Want Student Loan Forgiveness? To Qualify, Borrowers May Need To Do This First
The Biden administration has unveiled two sweeping, temporary expansions of student loan forgiveness programs. The Department of Education has indicated that millions of student loan borrowers may ultimately benefit, many automatically. But other borrowers will have to take a critical step first to qualify for student loan cancellation: Direct loan consolidation.
Here are the details.
Student Loan Forgiveness Through PSLF
Last October, the Biden administration announced a broad initiative to expand access to the Public Service Loan Forgiveness (PSLF) program. PSLF provides student loan forgiveness to borrowers who work at least 10 years for qualifying nonprofit or public organizations. But until Biden’s announcement, the PSLF program had very strict eligibility criteria and was plagued by administrative problems, resulting in a denial rate as high as 99%.
Through the new “Limited PSLF Waiver” program, the Biden administration is temporarily relaxing several core PSLF eligibility rules to allow many more borrowers to qualify, albeit temporarily. Under the waiver, the Education Department will be able to count past loan repayment periods that would have been rejected under the original PSLF framework, including payments made under ineligible repayment plans or on non-qualifying types of federal student loans.
Student loan borrowers who already have Direct-program federal student loans — which are loans issued and owned directly by the federal government — may not have to do much to qualify, other than submitting PSLF employment certification forms that confirm the borrower’s dates of qualifying employment.
But for borrowers with FFEL-program student loans — an older program where commercial lenders issued federal student loans that were backed or guaranteed by the government — an additional step is required to qualify for the Limited PSLF Waiver. The same is true for federal Perkins loans, which are student loans issued by colleges and universities that are similarly backed or guaranteed by the government, and other non-Direct federal student loans.
“If you have Federal Family Education Loan (FFEL) Program loans, Federal Perkins Loans, or other types of federal student loans that are not Direct Loans (for example, those from older loan programs, such as Federally Insured Student Loans [FISL] or National Defense Student Loans [NDSL]), you must consolidate those loans into the Direct Loan program by Oct. 31, 2022,” says the Department of Education. The Limited PSLF Waiver ends on that date — so to benefit, these borrowers must consolidate into the Direct loan program by then.
Student Loan Forgiveness Through Income-Driven Repayment
Just a few weeks ago, the Biden administration went even further than the Limited PSLF Waiver and announced a massive “fix” to income-driven repayment (IDR) plans. IDR programs — which include individual repayment plans like Income Based Repayment (IBR) and Pay As You Earn (PAYE) — use a formula to provide borrowers with affordable student loan payments tied to their income.
IDR plans are a required component of PSLF under the original PSLF program rules. IDR plans also have their own student loan forgiveness (regardless of the borrower’s employment) that kicks in after 20 or 25 years, depending in the specific IDR plan.
But just like with PSLF, IDR program requirements have historically been poorly communicated to borrowers. And the government has done a poor job overseeing the program and tracking borrowers’ progress. As a result, only a few dozen borrowers had qualified for student loan forgiveness under IDR, according to the Department of Education’s statistics.
To address these issues, the Biden administration announced a broad “IDR Adjustment” whereby many past periods of repayment, forbearance, and deferment that would otherwise not count towards a borrower’s repayment term can be retroactively counted. This will benefit millions of borrowers who are in IDR plans or otherwise have simply been in repayment for many years, as well as borrowers seeking student loan forgiveness through PSLF.
But just like with the Limited PSLF Waiver program, borrowers with FFEL loans would need to consolidate to benefit. “If you have commercially held FFEL loans, you can only benefit from the IDR account adjustment if you consolidate before we complete implementation of these changes, which is estimated to be no sooner than Jan. 1, 2023,” says the Department of Education in published guidance.
Biden Considers Broader Student Loan Forgiveness
President Biden is also reportedly considering broader student loan forgiveness initiatives. While he was ruled out $50,000 or more in student loan cancellation, he is considering smaller amounts of student loan forgiveness. White House officials are debating whether to include eligibility restrictions based on income, which could result in a formal application process that borrowers would have to endure.
While it is too soon to know whether FFEL borrowers would have to consolidate into the Direct consolidation program to benefit, it certainly is a possibility, in light of how the administration is implementing the Limited PSLF Waiver and IDR Adjustment.
Next Steps for Borrowers Seeking Student Loan Forgiveness
Borrowers who are interested in the Biden administration’s newest student loan forgiveness initiatives should review the Department of Education’s current guidance and determine if action is required:
- Learn more about the Limited PSLF Waiver program.
- Learn more about the IDR Adjustment.
- Learn more about Direct loan consolidation.
Under both the Limited PSLF Waiver and the IDR Adjustment, the Department of Education has indicated that periods prior to loan consolidation can be counted towards loan forgiveness, which hasn’t always been the case.
Note that the federal Direct consolidation loan process can take 30 to 60 days, so borrowers should not wait until the last minute to proceed. Direct loan consolidation may not be the right move for all borrowers, so it’s important to understand how each initiative works before consolidating.