Failing to Inform Borrowers About the Looming IDR Account Adjustment Deadline Likely Violates Consumer Protection Law
There have been several major announcements and deadlines related to federal student loans this year. The Supreme Court’s rejection of President Biden’s debt relief program, the rollout of a new, more affordable repayment plan, and bills going out after 3.5 years of a payment pause, to name a few. There is one looming deadline, however, that is fast approaching and has not been properly conveyed to borrowers: the opportunity for debt cancellation through the Income-Driven Repayment (IDR) Account Adjustment.
Federal and state consumer protection agencies have a duty to ensure that borrowers are made aware of important programs like the IDR Account Adjustment. One cost-effective and targeted way to do this is to inform the student loan servicing industry that any failure to properly communicate the IDR Account Adjustment to borrowers represents a material omission in violation of consumer protection law. SBPC sent a memorandum to consumer protection agencies urging them to issue industry guidance to this effect. This blog summarizes that memo.
The IDR Account Adjustment Addresses Past Servicer Misconduct to Deliver Congressionally Provided Debt Cancellation.
Under the IDR plans, borrowers’ monthly payments are based on what they earn, not what they owe. In this way, they are meant to make payments more affordable. An important feature of the IDR plans is that they offer complete debt cancellation to borrowers who have been enrolled in one of the IDR plans for at least 20 years. (The new SAVE plan will cancel debts after 10 years for some borrowers.) The rationale for this debt cancellation is that if a borrower is making lower payments, they might not cover their monthly interest accrual, so over time their balance will increase rather than decrease. To avoid a permanent debt trap, the program provides for eventual debt cancellation.
In practice, however, borrowers were not receiving this debt cancellation. Investigations by advocates, journalists, and the federal Government Accountability Office all found that of the over 4 million borrowers whose loans were at least 20 years old and so should have been eligible for IDR debt cancellation, fewer than 200 had had their debts cancelled through the program. This was in large part due to years of steering by student loan servicers, the practice of directing borrowers toward forbearances and away from IDR plans. Steering, which is well documented by law enforcement, is more financially advantageous to student loan servicers, but robs borrowers of qualifying time toward IDR cancellation.
To address this servicer misconduct and restore the IDR eligibility that had been stolen from millions of borrowers, in April 2022 the Biden Administration announced the IDR Account Adjustment. Under the adjustment, the U.S. Department of Education (ED) is crediting borrowers’ accounts for any time spent in repayment, even if they were not enrolled in an IDR plan, and with certain time in deferment and forbearance. Once their accounts are credited, borrowers who meet the minimum required time in repayment will have their debts cancelled, and all other borrowers will be able to accrue more time by affirmatively enrolling in an IDR plan and continuing to make payments until they are eligible for cancellation. Since August 2023, nearly one million borrowers have already had their debts cancelled through the adjustment.
Borrowers With Older Loans Stand to Gain the Most From the IDR Account Adjustment, But Are Also the Only Population That Will Not Receive Its Benefits Automatically.
The IDR Account Adjustment is not automatic for all borrowers: only those whose loans are owned by the federal government receive automatic benefits. Some older federal loans known as Federal Family Education Loan (FFEL) program loans are not all owned by the federal government, instead, they are held by private entities and are known as “commercially held FFEL” or “commercial FFEL” loans. These FFEL loans were originated by private banks and were merely insured by the federal government but are still considered “federal loans” under federal law. The FFEL program ended in 2010, at which point the Direct Loan program—loans both issued and owned directly by ED—became the primary federal student loan program. This means that all commercial FFEL loans are at least 13 years old, and some are even over 30 years old. As a result, many FFEL borrowers could have their loans cancelled under the IDR Account Adjustment. Although ED has acquired many of these loans over the years, approximately 4.3 million borrowers’ loans are still commercially owned or are with intermediary entities called Guaranty Agencies, totaling approximately $110 billion. Each year ED publishes a list of the largest FFEL holders.
In order to benefit from the IDR Account Adjustment, commercial FFEL borrowers must “consolidate” their loans by December 31, 2023. Consolidation is the process of taking out a new federal Direct Consolidation Loan to pay off one or more existing federal student loans, including commercial FFEL loans. It is similar to refinancing on the private market and has the practical effect of moving commercial FFEL loans into ED’s own portfolio. The consolidation application is easy and can be done online in a matter of minutes.
