDR plan.
Because loan servicers did not adequately communicate that borrowers had to be on an IDR plan to qualify for PSLF, many borrowers were not aware that they needed to change their repayment plan.
The PSLF waiver will help millions of borrowers get closer to complete loan forgiveness. And according to Travis Hornsby of Student Loan Planner, this new IDR waiver could be combined with the PSLF waiver to help borrowers have more of their payments count.
Borrowers who were on forbearance while working for a PSLF-eligible employer could have those months of forbearance count toward the 120-payment requirement.
“People who are in public service might get a double whammy,” Hornsby said.
The PSLF waiver will expire on October 31, 2022, so interested borrowers should contact their loan servicer and fill out the PSLF form. Some borrowers may be required to consolidate their loans first before receiving the full PSLF waiver.
Those who have been making payments for more than 20 years
Many borrowers have been making payments for more than 20 years and still have months or even years left on their repayment terms. This waiver could mean that their loans may be forgiven if they’ve made at least 20 years of payments for undergraduate study loans or 25 years of payments for graduate or professional study loans.
Let’s say you have a Direct Consolidation Loan from graduate or professional school. If you’re on the standard repayment plan, you will have a 30-year repayment term. With this forgiveness, a borrower on year 25 of 30 would be able to have their loans forgiven even though the repayment term is technically not over.
What Borrowers Should Do Now
Wait before contacting your servicer
Hornsby said that borrowers should wait a couple of weeks before making any changes to their student loans. He said borrowers may start to hear from their loan servicers about changes to their loans, like receiving credit for forbearance or for payments made under another repayment plan.
But borrowers should avoid calling their loan servicer until a few weeks have passed. That will give enough time for the government to provide guidance to the loan servicers on how to proceed. If you call your loan servicer right now, they may not be able to give you the right advice.
Consolidate if you have FFEL loans
When the Covid-19 pandemic began, the federal government suspended federal student loan payments with a 0% interest rate. But the special Covid forbearance program did not apply to borrowers with commercially-held Federal Family Education Loans (FFEL).
While most borrowers shouldn’t change anything right now, Hornsby said those with commercially-held FFEL loans should consolidate their loans into a federal Direct Consolidation Loan. This will likely help them qualify for more repayment options later on.
A federal Direct Consolidation Loan is not the same as consolidating with a private lender. If you consolidate loans with a private lender, they will become private student loans and you will not be eligible for any federal loan forgiveness or cancellation programs.
Avoid refinancing your student loans
As the Federal Reserve continues to raise interest rates, many borrowers feel that their best chance to refinance their student loans to a lower interest rate is slipping away.
If you have federal student loans, Hornsby recommends not refinancing and seeing what new programs or waivers the government will enact.
“The only people that should refinance at this moment are those who have private student loans and who are very afraid of interest rate increases,” he said.