Biden administration unveils sweeping new rules to cut student loan interest and improve student loan forgiveness programs

The Biden administration on Wednesday released new draft regulations that would significantly reform the federal student loan system. The proposed changes would curb runaway growth in balances due to capitalization of student loan interest, and streamline and expand existing student loan forgiveness programs.

The proposed new regulations follow a series of rulemaking sessions negotiated last year, in which a committee of key stakeholders (including government officials, student borrowers, student loan servicers and schools) attempted to reach consensus on key reform packages. While the proposed rules would fix many problems within the student loan system, some stop short of more sweeping changes that student loan advocates have been pushing for.

“We undertake to repair a faulty system. If a borrower qualifies for student loan relief, they shouldn’t need mountains of paperwork or a law degree to get it,” US Education Secretary Miguel Cardona said in a statement. communicated. “Nor should the benefits of student loans be so difficult to obtain that borrowers never actually benefit…These proposed regulations will protect borrowers and save them time, money and frustration. “

Here are the details.

New rules would limit interest capitalization on student loans

Under many federal student loan repayment plans tied to a borrower’s income, a borrower’s monthly payment may not be enough to cover monthly accrued interest. Also, during most periods of nonpayment — including most deferments, forbearances, and grace periods — interest will continue to accrue on most types of federal student loans. The result is that over time, a borrower’s federal student loan balance may increase, not decrease, even if they meet their repayment obligations.

In addition, certain events under federal law may cause such accrued interest to be “capitalized”, which means that the accrued interest is added to the principal balance of the loan. From there, interest continues to accrue on that larger principal balance. Since interest is charged as a percentage of the loan principal, compounding interest can have a cumulative effect, causing the balance to grow wildly and effectively trapping borrowers in debt.

Under the new regulations proposed by the Ministry, most interest-generating events will be eliminated. This includes when a borrower enters repayment, exits a forbearance period, defaults on their loan, and leaves most income-based repayment plans (except income-based repayment). The proposed rules do not completely prevent interest on student loans from accumulating and would not reverse past interest capitalization, but would significantly reduce future runaway balance increases associated with interest capitalization.

New rules would improve student loan forgiveness for borrowers working in the civil service

The proposed new regulations would also improve Public Service Loan Forgiveness (PSLF) – a student loan forgiveness program for borrowers who commit to working for nonprofit or public organizations for at least 10 years. The proposed rules would codify some of the temporary changes implemented by the Biden administration under the Limited PSLF Waiver program, which is expected to end in a few months.

Under the proposal, the Ministry of Education would allow more types of payments to count for the PSLF (including partial payments, lump sum payments and untimely payments). The Department would also be able to count certain periods of deferment and forbearance toward the PSLF, including deferments due to economic hardship, deferments for military service, and involuntary administrative forbearances initiated by loan servicers. And the Department would add flexibility to qualifying job definitions for nonpermanent university instructors.

The rule changes would also allow, to the extent possible, automatic cancellation of student loans through the PSLF, and codify a PSLF reconsideration process for borrowers who have been denied student loan cancellation. The Biden administration launched a process to review the PSLF in the spring.

But the proposed rule changes don’t go as far as the PSLF’s limited exemption counting long past periods of repayment, deferment and forbearance on nearly all types of federal student loans. And the changes do not include the more sweeping reforms some student loan advocacy groups had hoped for, including a more dramatic expansion of eligible PSLF employment to include independent contractors who work exclusively in the civil service space.

“Any PSLF-limited waiver provisions are not included in the proposed settlement due to legal restrictions,” the Department of Education said in a statement. “Borrowers seeking to count their payments” under the provisions of the limited PSLF waiver “should apply for the PSLF by October 31, 2022, when it expires.

Changes to student loan forgiveness for borrowers defrauded by their school

The proposed rule changes would also reform Borrower Defense of Repayment, a federal student loan forgiveness program for borrowers who have been defrauded by their school. Under current regulations, student borrowers can seek student loan forgiveness through Borrower Defense until Repayment if a school has misled them about key elements of their program such as admissions selectivity, employment prospects or the transferability of their credits to other institutions.

Proposed new borrower defense rules would expand the definition of academic misconduct that would give rise to a potential claim, including “material misrepresentations,” “material omissions of fact,” and “aggressive recruiting” practices. and misleading”. The settlement would also include a review and appeal process for borrowers who are denied student loan forgiveness under the program, and make it easier to apply for and obtain relief for groups or classes of students. borrowers in the same situation.

The proposed rule changes follow recent actions by the Biden administration to provide sweeping borrower defense relief to hundreds of thousands of student borrowers who have been the subject of false promises and misrepresentations by the from their schools. The new borrower defense rules would replace a patchwork of existing regulations that provide different standards of relief for borrowers depending on when they took out their student loans.

Next steps

The regulatory overhaul of these programs has yet to be finalized, and the Ministry of Education has invited public comment on certain elements of the proposals, including the PSLF. Once finalized, the rules are expected to come into force on July 1, 2023.

In the meantime, the Biden administration is grappling with a host of major student loan decisions, including extending the current student loan payment pause (which ends August 31), extending the limited PSLF waiver (which ends October 31), and whether to enact large-scale student loan forgiveness.

Further Reading on Student Loans

3 Key Student Loan Forgiveness Opportunities Could End Soon – Here’s How to Apply

If You’ve Been To These Schools, You May Qualify For Student Loan Forgiveness: Here’s What To Do

264,000 borrowers to receive $6 billion in student loan forgiveness in ‘historic’ settlement deal with Biden administration

Biden Reportedly Close to Making a Decision on Widespread Student Loan Forgiveness – Here’s Where It Stands

Bernadine J. Perkins