Lyudmila Chernetska | Istock | Getty Images
The US Department of Education recently announced a number of massive changes to the federal student loan system, which it says could bring millions of borrowers one step closer to debt cancellation.
Federal student loan borrowers have long had serious problems, including misinformation from their service agents, too many choices and complicated terms. The Ministry of Education is now trying to solve these problems.
Outstanding student debt in the United States exceeds $1.7 trillion, weighing more on households than credit card or auto debt. More than 40 million Americans are in debt for their education, and up to a quarter are overdue or in default.
“The Department of Education will begin to address years of administrative failures,” US Education Secretary Miguel Cardona said in a statement on Tuesday.
For now, the Biden administration has extended the Covid pandemic-era relief policy by suspending federal student loan payments until at least September (it has been in effect for more than two years).
When payments resume, here are some of the changes borrowers will see.
Federal student loan holders can suspend their payments under an option known as forbearance. Each forbearance can last up to one year and borrowers can take advantage of the relief up to three times. However, interest is running on borrowers’ debt during the break, and companies that handle federal student loans have been accused of steering people there too quickly.
To try to ease some of the pain of these costly delays, the Department for Education says borrowers who are on track for their loan cancellation – either through the Loan Cancellation Program public service or an income-driven repayment plan – can get some or all of the months they were enrolled in counted.
Normally, this time is not calculated in their tally of eligible payments for debt cancellation. (Debt cancellation for those on income-driven repayment plans comes after 20 or 25 years, and after 10 years for those who want to cancel their utility loan.)
“While we are still awaiting further guidance, the announcement appears to indicate that they will be making a one-time adjustment for borrowers who have had either 12 continuous months of discretionary forbearance or 36 months in total,” Betsy said. Mayotte, President of the Institute. Student Loan Counselors, a non-profit organization.
The change should be automatic, Mayotte said. Yet, if a borrower has not been forborne for 12 consecutive months or up to 36 months, there will be a process by which they can appeal to the Department of Education Ombudsman to try to make time count anyway, she said. .
A shorter time for forgiveness
Recently, it was discovered that student loan servicers were not tracking how many payments borrowers had made under income-driven repayment plans, said higher education expert Mark Kantrowitz.
“The remaining debt is supposed to be canceled automatically,” Kantrowitz said. “But it is not possible to do this automatically if the loan officer does not track the number of qualified payments”
To address this issue, the Department of Education will order repairers to retroactively count the number of qualifying payments, he said.
Even if your loans have been deferred or suspended for a while, as mentioned earlier, that time can be counted now. Likewise, if you were enrolled in a payment plan other than an income-based plan, those months may also be applied to your schedule as a result of the audit.
Once the changes are made, borrowers should be able to get their new payment statement on StudentAid.gov, Kantrowitz said.
A fresh start if you’ve been in default
The Biden administration offered good news to borrowers who were behind on student debt payments before the pandemic. The Ministry of Education is preparing to remove these millions from default and mark their accounts as current.
Moving to a current status should be automatic for borrowers, Kantrowitz said.
Collection activity, including wage garnishment and social security benefit offsetting, will also end. About 30 days after the delinquency or defect is removed from your credit history, you should order a free credit report to make sure the negative mark is gone, according to Kantrowitz.