In a significant development impacting higher education financing, more than 300,000 applicants for income-driven repayment (IDR) plans for student loans faced rejection by the US Department of Education. This move, revealed in a recent court filing, has created a major hurdle for borrowers seeking manageable monthly payments and a path to eventual loan forgiveness.
Scale of the Rejection and Mounting Backlog
The court document disclosed that the Education Department turned down a staggering 327,955 requests in August alone. This mass denial has forced numerous borrowers into a difficult position, either saddled with unexpectedly high monthly payments or placed in forbearance while interest continues to pile up on their loans. IDR plans are a critical lifeline for millions, designed to keep payments affordable based on income and to count towards forgiveness programs like the Public Service Loan Forgiveness (PSLF).
Compounding the problem is a massive application backlog. As of the end of November, the department still had 802,730 IDR applications pending review. Consumer advocates have raised serious concerns about these figures. Persis Yu, deputy executive director at the Student Borrower Protection Center, warned CNBC that this situation could significantly delay progress towards loan cancellation for many, causing borrowers to lose qualifying months for both IDR and PSLF forgiveness while paying more each month.
Reasons Behind the Denials and Expert Scrutiny
According to the court filing, department officials attributed the wave of rejections to an "unforeseen ambiguity" in applications. They explained that when borrowers selected the option requesting the plan with the lowest monthly payment, two different repayment plans sometimes calculated identical amounts, creating confusion. The department's response was to deny these applications on procedural grounds.
However, this justification has been challenged by experts. Persis Yu pointed out to CNBC that the IDR application form already includes a mechanism for such scenarios by requiring applicants to rank their plan preferences. Higher education expert Mark Kantrowitz also questioned the department's reasoning, telling CNBC that it appeared weak and inconsistent with long-standing practice to reject applications on such a large scale for this reason.
What Affected Borrowers Should Do Now
This setback comes at a precarious time, with student loan default rates on the rise. The Education Department has previously stated that over five million borrowers are currently in default, a number that may climb to 10 million. The department confirmed to CNBC that wage garnishment for borrowers in default will resume in early January.
For those whose IDR applications were denied, Mark Kantrowitz advises submitting a new application immediately. He strongly recommends that applicants select a specific repayment plan by name rather than opting for the generic "lowest payment" choice. With the Biden administration's SAVE plan currently blocked by a court and older plans being phased out, Kantrowitz suggests the Income-Based Repayment (IBR) plan may now be the most viable option for many. Under IBR, payments are typically 10% (or 15% for older loans) of a borrower's discretionary income.
Borrowers are encouraged to use the comparison tools available on the official StudentAid.gov website to evaluate their options before reapplying. This issue underscores the ongoing challenges within the massive US student loan system, which involves over 42 million Americans holding a combined debt exceeding $1.6 trillion.
