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U.S. could have forgiven thousands of student loans but never told borrowers

People also availed themselves of repayment delays without knowing it would push back their forgiveness, a government report said

Supporters of the Debt Collective walk past the Education Department on April 4 to demand full student debt cancellation. (Leigh Vogel/Getty Images for MoveOn & Debt Collective)
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A blistering government audit of income-driven repayment plans — those tied to the borrower’s salary — accuses the Education Department of mismanagement that may have robbed student loan holders of timely debt forgiveness.

A Government Accountability Office report on repayment plans that offer debt cancellation after 20 or 25 years said Wednesday that about 7,700 loans may have been eligible for forgiveness since Sept. 1, 2020. But holes in the department’s data made it difficult to definitively grant cancellation. Only 157 loans have been forgiven as of June 2021.

According to the report, the Education Department failed to ensure payments were accurately tracked until a decade after the first income-driven plan was implemented in 1994. As a result, some borrowers with older loans are at high risk of spending more time in repayment than necessary. Even now, there is no uniform procedure to verify and correct errors in the oldest loan accounts, the report said.

What’s more, the department has never provided borrowers regular updates on their progress toward debt cancellation or readily available information about forgiveness requirements. Without that guidance, the GAO said, people who believed they were making progress may not have known that postponing payments for months through forbearance or most types of deferment don’t count.

More than half of the 70,300 loans the government watchdog identified as potentially eligible for income-based forgiveness had at least seven years’ worth of non-qualifying months as of Sept. 1, 2020.

“Unless Education ensures borrowers are better informed about forgiveness requirements and qualifying payment counts, [income-driven repayment] borrowers may make uninformed decisions and be unable to correct inaccurate counts, potentially delaying forgiveness,” the GAO report said.

The findings arrive a day after the Biden administration said it would use one-time waivers and adjustments to retroactively credit millions of borrowers with additional payments to rectify years of administrative failures. The move will ameliorate some long-standing problems in the income-driven plans by clearing out many of the oldest loans. All borrowers that have been in repayment since at least 1997 or 2002 will receive automatic forgiveness of their remaining balances.

Biden administration gives more borrowers chance of debt cancellation

In the department’s response to the GAO findings, Richard Cordray, who heads the Federal Student Aid office, agreed with all of the recommendations to improve the plans, including making people aware they can request reviews of their payments.

Cordray noted that the initial design of the program limited debt cancellation. Terms of early plans were restrictive and required higher monthly payments that increased the chance of borrowers paying off their loans before hitting the forgiveness threshold. Few people took advantage of the plans until the Obama administration expanded eligibility, lowered monthly payments and reduced the years to forgiveness.

Still, Cordray acknowledged the department could have done more over the years to shore up the infrastructure of the program.

“We recognize that it is important to get payment counting correct now, as the number of loans that have been in repayment long enough to qualify for loan forgiveness will only grow over time,” he said.

The GAO estimates that about 1.5 million loans held by 600,000 borrowers will meet that mark by 2030, but some of that debt may be paid in full by then or may not accrue enough qualifying payments.

House Education and Labor Chairman Robert C. “Bobby” Scott (D-Va.), who requested the GAO probe, said in a statement he is “pleased the Biden-Harris Administration announced steps to fix the problem and help students receive the loan forgiveness to which they are entitled.”

The report, he said, “confirms serious problems” with the management of income-driven plans, including some issues brought to light in a recent NPR investigation that found inconsistencies in the way loan servicers treat and track payments.

The GAO said the Education Department had long been aware of inaccuracies dating back to the record-keeping of ACS Education Services, the sole servicer of federal student loans until 2009. The agency did not require the company to track qualifying payments, which became evident when vendors who received accounts from ACS discovered missing information, according to the report.

Servicers say they urged the department to revamp record-keeping and payment counts, which the department initially agreed to. It drafted plans between 2015 and 2017. But the initiative was shelved out of concern about the cost and complexity of manually reviewing documents for every loan in an income-driven plan.

The GAO argues that the department could have used the same approach it employed to identify high-risk loans for review without combing through every file.

Jason D. Delisle, a senior policy fellow in the Center on Education Data and Policy at the Urban Institute, said the department, loan servicers and Congress share the blame for the poor execution of income-driven repayment plans.

“Congress designed these programs and set these terms, and they are complicated and confusing to borrowers,” said Delisle, who co-authored a recent paper on reforming the income-driven repayment. “If you’re going to have these kinds of programs, you need really good administrative tracking systems that neither the servicers nor the department has put effort into.”

It is still unclear how the department will address some lingering deficiencies in the program. Because of an antiquated file system, the agency uses payment data that may be lost when loan accounts are transferred from one servicer to another. While Cordray told the GAO his office is developing a way to identify and correct inaccuracies, no timeline was given.

In the meantime, scores of accounts are being transferred between vendors amid the departure of the Pennsylvania Higher Education Assistance Agency and Granite State Management and Resources from federal student loan servicing. Some of those loans may contain erroneous payment counts without any clear sense of how they will be fixed.

Addressing breakdowns is important as the department transitions to a new servicing system, dubbed Next Gen, and shifts servicer roles and requirements, the GAO said.

“Although the planned transition provides opportunities to improve, implementing changes in the interim will better position Education to ensure all IDR borrowers receive timely IDR forgiveness,” GAO researchers said in the report.