The Biden administration has released detailed new guidance for the IDR Account Adjustment, a temporary initiative that can advance a borrower’s progress towards student loan forgiveness under Income-Driven Repayment, or IDR, plans.
IDR plans, which tie a borrower’s monthly student loan payments to their income and family size, can result in a discharge of any remaining unpaid balance after 20 or 25 years in the program. But IDR plans have historically been complicated for borrowers to navigate, and both the government and its contractors have poorly administered the IDR system for years, according to consumer advocates.
The IDR Account Adjustment, first announced last year, is designed to remedy these longstanding issues by allowing borrowers to receive retroactive credit toward IDR student loan forgiveness terms for periods that otherwise would not have counted. This includes most past periods of repayment (including periods before consolidation), as well as some prior periods of deferment and forbearance. Borrowers who receive enough IDR credit to reach the threshold of student loan forgiveness will have their balances discharged. Others will receive a head start that will accelerate their progress — in some cases, dramatically — toward eventual loan forgiveness.
The Education Department will be implementing the IDR Account Adjustment automatically through 2024. Some borrowers do not have to take any action to qualify. But others do — either to qualify for student loan forgiveness or to maximize the available benefits. And since the program is temporary, there are deadlines.
Here’s what borrowers should know.
Consolidation To Qualify For Student Loan Forgiveness Under IDR Account Adjustment
Borrowers who already have government-held federal student loans — which includes all Direct-program federal student loans as well as some government-owned FFEL-program loans — may not have to consolidate. The Education Department will automatically apply the benefits of the IDR Account Adjustment for all government-held federal student loans. However, some borrowers will need to consolidate their loans:
- Borrowers with non-government federal student loans, such as commercially-held FFEL loans, school-held Perkins loans, or HEAL loans must consolidate via the Direct consolidation program to convert these loans into a Direct loan (which is government-held) to qualify for the IDR Account Adjustment.
- Borrowers with FFEL loans that are government-held (as opposed to commercially-held) may qualify for the IDR Account Adjustment without needing to consolidate, but those looking to receive credit for Public Service Loan Forgiveness (PSLF) as well would need to consolidate, as only Direct loans qualify for PSLF. Credit awarded under the IDR Account Adjustment can also count toward PSLF for borrowers who were working in qualifying employment.
- Borrowers who have Direct or FFEL student loans with different repayment histories may want to consider Direct consolidation to maximize benefits under the IDR Account Adjustment. The Education Department says in its updated guidance, “Assuming your repayment history overlaps for each loan, the consolidation loan will be credited with the longest amount of time in repayment of the loans that were consolidated.”
- Borrowers with Parent PLUS loans may want to consider Direct loan consolidation as well. Unconsolidated Parent PLUS loans can receive retroactive credit under the IDR Account Adjustment, according to the new guidance. But Parent PLUS borrowers who are short of the threshold for loan forgiveness would then have to continue repaying their loans under an IDR plan — and the only way for Parent PLUS borrowers to do that would be to consolidate those loans and select the Income-Contingent Repayment (ICR) plan, which is the only available IDR option for consolidated Parent PLUS loans.
Borrowers who need to consolidate their loans to qualify for (or maximize benefits under) the IDR Account Adjustment would need to do so before the end of 2023, according to the Education Department.
There may be some downsides to consolidating, however, including the potential loss of voluntary interest rate incentives associated with some FFEL loans, as well as interest capitalization. In addition, combining certain types of loans in a Direct consolidation loan — such as Parent PLUS loans with non-Parent PLUS loans, or Direct loans with commercially-held FFEL loans — can “taint” the consolidation loan and limit eligibility for certain programs, such as Revised Pay As You Earn (REPAYE) or President Biden’s separate one-time student loan forgiveness plan currently before the Supreme Court. So borrowers should make sure that consolidation is the right move.
Get Out Of Default To Qualify For Student Loan Forgiveness
Borrowers who are in default on their federal student loans may need to get out of default to benefit from the IDR Account Adjustment, says the Education Department. The new guidance indicates that defaulted federal student loan borrowers can receive automatic student loan forgiveness under the adjustment if they receive enough retroactive credit to reach the 20 or 25-year mark, not counting time spent in default.
But other defaulted federal student loan borrowers need to get out of default. “Borrowers with loans in default can benefit by getting out of default—including through the Fresh Start initiative,” says the Education Department. “Borrowers who exit default prior to the end of the Fresh Start period will receive the full benefit of the account adjustment.” Fresh start is a separate one-time Biden administration initiative that provides borrowers with another pathway out of default.
Borrowers in default on commercially-held FFEL loans may be looking at a multi-step process. “Commercial FFEL loans that entered defaulted during the COVID-19 emergency are assigned to ED and removed from default,” says the new guidance. “These loans will receive IDR credit under the adjustment when that assignment occurs. However, since only Direct Loans are eligible for PSLF, the borrowers must consolidate their FFEL loans into the Direct Loan before the adjustment to receive PSLF credit under the adjustment.”
Time in default generally will not count toward a borrower’s IDR student loan forgiveness term. However, the new guidance indicates that borrowers who get out of default in time to benefit from the IDR Account Adjustment will “receive credit for periods in default from March 2020 through the month they exit default.”
Switch To An IDR Plan To Qualify For Student Loan Forgiveness Under Adjustment
Borrowers do not have to presently be in an IDR plan to receive the benefits of the IDR Account Adjustment. However, borrowers who are short of the 20 or 25-year thresholds for student loan forgiveness after receiving the retroactive credit would need to continue repaying their loans under an IDR plan to make ongoing progress toward eventual loan forgiveness.
“You don’t need to be enrolled in an IDR plan to benefit from the adjustment,” says the department’s guidance. “If you don’t reach the forgiveness milestones with the adjustment, you will need to enroll in an eligible plan after payment resumes to continue accruing credit toward forgiveness.”
In addition, unless your student loans are entirely undergraduate loans, borrowers with any graduate school loans would have to be enrolled in the Pay As You Earn (PAYE) plan to be eligible for the 20-year (as opposed to the 25-year) student loan forgiveness term. But not everyone qualifies for PAYE. To be eligible for the PAYE plan, a borrower must have had no outstanding federal student loan debt as of October 1, 2007 and must have received a new federal student loan on or after October 1, 2011.
Submit PSLF Forms To Qualify For Student Loan Forgiveness Under Adjustment
Credit received under the IDR Account Adjustment can also count toward PSLF for borrowers who worked (or continue to work) in qualifying public service employment from October 1, 2007 onwards. PSLF can allow borrowers to receive student loan forgiveness in as little as 10 years, as opposed to 20 or 25 years under the IDR terms.
However, borrowers seeking PSLF credit have an additional step: they must submit PSLF employment certification forms, signed by their employer, to have their payments counted toward PSLF. Borrowers can use the Education Department’s PSLF Help Tool to start the process. And a new feature will may make it easier for borrowers to get their employer’s signature.
Further Student Loan Forgiveness Reading
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What The Supreme Court’s Latest Move Means For Student Loan Forgiveness
4 Critical Student Loan Forgiveness Dates Borrowers Should Know About
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