The Biden administration has released final regulations that will provide sweeping changes to the federal student loan system. The new rules will curtail interest accrual and expand relief under several existing student loan forgiveness programs.
The release of these final regulations is the next step in a long process that began last year with negotiated rulemaking, where the Education Department convened key stakeholders to review and approve proposed reforms to student loan programs.
“Today is a monumental step forward in the Biden-Harris team’s efforts to fix a broken student loan system and build one that’s simpler, fairer, and more accountable to borrowers,” said U.S. Secretary of Education Miguel Cardona in a statement on Monday.
Here’s an overview of the major changes that will result from the new regulations.
Student Loan Interest Capitalization Reforms
The new federal regulations will curtail student loan interest capitalization.
In many circumstances, student loan interest can accrue on top of a borrower’s monthly payments, such as when the borrower is in an income-driven repayment plan. In addition, interest can accrue during many periods of nonpayment, such as a forbearance. Over time, this interest accrual can result in steadily increasing balances.
Adding to the problem is that certain events can cause that accruing interest to be added back on to the loan principal balance through a process called interest “capitalization.” Since interest is charged as a percentage of the loan principal, capitalization has a compounding effect, where interest accrues on interest. This can lead to substantial balance increases.
The new federal regulations will eliminate certain interest capitalization events including when a borrower first enters repayment, when a borrower exits a forbearance, and when a borrower leaves most income-driven repayment (IDR) plans such as Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE). Interest will still be capitalized for borrowers who leave the Income-Based Repayment (IBR) plan, however, because changing that rule would require an act of Congress.
Expanded Student Loan Forgiveness
The final regulations released on Monday will also streamline and expand student loan forgiveness under several existing programs:
- For Borrower Defense to Repayment — a loan forgiveness program for borrowers misled or defrauded by their school — the new rules will strengthen protections for borrowers and expand the avenues of relief. The rules will allow the Education Department to provide individual or group relief, and will expand the categories of school misconduct that can give rise to a borrower claim. Borrowers will also be entitled to full relief (rather than partial relief, which had previously been permitted) for approved Borrower Defense claims.
- Borrowers will be entitled to automatic Closed-School Discharges “one year after a college’s closure date for borrowers who were enrolled at the time of closure, or [if they] left 180 days before closure and... do not accept an approved teach-out agreement or a continuation of the program at another location of the school.”
- Borrowers seeking loan forgiveness through the Total and Permanent Disability (TPD) discharge program will have an easier process of proving that they are disabled under the TPD standard. A greater percentage of borrowers receiving Social Security benefits will be entitled to relief automatically, and borrowers will no longer be subject to post-discharge income monitoring.
Additional Student Loan Relief Is Coming
The new federal regulations are expected to be effective by July 1, 2023. In the meantime, there are several other initiatives by the Biden administration that may provide significant relief for federal student loan borrowers by then, as well:
- The Limited PSLF Waiver, which temporarily relaxes key requirements associated with Public Service Loan Forgiveness, ends today. Millions of borrowers have already been approved. But there’s still time to apply.
- The Biden administration is in the process of developing a new Income-Driven Repayment (IDR) plan, which may be more affordable than current options and will also suspend excess interest accrual during periods where monthly payments do not cover all accruing interest.
- The Education Department is starting to roll out the IDR Account Adjustment initiative, which will provide retroactive credit towards borrowers’ 20-year and 25-year IDR student loan forgiveness terms, bringing millions of borrowers closer to eventual loan forgiveness.
- The administration is still accepting applications for its one-time student loan forgiveness initiative of $10,000 or $20,000. A federal appeals court has temporarily blocked the plan, but the Education Department is still encouraging borrowers to submit a student loan forgiveness application.
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