The Biden administration on Wednesday released proposed new regulations that would significantly reform the federal student loan system. The proposed changes would curb runaway balance growth due to student loan interest capitalization, and would streamline and expand existing student loan forgiveness programs.
The proposed new regulations follow a series of negotiated rulemaking sessions last year, during which a committee of key stakeholders (including representatives for government, student loan borrowers, student loan servicers, and schools) tried to reach consensus on key sets of reforms. While the proposed rules would address many issues within the student loan system, some stop short of more sweeping changes that advocates for student loan borrowers had called for.
“We are committed to fixing a broken system. If a borrower qualifies for student loan relief, it shouldn’t take mountains of paperwork or a law degree to obtain it,” said U.S. Secretary of Education Miguel Cardona in a statement. “Student loan benefits also should not be so hard to get that borrowers never actually benefit from them… These proposed regulations will protect borrowers and save them time, money, and frustration.”
Here are the details.
New Rules Would Limit Student Loan Interest Capitalization
Under several federal student loan repayment plans tied to a borrower’s income, a borrower’s monthly payment may not be sufficient to cover monthly interest accrual. In addition, 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 a time, a borrower’s federal student loan balance may increase, not decrease, even while they comply with their repayment obligations.
In addition, certain events under federal law can cause that accrued interest to “capitalize” — meaning the accrued interest is added to the loan’s principal balance. From there, interest continues to accrue on that larger principal balance. Since interest is charged as a percentage of the loan principal, interest capitalization can have a compounding effect, leading to runaway balance growth and effectively trapping borrowers in debt.
Under the Department’s proposed new regulations, most interest-capitalizing events will be eliminated. This includes when a borrower enters repayment, exits a forbearance period, defaults on their loan, and exits most income-driven repayment plans (with the exception of Income-Based Repayment). The proposed rules do not stop student loan interest from accruing altogether, and would not reverse past interest capitalization, but would dramatically curtail future runaway balance increases associated with interest capitalization.
New Rules Would Improve Student Loan Forgiveness For Borrowers Working in Public 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 set to end in a few months.
Under the proposal, the Education Department would allow more kinds of payments to count towards PSLF (including partial payments, lump sum payments, and untimely payments). The Department would also be able to count certain deferment and forbearance periods towards PSLF including economic hardship deferments, deferments for military service, and involuntary administrative forbearances initiated by loan servicers. And the Department would add flexibility to qualifying employment definitions for non-tenured academic instructors.
The rule changes would also allow automatic student loan forgiveness through PSLF where possible, and would codify a PSLF reconsideration process for borrowers denied student loan forgiveness. The Biden administration rolled out a PSLF reconsideration process in the spring.
But the proposed rule changes do not go as far as the Limited PSLF Waiver in counting broad past periods of repayment, deferment, and forbearance on nearly any kind of federal student loan. And the changes do not include more sweeping reforms that some student loan borrower advocacy groups had hoped for, including a more dramatic expansion of qualifying PSLF employment to include independent contractors who work exclusively in the public service space.
“Not all of the limited PSLF waiver provisions are included in the proposed regulations due to statutory restrictions,” said the Department of Education in a statement. “Borrowers seeking to count their payments” under the provisions of the Limited PSLF Waiver “should apply for PSLF before October 31, 2022,” which is when it expires.
Changes to Student Loan Forgiveness For Borrowers Defrauded By Their School
The proposed rule changes would also reform Borrower Defense to Repayment, a federal student loan forgiveness program for borrowers who were defrauded by their school. Under current regulations, student loan borrowers can apply for student loan forgiveness through Borrower Defense to repayment if a school misled them about key elements of their program such as admissions selectivity, job prospects, or the transferability of their credits to other institutions.
The proposed new Borrower Defense rules would broaden the definition of school misconduct that would give rise to a potential claim, including “substantial misrepresentations,” “substantial omissions of fact,” and “aggressive and deceptive recruitment” practices. The regulations would also include a reconsideration and appeal process for borrowers denied student loan forgiveness under the program, and would make it easier for groups or classes of similarly situated borrowers to request and receive relief.
The proposed rule changes follow recent actions by the Biden administration to provide sweeping Borrower Defense relief for hundreds of thousands of student loan borrowers who were subjected to false promises and misrepresentations by their schools. The new Borrower Defense rules would replace a patchwork of existing regulations that provide for different relief standards for borrowers depending on when they took out their student loans.
The regulatory overhaul of these programs still must be finalized, and the Department of Education has invited public comment on certain elements of the proposals, including PSLF. Once finalized, the rules are expected to be effective as of July 1, 2023.
In the meantime, the Biden administration is contending with a host of major student loan decisions including whether to extend the ongoing student loan payment pause (which ends on August 31), whether to extend the Limited PSLF Waiver (which ends on October 31), and whether to enact wide-scale student loan forgiveness.