On Friday, the Department of Education announced that it will begin discharging student loan debts for borrowers who’ve been in repayment for 20-25 years under a one-time payment adjustment.
Around 800,000 borrowers will have $39 billion in federal student loans discharged as a result.
President Biden said that the previously announced one-time adjustment will become an even more important lifeline for struggling borrowers when repayments start in September.
"For far too long, borrowers fell through the cracks of a broken system that failed to keep accurate track of their progress towards forgiveness," Miguel Cardona, US Secretary of Education, said in a press release. "Today, the Biden-Harris Administration is taking another historic step to right these wrongs and announcing $39 billion in debt relief for another 804,000 borrowers. By fixing past administrative failures, we are ensuring everyone gets the forgiveness they deserve, just as we have done for public servants, students who were cheated by their colleges, and borrowers with permanent disabilities, including veterans."
The one-time payment adjustment counts certain months that were previously ineligible toward student loan forgiveness under income-driven repayment plans, or IDRs. Around 3.6 million borrowers would receive at least three years of credit toward forgiveness as a result, according to Federal Student Aid.
"The one-time adjustment hasn’t gotten the attention it deserves as it remedies decades of a broken system due to forbearance steering on behalf of loan servicers," Persis S. Yu, deputy executive director of Student Borrower Protection Center (SBPC), told Yahoo Finance. "Millions of borrowers will benefit."
In April 2022, the Education Department announced the one-time payment adjustment for all Direct Loans and federally owned Federal Family Education Loans (FFELs). The adjustment to student loan accounts would go toward helping borrowers get closer to forgiveness under income-driven repayment plans, which offer cancellation after 20 or 25 years, depending on the particular plan.
After the adjustment, borrowers with 20 or 25 years of repayment history automatically get forgiveness even if they aren’t enrolled in an income-driven repayment plan.
FFEL borrowers with commercially-held loans can benefit from the adjustment too if they consolidate their loans with Federal Student Aid by December 31, 2023.
Default borrowers have until December 31, 2023, to use the Fresh Start Program to become in good standing and take advantage of the one-time payment adjustment.
The one-time payment adjustment helps to reverse some of the damage caused by loan servicers that did not properly track deferments or steered borrowers to forbearance instead of income-driven repayment plans, which would have counted toward years of payment.
"Of the 4.4 million people who should have gotten their debts canceled if IDR worked, fewer than 200 ever have," Thomas Gokey, policy director at the nonprofit Debt Collective, told Yahoo Finance. "The IDR [one-time] adjustment should address some of that, but let's be honest about what that means: IDR was a broken promise and people are being let out after an enormous amount of damage was done."
Many borrowers may be unaware of the adjustment and how it may help them due to the Supreme Court case taking center stage.
"That’s because some loan servicers and the education department have not done a good job of informing borrowers about the one-time payment adjustment," Katherine McKay, associate director of insights and evidence at the Aspen Institute Financial Security Program, told Yahoo Finance.
Some borrowers in the public service loan forgiveness (PSLF) program have already seen payment adjustments to their accounts. Other borrowers have reported receiving emails from the Education Department early Friday morning.
"The Department of Education's announcement is a cause for celebration and a testament to the power of advocacy and collective action," Cody Hounanian, executive director of the Student Debt Crisis Center, said in a press release. "It is a reminder that progress can be made, and that a fairer, more just society is within our reach."
Learn more about the one-time payment adjustment here.
Ronda Lee is a personal finance senior reporter for Yahoo Finance and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda