A newly discovered student loan forgiveness loophole may allow more borrowers to qualify for immediate student loan forgiveness, not just those with an original principal loan balance of $12,000 or less.

The U.S. Department of Education has announced early implementation of the accelerated forgiveness for borrowers with low initial loan balances in the SAVE repayment plan.

The SAVE plan included some unique loan forgiveness programs, but upon closer inspection of the actual regulations being used to authorize this loan forgiveness, there may be a more promising opportunity.

Fast-Tracked Forgiveness

Normally, if a final rule is published in the Federal Register by November 1, the regulation goes into effect on the following July 1, which would be July 1, 2024 in the case of the SAVE plan.

For example, cutting the monthly payments on undergraduate debt in half, from 10% of discretionary income to 5%, is scheduled to go into effect on July 1, 2024. Likewise, forgiving the debt of borrowers with low original loan balances was scheduled to start on July 1, 2024.

However, the U.S. Secretary of Education has the authority under section 482(c) of the Higher Education Act of 1965 [20 USC 1089(c)] to implement regulatory changes early.

The U.S. Secretary of Education published a notice in the Federal Register on January 16, 2024, announcing an early implementation date of January 21, 2024 for the accelerated student loan forgiveness provisions.

If a borrower’s original principal balance is less than or equal to $12,000, the remaining debt will be forgiven after 120 qualifying payments (10 years) instead of 240 payments (20 years) or 300 payments (25 years). Each additional $1,000 in original loan debt increases the repayment term by one year. For example, a borrower who borrowed $14,000 will have the remaining debt forgiven after 12 years of payments.

Borrowers can find information about their original principal balance on StudentAid.gov or their loan servicer’s website.

Borrowers must switch into the SAVE repayment plan to qualify. They can switch by filing an Income-Driven Repayment (ICR) Plan Request form and choosing the SAVE repayment plan. They will need to authorize the transfer of income data from the IRS to the U.S. Department of Education.

Once their loans are in the SAVE plan, the forgiveness will be automatic when the borrower becomes eligible for forgiveness. Some borrowers are already eligible. The U.S. Department of Education will begin notifying borrowers who are eligible for forgiveness that their loans are canceled in February 2024.

Section 9675 of the American Rescue Plan Act of 2021 [P.L. 117-2] temporarily excludes student loan forgiveness and discharge from income through December 31, 2025. This makes student loan forgiveness, including forgiveness at the end of an income-driven repayment plan like the SAVE plan, tax-free on federal income tax returns and most state income tax returns.

Related: Taxes and Student Loan Forgiveness

The Student Loan Forgiveness Loophole

A careful reading of the new regulations reveals a possible loophole that will enable more borrowers to qualify for accelerated student loan forgiveness.

The regulations at 34 CFR 685.209(k) describe the criteria for forgiveness in the SAVE plan after a number of payments. Paragraph (3) specifies the criteria for forgiveness for low original loan balances, namely:

The REPAYE plan mentioned in this excerpt is now known as the SAVE plan.

Thus, the accelerated forgiveness is based on the loans that are being repaid under the SAVE plan, not the total student loan debt owed by the borrower. The original principal balance of loans that aren’t being repaid under the SAVE plan does not appear to count against the forgiveness requirement.

So, a borrower who has made 120 qualifying payments (10 years of payments) on their loans could move up to $12,000 of those loans into the SAVE repayment plan and qualify for immediate forgiveness of those loans. Then, after the first set of $12,000 in loans is forgiven, they could repeat the process for the next set of $12,000 in loans each month until all of the loans are forgiven.

In short, there is no cap on the amount of times $12,000 can be forgiven assuming you meet the other criteria.

How Do You Only Move $12,000 Into SAVE At A Time?

The discussion about student loan debt typically focuses on the "average" student loan debt, but the reality is most college graduates have 1-2 student loans per year in school. In fact, it's very common for graduates to have 4-5 individual loans when they graduate.

For a dependent student, the annual loan limits are $5,500, $6,500, $7,500 and $7,500. For an independent student, $9,500, $10,500, $12,500 and $12,500. But, subsidized loans are part of each year's loans, splitting them.

For the 2022-2023 school year, the average subsidized loan was $3,665 and the average unsubsidized loan was $4,026.

Most borrowers should be able to pick 2-3 of their loans that sum to less than $12,000 to enroll in the SAVE plan, while keeping their other loans on another repayment plan. A borrower can then repeat the process of enrolling $12,000 into SAVE once the first set of loans is forgiven.

Note: For borrowers who consolidated into larger loans (or who already had larger loans), this loophole would not apply.

What Payments Count Towards Loan Forgiveness?

The regulations at 34 CFR 685.209(k)(4) specify which payments count toward forgiveness.

This includes payments made under an income-driven repayment plan (including a payment obligation of zero) and payments made under the standard 10-year repayment plan.

Payments made under other repayment plans will count if they are at least as much as they would have been under the standard 10-year repayment plan. (This includes borrowers who were in the REPAYE/SAVE plan but who were placed in a standard 10-year repayment plan after failing to complete the annual recertification, but with a cap of 12 months.) Payments under extended repayment or graduated repayment will not count if they are less than the standard 10-year repayment plan amount.

Time spent in certain deferments and forbearances will count toward forgiveness, including

• Cancer treatment deferment
• Rehabilitation training program deferment
• Unemployment deferment
• Economic hardship deferment (including volunteer service in the Peace Corps)
• Military service deferment and the post active-duty student deferment
• National service forbearance
• National guard duty forbearance
• Department of Defense Student Loan Repayment forbearance (on or after July 1, 2024)
• Administrative forbearance (on or after July 1, 2024)
• Bankruptcy forbearance (on or after July 1, 2024) if the borrower made the required payments on a confirmed bankruptcy plan

In addition, a lump sum payment will count as the equivalent number of monthly payments, per the regulations at 34 CFR 685.219(c)(2).

Qualifying payments made prior to consolidation into a Federal Direct Consolidation Loan also count.

Section 3513(c) of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) [P.L. 116-136] provided that paused payments during the payment pause and interest waiver count toward loan forgiveness as though they were made.

If a borrower is in default, they are eligible for forgiveness if they rehabilitate the loans and switch them into the SAVE plan. Rehabilitation defaulted federal student loans requires making 9 out of 10 consecutive, full, voluntary, reasonable and affordable monthly payments by the due date pursuant to a loan rehabilitation agreement.

Payments made while loans were in default do not count toward forgiveness, with one exception. Payments made under Income-Based Repayment (IBR), including a calculated payment obligation of zero, and payments made under standard 10-year repayment count toward forgiveness. Amounts collected through administrative wage garnishment or Treasury Offset count as the equivalent number of payments under IBR or standard repayment. However, the number of payments that may count under IBR is capped at the number of payments until the next recertification date.

Other Issues Affecting Eligible Payment Counts

More than 3.5 million borrowers in an income-driven repayment plan will receive a payment count adjustment for qualifying payments that weren’t previously counted.

This may reduce the amount of time remaining until the remaining debt is forgiven or may even lead to immediate forgiveness if the borrower has otherwise satisfied the requirements for forgiveness.

The payment count adjustment will include the following adjustments:

• Forbearance steering: Adjustments will be made for 12 or more months of consecutive forbearance or 36 or more months of cumulative forbearance.
• Loan servicers failed to track eligible deferments: This includes all economic hardship and military service deferments starting in 2013. In addition, all months spent in any deferment prior to 2013, other than an in-school deferment, will be counted. Although only the economic hardship and military service deferments previously counted toward forgiveness in an income-driven repayment plan, the U.S. Department of Education is unable to distinguish the type of deferment prior to 2013, so all deferments will be counted.
• Payments prior to consolidation: Previously, consolidating a loan reset the qualifying payment count to zero. This change counts payments (and deferments and forbearances, as applicable) made on loans prior to consolidation.

The U.S. Department of Education is also counting all time spent in a repayment status, regardless of the type of loan, repayment plan or whether payments were partial or late.

The U.S. Department of Education expects to complete the payment count adjustments by July 1, 2024, but there may be further delays. So borrowers who have just a few months or years left on their loans should be patient while waiting for the adjustments to occur.

If a borrower is not currently in an income-driven repayment plan, they will nevertheless benefit from the payment count adjustment. If they later switch into an income-driven repayment plan, they will receive credit for the correct number of payments.

The buyback program, which is not yet implemented, will allow borrowers with deferments and forbearances that don’t count toward forgiveness to make retroactive payments for the deferments and forbearances. Only deferments and forbearances within three years of the additional payment are eligible and the additional payments must occur on or after July 1, 2024. The additional payments must be at least the amount of the borrower’s current income-driven repayment plan payment, including a calculated payment obligation of zero.