Biden cancels $39 billion in student loans for 800,000 borrowers

More than 800,000 borrowers will have $39 billion in federal student loan debt canceled as part of a government effort to fix years of mistakes by loan providers collecting payments on behalf of the government.

Millions of other people’s loans will be modified as part of the program.

The exemption will go to those with federal loans directly owned by the Department of Education and who are enrolled in income-paid repayment plans. These plans limit the payments that borrowers owe for a percentage of their income. Under these plans, borrowers must make payments for a period usually of 20 or 25 years. At the end of that period, any remaining balance is forgiven.

More than eight million people use income-paid repayment plans, but for decades, many of the companies that bill borrowers have made serious mistakes in tracking payments and guiding borrowers through the payment process. These errors have caused millions of borrowers to fall further behind over the years as they seek to repay their loans.

“For too long, borrowers have fallen through the cracks of a broken system,” Miguel Cardona, the education minister, said on Friday.

The planned move comes two weeks after the Supreme Court struck down President Biden’s plan to cancel $400 billion in student loan debt for tens of millions of borrowers. The court ruled that the president lacked the authority to cancel debts on a large scale without express authorization from Congress.

But Friday’s much smaller amendment, which was separate and did not lead to court challenges, falls more under the education secretary’s authority to administer loan repayment programmes.

The education department said the debt cancellation — which will happen in the next few weeks — is part of a plan announced by the Biden administration last year to address the problem of servant errors. The administration decided to automatically and retroactively credit millions of borrowers for late or partial payments and for extended periods of time before the pandemic with their delinquent payments.

The 804,000 borrowers whose balances will be wiped out are those who, after adjustments, have made 240 or 300 monthly payments (depending on their payment plan) to clear out their remaining debt.

The ministry said last year that the so-called “patience directive” was a particularly glaring issue. Low-income borrowers could qualify for $0 monthly bills through income-driven repayment plans, but loan service providers often put distressed borrowers on forbearance—a move that kept their loans in good standing but meant interest continued to accrue, resulting in to inflated borrowers’ balances.

The Consumer Financial Protection Bureau in 2017 sued Navient, then one of the government’s largest providers of student loans, over these tactics. The lawsuit is still pending, but Navient no longer makes federal loans: It went out of business in 2021.

Borrowers who qualify for forgiveness will not have to apply – their debts will be automatically forgiven. “By fixing past administrative failures, we are ensuring that everyone gets the tolerance they deserve,” said Mr. Cardona.

About 45 million borrowers owe the government, Americans’ largest lender to higher education, totaling $1.6 trillion. Their loan payments have been on pause since March 2020 — a move President Donald J. Trump initiated as a pandemic relief measure, and Biden has extended it several times — but that pause will soon end. Borrowers will have to resume making payments again in October.