The Education Department has instructed student loan servicers to stop accepting and processing all … [+]
The Education Department Memo To Student Loan Servicers
The Education Department has instructed student loan servicers to stop accepting and processing all student loan forgiveness applications for three months, according to a memo obtained by The Washington Post. The loan servicers – including MOHELA, Aidvantage, and Nelnet – manage student loans on behalf of the Education Department, including collecting payments, processing applications, and providing customer service. The memo directs loan servicers “to stop accepting and processing all income-driven repayment and consolidation applications for three months.” It informs servicers that the hold could be extended beyond three months or potentially end early.
In addition, the Education Department’s memo gives guidance that explicitly bars student loan borrowers who already enrolled in an IDR plan and are making payments on those loans from recertifying in the next 3 months. Finally, the memo “halts the processing of not only new and pending online applications but also paper forms submitted to servicers. Borrowers can still submit a paper loan consolidation application but will not have access to income-driven option,” The Washington Post reported.
The memo confirms what was foreshadowed last week when the Department of Education department “took down the online applications for IDR plans and for Direct loan consolidations,” which Adam Minsky identified in a Forbes.com article. The memo and the abrupt block of all student loan forgiveness adds another layer of confusion and anxiety for millions of student loan borrowers. It also has real financial implications for millions of student loan borrowers.
The Education Department’s guidance effectively excludes borrowers from accessing IDR plans and leaves them with only the most expensive repayment options. The memo instructs servicers that the only available plans are the standard 10-year repayment options as well as the graduated and extended repayment plans. The four IDR plans – Pay As You Earn, Income-Based Repayment, Income-Contingent Repayment, and Saving on a Valuable Education – are explicitly designed to help student loan borrowers keep monthly payments affordable by tying them to earnings. The programs prevent borrowers from choosing between paying rent, buying groceries, or meeting their student loan obligations. They also provide a lifeline by offering to forgive the loans after 2o to 25 years, preventing borrowers from a lifetime of indebtedness.
When it comes to Public Service Loan Forgiveness, the situation is tricky. The PSLF program is still open for new enrollment for those who work for eligible employers – including government agencies (at the federal, state, local, or tribal level) and qualifying non-profit organizations. However, borrowers may ultimately need to be enrolled in one of the four IDR plans to have their loan forgiven, which isn’t possible right now given the Education Department’s memo. For example, given the recent lawsuit, individuals enrolled in SAVE have had their qualifying payments put on hold, which means they can’t get to the required 120 payments and qualify for PSLF, Tara Siegel Bernard noted in The New York Times. Simply put, while new eligible borrowers can enroll, the loan forgiveness aspect of PSLF is effectively blocked at the moment.
Impact Of The Education Department’s Memo On Student Loan Borrowers
In a previous article, I highlighted a few illustrative cases simulating the effect on student loan borrowers if the Education Department eliminated IDR plans. Given the recent guidance, it may be useful to revisit two examples to illustrate how consequential the block on IDR plans could be. First, assume a borrower earning $50,000 a year with $50,000 in student loan debt would have paid $12,345 under the SAVE plan and had $50,000 forgiven. If the IBR plan remains, the borrower would have to pay over $40,000 more. However, with no IDR options, the borrower would likely have to revert to the standard repayment plan and pay $68,220. This would be an increase of $55,000 compared to the SAVE plan.
Second, consider a borrower earning $50,000 a year with $100,000 in student loan debt who would have paid $12,345 under the SAVE plan and had $100,000 forgiven. If the IBR plan remains, the borrower would have to pay over $40,000 more. However, with no IDR options, the the borrower would likely have to revert to the standard repayment plan and pay a total of $136,441, which would be an increase of $120,000 compared to the SAVE plan.
Impetus For The Education Department’s Memo
The impetus for the Education Department’s actions is a federal court ruling against the SAVE plan in a lawsuit filed by Missouri Attorney General Andrew Bailey and six other Republican-led states. The lawsuit challenged President Biden’s authority to create the SAVE plan, which was finalized in 2023 and was designed to lower monthly payments and provide a faster path to loan cancellation. SAVE has already cleared the balances of 414,000 borrowers with loans under $12,000 and has over 8 million enrollees. The states argued that loan forgiveness was not authorized under the 1993 statute that Biden relied on.
In August, the 8th Circuit Court of Appeals imposed an injunction to halt SAVE and further blocked forgiveness for borrowers whose loans are governed in whole or in part by the statute. Last week, the court ordered a lower court to block the complete SAVE plan and its predecessor, Revised Pay As You Earn. This sends the lawsuit back to the district court, leaving millions of borrowers in forbearance as they await a final ruling.
Despite the court’s ruling, the appeals court explicitly stated that borrowers could switch to IBR to obtain forgiveness eventually. The complication is that the Education Department uses a single application for all income-driven repayment (IDR) plans, which it has now been completely disabled.
Student loan advocates are calling for action and for the Education Department to reconsider its approach. Persis Yu, deputy executive director of the Student Borrower Protection Center, condemned the decision in a statement to The Post. “This was a choice by the Trump Administration and a cruel one that will inflict massive pain on millions of working families.” Advocates argue that nothing in the court order required the administration to block access to all affordable repayment options and are urging the Education Department to at least reopen one IDR plan.
Read the full article here