Millions of student loan borrowers are closer to being debt-free. What to know about the changes

The U.S. Department of Education recently announced a number of massive changes to the federal student loan system, which it says could bring millions of borrowers closer to debt forgiveness.

Federal student loan borrowers have long run into serious issues, including misinformation from their servicers, too many choices and complicated terms. The Education Department is now trying to fix those problems.

Outstanding student loan debt in the U.S. exceeds $1.7 trillion, burdening households more than credit card or auto debt. More than 40 million Americans are in debt for their education, and up to a quarter are in delinquency or default.

“The Department of Education will begin to remedy years of administrative failures,” U.S. Secretary of Education Miguel Cardona said Tuesday in a statement.

For now, the Biden administration has extended the Covid pandemic-era relief policy pausing federal student loan payments until at least September (it’s been in effect for more than two years).

When the payments turn back on, here are some of the changes borrowers will see.

Holders of federal student loans can put their payments on pause in an option known as a forbearance. Each forbearance can be as long as a year, and borrowers can tap the relief up to three times. However, interest accrues on borrowers’ debt during the pause, and the companies that service federal student loans have been accused of too quickly steering people into them.

To try to lessen some of the pain of these pricey delays, the Education Department says borrowers who are on track for loan forgiveness — either through the public service loan forgiveness program or an income-driven repayment plan — may get some or all of the months they were enrolled in them counted.

Normally that time is not calculated in their tally of qualifying payments for debt cancellation. (Debt forgiveness for those in income-driven repayment plans comes after 20 years or 25 years, and following 10 years for those pursuing public service loan forgiveness.)

“While we are still waiting for additional guidance, the announcement appears to say that they will be doing a one-time adjustment for borrowers who had either 12 continuous months of discretionary forbearance or 36 total months,” said Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit.

The change should be automatic, Mayotte said. Yet if a borrower hasn’t been in a forbearance for 12 months in a row or for as many as 36 months, there will a process by which they can appeal to the Education Department’s ombudsman to try and get the time counted anyway, she said.

Recently, it was discovered that student loan servicers weren’t tracking the number of payments borrowers had made in income-driven repayment plans, said higher education expert Mark Kantrowitz.

“The remaining debt is supposed to be forgiven automatically,” Kantrowitz said. “But it’s not possible to do this automatically if the loan servicer is not tracking the number of qualified payments”

To fix this, the Education Department will order servicers to count the number of qualifying payments retroactively, he said.

Even if your loans were in a deferment or forbearance for a period, as mentioned before, that time may be counted now. Likewise, if you were enrolled in a payment plan other than a income-driven one, those months may also be applied to your timeline as a result of the audit.

Once the changes are made, borrowers should be able to get their new payment count at StudentAid.gov, Kantrowitz said.

The Biden administration has offered good news to borrowers who were behind on their student debt payments before the pandemic. The Education Department is moving to pull those millions of people out of default and mark their accounts as current.

The switch into a current status should be automatic for borrowers, Kantrowitz said.

Collection activity, including wage garnishment and the offset of Social Security benefits, will also end. About 30 days after the delinquency or default is removed from your credit history, you should order a free credit report to make sure the negative mark is gone, according to Kantrowitz.