On Friday, July 14th, the Department of Education announced that it was sending notice to 804,000 borrowers who had spent 20 to 25 years in repayment on their federal student loans that their remaining balance would be canceled. This announcement marks the first big wave of loans being forgiven through the Income-Driven Repayment (IDR) programs that were first created in the 1990s. The IDR programs allow borrowers to make payments based on their income and forgive any remaining balances after borrowers accrue 20 or 25 years of qualifying time in repayment. This particularly large batch of canceled balances is the result of a recount of borrowers’ qualifying time in the program under the Income-Driven Repayment Account Adjustment announced last year.
Under the IDR Account Adjustment, the Department is putting millions of borrowers closer to being debt free after 20 to 25 years in repayment by counting more past time—including all time in repayment and some periods of time in forbearance and deferments—towards IDR forgiveness. The Department adjusted the accounts of borrowers who had reached or exceeded the number of qualifying months toward forgiveness first; however, the Department will continue adjusting all borrowers’ accounts until 2024. Borrowers who are not yet at cancellation will see an adjustment to their accounts next year that will reflect their updated number of qualifying months toward cancellation of any remaining balance. For more information about the details of the IDR Account Adjustment, see our blog post here.
What do I need to know if I’m eligible for loan cancellation now through IDR?
The Department of Education has begun emailing borrowers who are eligible to have some or all of their outstanding loans forgiven. These borrowers have 30 days to opt out; otherwise, the Department will move forward with canceling the balance of their eligible loans. You do not have to apply for forgiveness, it will be automatic if you do not opt-out. Most borrowers will not want to opt out; borrowers who have loans forgiven through IDR before December 31, 2025 do not have to report their canceled loans for federal income tax purposes. However, they may have to report the cancellation for state tax purposes in a handful of states.
One reason to consider opting out of this initial wave of cancellation is if you have multiple outstanding federal student loans and only some are eligible for cancellation now. By opting out and consolidating your loans, you could effectively make all of your loans eligible for forgiveness now. It’s important that you check to see if you have any commercially-held FFEL loans, school-held Perkins loans, or HEAL loans–these loan types are only eligible for the IDR Account Adjustment if they are consolidated into a Direct Consolidation Loan (learn more about the types of federal loans here and consolidation here). Through April 30, 2024 (updated from the original deadline of December 31, 2023), the Department of Education is crediting Direct Consolidation Loans with the longest amount of qualifying time of the loans that were consolidated (some examples of what that means are here). Therefore, if a borrower has some loans that are eligible for IDR forgiveness now, and consolidates those loans with other loans, the entirety of the new Direct Consolidation Loan will be canceled in the coming months as the Department continues to implement the IDR Account Adjustment.
Borrowers have until April 30, 2024 (updated from the original deadline of December 31, 2023) to consolidate their loans to take full advantage of the IDR Account Adjustment.
Why did the Department implement an IDR Account Adjustment?
The IDR Account Adjustment is a fix to address long-standing problems in the student loan system that resulted in inaccurate payment counts and borrowers being wrongly denied credit toward IDR forgiveness. In 2021, the National Consumer Law Center and Student Borrower Protection Center reported that millions of borrowers had been in repayment for 20 years or longer yet only 32 had actually had their loans forgiven through IDR. A number of lawsuits and investigations revealed the reason why:
- Numerous lawsuits and state investigations revealed that, in violation of Department rules, student loan servicers were steering borrowers into long-term forbearances when borrowers called seeking help because they couldn’t afford their standard payments, instead of informing them of their eligibility for a lower payment in IDR. If borrowers had been properly serviced, many would have been enrolled in an IDR plan with a payment as low as $0 per month and would have earned credit toward IDR forgiveness for that time.
- An NPR investigation exposed that servicers’ records of borrowers’ past qualifying time toward IDR forgiveness were inaccurate and unreliable. Problems included that servicer account transfers often resulted in lost payment histories, failures to give credit for some payments and qualifying deferments, differences in the ways that servicers determined which payments were qualifying for IDR purposes, and that servicers simply weren’t keeping track of who had reached cancellation or tracking borrower progress toward cancellation.
- A 2022 GAO report found that significant data gaps on borrowers’ accounts were preventing borrowers from receiving the cancellation they were legally entitled to. It also found that the Department failed to provide borrowers with sufficient information about IDR cancellation. Further, it found that neither servicers nor the Department provided borrowers with a count of how much progress they had made towards cancellation or a way to request that the time towards cancellation be verified.
- Borrowers are often encouraged to consolidate their loans to simplify repayment or access new repayment programs, but previously—without the borrower realizing it—borrowers would lose all of the time they’d already earned towards IDR forgiveness when they consolidated. In other words, their 20-year payment clock would reset without anyone warning them.
The IDR Account Adjustment—and the cancellation that the Department recently announced—are an effort to fix these historical inaccuracies and longstanding errors that deprived millions of borrowers of progress toward loan forgiveness promised by the IDR program..
While the cancellation announced on July 14th is worth celebrating, it doesn’t include all 4.4 million people who have been in repayment for over 20 years. A key reason for that is that the Department of Education excluded time in default from the IDR account adjustment. This remains an area for continued work, as the borrowers hurt most profoundly by forbearance steering are the low-income borrowers who never got the help they needed to access an IDR plan and whose loans defaulted as a result. NCLC will continue to fight to ensure that these borrowers receive the debt relief they would have secured if the system had worked as intended.
