Biden administration announces automatic debt erasure for 804,000 federal student loan borrowers, wiping out $39 billion in loans

Over 804,000 borrowers of federal student loans are about to receive some unexpectedly good news. Despite President Biden‘s attempts at widespread debt forgiveness being thwarted by the Supreme Court, these borrowers will soon be notified by the U.S. Department of Education that their debts will be automatically eliminated.This forgiveness initiative stems from a promise made by the Biden administration last year in response to numerous complaints, lawsuits and an NPR investigation. The investigation uncovered a systemic mismanagement issue within the Department of Education and loan servicing companies, resulting in many long-term borrowers who should have qualified for loan forgiveness under the government’s income-driven repayment plans (IDR) not receiving it.U.S. Secretary of Education Miguel Cardona, in a press release on Friday, acknowledged the broken system that failed to accurately track borrowers’ progress towards forgiveness, stating that borrowers had fallen through the cracks for far too long.

This step towards automatic forgiveness will erase a staggering $39 billion in federal student loan debt. For years, borrowers, advocates and journalists have been sounding the alarm about the failures of the IDR program. While these plans promised loan forgiveness after 20 years of payments, a report by borrower advocates in March 2021 revealed that only 32 out of 4.4 million borrowers had their debts canceled under IDR.

The primary issue was the difficulty in enrolling in IDR plans, intended as a safety net for low-income borrowers. As a result, the loan servicing companies often placed financially distressed borrowers in long-term forbearance, which is a simpler process to navigate over the phone for the companies’ call center workers. While forbearance provided temporary relief from payments, interest continued to accumulate.

In April 2022, an NPR investigation, utilizing undisclosed Education Department documents, shed further light on problems with the department’s handling of IDR plans. It revealed that several loan servicing companies were not accurately tracking borrowers’ progress towards forgiveness, a fact known by the department. Additionally, payment histories were frequently damaged and incomplete when borrowers were transferred between servicers, a common practice.

In response to these issues, the Biden administration announced a one-time “account adjustment” in spring 2022. This adjustment would grant federal student loan borrowers retroactive credit towards loan forgiveness for the months they spent in long-term forbearance. Even borrowers who were never enrolled in an IDR plan would receive retroactive credit, regardless of the completeness or timeliness of payments, loan type, or repayment plan.

FAQs

1. Who is eligible for debt erasure?
The debt erasure is available to borrowers who have been in repayment for at least 20 years under an income-driven repayment (IDR) plan. These plans allow borrowers to make monthly payments based on their income and family size. After 20 or 25 years of payments, depending on the plan, any remaining debt is forgiven.

2. What if I am not eligible for debt erasure?
If you are not eligible for debt erasure, you may still be eligible for other forms of student loan relief. The Biden administration has made a number of changes to the student loan system, including expanding eligibility for loan forgiveness and providing more flexibility for borrowers, who are struggling to make payments.