On April 19th, the Department of Education announced steps to remedy years of mismanagement related to income-driven repayment plans for student loan borrowers. This means that tens of thousands could see their debt wiped out immediately. The steps would overhaul a system fraught with corruption and loopholes, negatively affecting the 45 million Americans carrying over $1.6 trillion in student loan debt.
Income-driven repayment plans (IDR) allow those enrolled to have their payments adjusted, depending on their income, and to forgive loans after 20-25 years. According to the National Consumer Law Center’s website:
“45 million Americans carry student loan debt, and over 8 million are currently enrolled in the federal government’s income-driven repayment (IDR) plans—plans that base borrowers’ monthly payment on their monthly income and promise cancellation of any remaining debt after 20 or 25 years. The IDR plans have existed for more than 25 years. Yet in all this time, of the millions of borrowers eligible for IDR, new data obtained by the National Consumer Law Center (NCLC) shows that the total number of borrowers who have ever received cancellation is 32.”
Under IDRs, the consecutive payments made, not the amount, are applied toward the debt. So, even if your scheduled monthly payment is zero – you still get credit. The problem is that many lenders failed to keep up with the number of payments made or to remind the borrower when it was time to renew, so there wasn’t a lapse in the continuity of payments – restarting the clock.
Loan providers, like Navient – formerly called Sallie Mae, and the largest provider of student loans in the country – used misinformation and temporary payment pauses, such as deferments and forbearance, to keep their over 12 million customers from seeing a light at the end of the student loan debt tunnel.
Deferments and forbearance typically delay payments for one year – with a combined maximum allowance of 36 months. But after the temporary relief ended, borrowers would begin repaying at the original monthly amount with no credit given for the months deferred, nor the months paid before entering either program. And while payments may be zero during forbearance, interest continues to accrue. While, with a zero dollar payment on an IDR, it doesn’t.
In 2015, the Consumer Financial Protection Bureau started keeping track of the deceptive practices, and in 2017 sued Navient for creating what the consumer rights agency calls “shortcuts” to deceive their clients while holding a collective $300 billion in debt across their borrowers. The CFPB had this to say in their suit:
“For years, Navient failed consumers who counted on the company to help give them a fair chance to pay back their student loans,” said CFPB Director Richard Cordray. “At every stage of repayment, Navient chose to shortcut and deceive consumers to save on operating costs. Too many borrowers paid more for their loans because Navient illegally cheated them and today’s action seeks to hold them accountable.”
In the five years between 2010 and 2015, over $4 billion in additional interest was added to the principal loans of those steered away from IDRs.
Originally called income-contingent repayment and available to students in 1995, if the program was handled properly, between two and four million borrowers would have been up for cancellation. Instead, one in four are in default.
Education Secretary Miguel Cardona seeks to right the wrongs of a system fraught with abuses, payment errors, improperly kept paperwork and a lack of transparency. Cardona seeks to correct the failure to communicate to borrowers that they qualify for IDR, or what the true impact of choosing deferment or forbearance over an income-driven repayment plan would be. Moreover. these failures disproportionately negatively affected African-Americans.
The solution seems to be to retroactively apply credit towards the cancellation of the debt, to issue new guidelines to improve payment tracking and to correct inaccuracies in payment history.
This will come as a relief for the millions who are either in or facing default. Those who have had their credit reports adversely affected – or their tax refunds garnished. The Covid pandemic saw millions get temporary relief with moratoriums on student loan payments, but there has been an increasing demand for the Biden Administration to do more. It seems they’re finally starting to listen.
Original Source: NPR
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