5 Key Takeaways From The Sudden Change To Student Loan Forgiveness Eligibility

Finance

The Biden administration announced on Thursday sudden changes to eligibility rules for its new one-time student loan forgiveness plan, and questions are swirling.

Under Biden’s new student loan cancellation initiative, borrowers can be eligible for up to $20,000 in federal student loan forgiveness (or $10,000 if they did not receive a Pell Grant) if they earned less than the income caps for the program. Only government-held federal student loans are eligible — meaning Direct and FFELP (also known as FFEL program) loans that are owned by the U.S. Department of Education.

The Education Department had previously advised borrowers in published guidance that commercially-held FFELP loans (federally-guaranteed student loans not owned or held by the government) do not automatically qualify for student loan forgiveness under the initiative. But officials had advised borrowers that they could consolidate these loans into a federal Direct consolidation loan to convert the loan into one that is eligible.

Yesterday, the administration reversed course, apparently in the face of mounting legal threats by Republican-led states and FFEL-program lenders. The Education Department’s new policy is that commercially-held FFEL loans will not be eligible for the $10,000 or $20,000 in student loan forgiveness, even if consolidated into a Direct loan, unless the borrower submitted an application to consolidate prior to September 29, 2022. Hundreds of thousands of borrowers may now be excluded from relief.

Still, the situation is nuanced and fluid. Here’s what borrowers should know.

Rule Change Only Applies to One-Time Student Loan Forgiveness Initiative

The abrupt change to eligibility rules for FFEL borrowers so far only applies to the one-time student loan forgiveness initiative that would result in $10,000 or $20,000 in student loan forgiveness. Other new, temporary initiatives that may result in student loan forgiveness for millions of borrowers — such as the Limited PSLF Waiver, and the IDR Account Adjustment — may also require FFEL borrowers to consolidate their loans into a Direct loan to qualify. The requirements for these programs are, as of this writing, unchanged.

Borrowers can learn more about the Limited PSLF Waiver here. And you can learn more about the IDR Account Adjustment here.

Some FFELP Loans Are Still Eligible for Student Loan Forgiveness Under the Initiative

The rule change does not result in a blanket exclusion of all FFEL-program loans from student loan forgiveness under the one-time cancellation initiative. Many FFEL loans will still qualify, including:

  • FFEL loans that are held or administered by the U.S. Department of Education or one of its contracted loan servicers.
  • FFEL loans that are in default, regardless of whether they are currently held by the U.S. Department of Education or a commercial guaranty agency.
  • FFEL loans that are already consolidated into a Direct loan, or that end up consolidated into a Direct loan based on an application submitted prior to September 29, 2022.

One useful (but non-exclusive) test to determine whether a FFEL loan qualifies for loan forgiveness is if it has been covered by the ongoing Covid-19 suspension of payments, interest, and collections. If so, it is a Dept. of Education-managed loan, and should qualify for student loan forgiveness.

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The Rule Change is Due to Legal Threats to Student Loan Forgiveness

The change in eligibility rules for the one-time student loan forgiveness program is because of legal challenges. Some FFEL lenders might be considering litigation to block Biden’s new student loan forgiveness initiative, arguing that borrowers consolidating their loans to leave the FFEL system in order to pursue cancellation may deprive them of revenue. In addition, several Republican-led states filed a lawsuit against the Biden administration this week, citing the FFEL program as a source of potential injury, as some FFEL lenders and guarantors are state-related entities.

The Education Department is attempting to blunt these challenges and avoid an injunction (or worse) by narrowing the rules and restricting eligibility to loans that it directly administers, in the hopes of maintaining the program for the vast majority of borrowers.

The Biden Administation is Working on Other Potential Solutions for FFEL Borrowers

The Education Department has indicated that officials are “assessing whether there are alternative pathways to provide relief to borrowers with federal student loans not held by ED, including FFEL Program loans and Perkins Loans, and is discussing this with private lenders.” This suggests that the situation is fluid, and borrowers with commercially-held FFEL loans may not be permanently blocked. The initiative is available until December 31, 2023, so there is time for the Biden administration to figure out another solution.

FFEL Borrowers May Still Need to Consolidate For Other Student Loan Relief Programs

Even if borrowers with commercially-held FFEL loans are excluded (for now) from Biden’s one-time student loan forgiveness initiative — even if they apply now to consolidate into a Direct loan — there might be other reasons for these borrowers to consider Direct loan consolidation.

FFEL borrowers can still potentially benefit from the Limited PSLF Waiver, which can allow borrowers to get retroactive credit towards the 10 years of qualifying payments required for loan forgiveness based on public service work. Direct loan consolidation is necessary for FFEL loans to qualify under the waiver — and the opportunity ends on October 31, 2022.

FFEL borrowers can also potentially benefit from the IDR Account adjustment, which — similar to the Limited PSLF Waiver — can allow borrowers to get retroactive credit towards a 20-year or 25-year repayment term required to get student loan forgiveness under income-driven repayment plans. While defaulted FFEL loans and FFEL loans already held by the Department of Education can quality, borrowers with commercially-held FFEL loans would still need to consolidate into a Direct loan, according to the Education Department. Current official guidance indicates that borrowers should consolidate by January 1, 2023, although officials are indicating this date will likely be pushed back further in 2023.

Further Student Loan Reading

In Reversal, Biden Administration Announces New Eligibility Limits On Student Loan Forgiveness

Biden’s Student Loan Forgiveness Could Be Taxable In Some States

Student Loan Borrowers Should Write Down These Critical Dates For Loan Forgiveness And Repayment

Millions Of Student Loan Borrowers Will Get Refunds Of Payments Under Biden’s Loan Forgiveness Initiative

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