By Kyra Taylor, National Consumer Law Center and Winston Berkman-Breen, Student Borrower Protection Center
This blog is the third post in a three part series about the IDR Account Adjustment and the continued flexibilities available to borrowers seeking Public Service Loan Forgiveness. Information about the IDR Account Adjustment is available in the first post and second post here.
Over the last twenty years, millions of low-income student loan borrowers have fallen into default because their servicer failed to inform them that they would be eligible for a $0 IDR plan. Instead, servicers placed these borrowers in expensive forbearance and deferments which extended their repayment time and caused substantial amounts of interest to accrue. When those forbearances and deferments ended, those borrowers were left with a gargantuan bill, but still didn’t have the resources to pay. As a result, they defaulted, and many faced the severe consequences of federal loan default: wage garnishment, tax refund seizure, and the seizure of other federal benefits. Had these borrowers been properly made aware of the option to have a low or $0 IDR plan payment, they could have avoided default and debt collection altogether.
The Department has recognized this system failure, and sought to address it via the IDR Account Adjustment, a one-time recount of past time in repayment that will get many borrowers closer to IDR cancellation. However, the Department has inexplicably excluded time in default from the IDR Account Adjustment. As a result, defaulted borrowers may have had their loans for over 10, 15, or 20 years, but time in default will not count towards cancellation even after the Income Driven Repayment Account Adjustment has been applied to their account. This is a grave oversight that will extend these borrowers’ repayment periods, prevent them from reaching PSLF cancellation, and will leave them vulnerable to defaulting on their loans again.
Note: Borrowers whose loans were in default before the pandemic should know that the Department of Education is operating its Fresh Start program, which will, upon request by the borrower, remove their loans from default, improve their credit score, and make them eligible to borrow additional federal loans. Although these loans will not receive IDR credit for their time while in default, once their loans are removed from default through Fresh Start, they will again be eligible for low or $0 payments through an IDR plan. More information on the Fresh Start program can be found here.
A Hypothetical Example of How Excluding Default Will Affect Borrowers:
Kelly’s story
2000: Kelly finishes an associates’ degree program in Child Development, for which she borrowed $20,000 and also used a Pell Grant.
2000-2001: Kelly struggles to make payments for a year because she cannot find a job. She becomes pregnant with her first child, which means she can no longer forego buying food to pay her student loans.
2001-2005: Rather than telling her about IDR plans as a way to manage her loans, Kelly’s servicer steers her into forbearances and deferments for 4 years, and then she defaults when she loses her job. During this time, thousands of dollars of interest accrued on her account. She is only able to find work as a call center worker during this time.
2005-2015: Her loans are in default for 10 years. From 2006-2015 she gets a job as a teacher’s aid. From 2011 until 2015, the government seizes her tax refund to pay her loans—money she needed to pay medical bills. In 2015, Kelly learns she can consolidate her loans to remove them from default. When she consolidates her loans, the significant fees associated with default and the additional interest that accrued are capitalized into her loan’s principal, which means her account starts to accrue interest on interest.
2015-2018: Kelly struggles to make payments and stops making payments because she becomes ill with a chronic illness.
2018-2020: Kelly’s loans go into default again, but her health improves and she is able to begin working as a teacher’s aide again.
2020-2023: Pandemic Payment Pause
2023: Kelly opts in to Fresh Start and removes her loans from default.
After the account adjustment, Kelly will only have approximately 7 years that will count towards IDR forgiveness, even though she’s had federal loans for 23 years. Although Kelly has worked in public service for 7 years, none of that time will count towards PSLF because that public service employment occurred while her loans were in default.
Did you default on your federal student loans? Please share your story with us here.