In order to consolidate and benefit from the IDR Account Adjustment, however, commercial FFEL borrowers must be aware that this one-time opportunity exists, must identify themselves as the class of borrower who must take the affirmative step of consolidating their loans, and must do so by the December deadline. Given all of the confusion and changes in the student loan landscape, this is more difficult than it may seem. Many borrowers do not even know that they have commercially held FFEL loans. FFEL loan holders and their servicers, however, are uniquely positioned to communicate these instructions directly to these borrowers. To date, the SBPC is unaware of any targeted communication from these companies about the IDR Account Adjustment.
Failing to Inform Commercial FFEL Borrowers About the Opportunity to Benefit From the IDR Account Adjustment Likely Violates State and Federal Consumer Protection Law.
Under the federal Consumer Financial Protection Act of 2010 (CFPA), it is unlawful for covered persons—which includes student loan servicers—to engage in an unfair, deceptive, or abusive act or practice, or so-called “UDAAPs.” This UDAAP consumer protection can be enforced by the federal Consumer Financial Protection Bureau (CFPB) and by state attorneys general and financial regulators. States also have their own UDAAP laws, which generally apply to firms like FFEL holders and servicers and which prohibit some combination of unfair, deceptive, and abusive acts or practices. At least 19 states across the country have also passed legislation that specifically regulates the student loan servicing industry. These “Borrower Bill of Rights” laws include UDAAP provisions specific to the servicing of both federal and private student loans.
The “deceptive practices” component of UDAAP laws generally includes representations, omissions, acts, or practices. Specifically, under the federal standard, there is a three-prong test to determine whether something is an unlawful deceptive act or practice. A representation, omission, act, or practice is deceptive when:
- It misleads or is likely to mislead a consumer;
- The consumer’s interpretation of the representation, omission, act, or practice is reasonable; and
- The misleading representation, omission, act, or practice is material.
A representation, omission, act, or practice is material if it is likely to affect a consumer’s choice of, or conduct regarding, a product or service. Put differently, it is important “if it is likely to be considered important by consumers.”
Failing to directly inform commercial FFEL borrowers about the upcoming deadline to consolidate and benefit from the IDR Account Adjust is a material omission. To a commercial FFEL borrower, the fact that they could receive complete debt cancellation by taking a simple administrative step would likely be considered important. It is certainly information that would likely affect a consumer’s choice—to consolidate, to make payments, to seek other debt relief, etc…—about their federal student loan, which is a product, or about how they engage with their student loan servicer, which is a service.
The CFPB, State Attorneys General, and Financial Regulators Should Put Commercial FFEL Holders and Servicers on Notice That They Will Hold Them Accountable for Failing to Communicate About the IDR Account Adjustment.
Commercial FFEL borrowers have seven weeks before the December 31, 2023, deadline to submit a consolidation application for their loans and benefit from the IDR Account Adjustment. Loan holders and servicers are uniquely positioned to convey this important information directly to these borrowers but have not done so.
Federal and state regulators and law enforcement should issue guidance to commercial FFEL holders and servicers that it is a material omission in violation of federal and state consumer protection law not to inform their federal student loan borrowers about their opportunity under the IDR Account Adjustment, the steps they need to take to benefit from this opportunity, and the deadline to do so.
Such a guidance letter would not be unusual. In 2022, the CFPB issued a bulletin to federal student loan servicers about the Limited Public Service Loan Forgiveness (PSLF) Waiver, a limited-time opportunity for public service workers to obtain debt cancellation similar to the IDR Account Adjustment. In the bulletin, the Bureau expressed its expectation that “servicers comply with Federal consumer financial protection laws[,]” and informed industry that it would “pay particular attention to . . . [w]hether servicers take steps to promote the benefits of the PSLF waiver to borrowers who express interest or whose files otherwise demonstrate their eligibility.” (Emphasis added.) Here, every commercial FFEL borrower is eligible for the IDR Account Adjustment, and so commercial FFEL servicers should promote the benefits of the opportunity to their entire portfolio of borrowers.
For many borrowers, this is a once-in-a-lifetime opportunity to become debt free. It is an opportunity originally conveyed by Congress in the Higher Education Act, being reaffirmed and extended to borrowers by the Biden Administration as a remedial measure after the federal government’s own student loan servicers interfered with borrowers’ rights. The borrowers who stand to benefit the most from the account adjustment are definitionally older borrowers who have had their loans for at least 20 years. State and federal consumer protection agencies must act to ensure these borrowers are finally given their statutory right to debt cancellation and that the same servicers whose misconduct necessitated the account adjustment do not stand in the way a second time.