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Department of Education Offers Proposed Hope for Student Loan Changes

The Department of Education announced a set of proposed changes to federal student loan programs.

It is interesting to note what is missing here. The two biggest fixes that are needed are the restoration of the discharge of student loan debt in bankruptcy as a regular debt and a fix for the spousal consolidation loan trap so many people are in.

Don’t get me wrong, all fixes to the broken federal student loan system are welcome.

You know it says a lot when all of the proposed changes are not enough.

The proposed regulations are just that, proposed. So don’t get all excited about these yet. We will have to see which way the political winds blow.

The proposed regulations will be published in the coming days and the public is invited to comment on the proposed regulations for 30 days. The Department aims to finalize these rules by November 1 of this year, meaning they will take effect no later than July 1, 2023. The rules propose needed and critical improvements to the student loan system including:

Borrower defense to repayment and arbitration

The proposed regulations would create a fair path for borrowers to receive a discharge if their colleges lied to or took advantage of them. This includes allowing for group claims, eliminating overly strict limits on when borrowers can file a claim, expanding the type of misconduct that can lead to an approved claim to include aggressive and deceptive recruitment practices, and ensuring borrowers receive timely decisions about their claims.

To curb predatory behavior by colleges, the Department proposes a strong process for recouping the costs of such discharges from the college, running for at least six years following the borrower’s last date of attendance at the school. The Department also proposes ensuring that borrowers whose schools take advantage of them be allowed their day in court, by prohibiting colleges from requiring borrowers to sign mandatory pre-dispute arbitration agreements or class-action waivers. Additional transparency into arbitration proceedings that do occur will help the Department investigate possible wrongdoing.

PSLF

The Department proposes to make it easier for borrowers working in public service to gain progress toward forgiveness. Specifically, the Department proposes allowing more payments to qualify for PSLF including partial, lump sum, and late payments, and allowing certain kinds of deferments and forbearances (such as those for Peace Corps and AmeriCorps service, National Guard duty, and military service) to count toward PSLF. The Department also proposes to ensure the rules work better for non-tenured instructors whose colleges need to calculate their full-time employment. It also seeks comments on how best to consider the eligibility for PSLF of doctors providing services at nonprofit hospitals in states that prohibit their direct employment by that hospital and employees of for-profit early education programs that are licensed and regulated. The Department also proposes to create a formal reconsideration process in the regulations for borrowers whose applications are denied.

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These proposed regulatory changes would build on parts of the limited PSLF waiver that the Department announced in October 2021. That waiver allows borrowers to count all their payments toward PSLF, provides for an automatic reconsideration process for borrowers whose payments or applications were previously denied, and provides for some automatic application of credit towards forgiveness. However, not all of the limited PSLF waiver provisions are included in the proposed regulations due to statutory restrictions. Borrowers seeking to count their payments on Federal Family Education Loans toward forgiveness should apply for PSLF before October 31, 2022.

Interest capitalization

The Department proposes to protect borrowers from seeing their balances balloon by removing instances of interest capitalization wherever it is not required by statute. Interest capitalization occurs when accrued interest is added to the principal balance of the loan, so that future interest accrues on a higher amount. The Department proposes to eliminate capitalization when a borrower enters repayment, exits forbearance, defaults on a student loan, and exits most of the income-driven repayment plans. These changes will help borrowers who struggle to repay their loans.

Total and permanent disability discharges

The proposed regulations would help more borrowers who are totally and permanently disabled receive and keep the discharge they are entitled to under the law. The proposed regulations would allow for a broader set of disability statuses recognized by the Social Security Administration (SSA) to qualify for discharge, eliminate the three-year income-monitoring period for borrowers who receive discharges based upon a determination by a physician or SSA, and widen the types of documentation and signatures borrowers may submit to demonstrate they are eligible for relief. The Department is particularly concerned that the income monitoring requirements have caused far too many borrowers to lose their discharges even though they still have low incomes.

Closed school discharges

In recent years, the Department has seen a significant number of college closures, and often these schools leave borrowers holding debt but no degree. Many of those borrowers default on their loans after the closure. The proposed regulations provide automatic discharges to any borrower who was enrolled within 180 days prior to the closure and who didn’t complete their education at the school or via an approved teach-out agreement at another school within one year after the closure of their original school.

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False certification

The Department proposes to streamline the rules for when a college falsely certifies a borrower’s eligibility for student loans when, in fact, the student was ineligible. These proposed rules would provide these borrowers with an easier path to a discharge. These improvements include expanding allowable documentation and clarifying the applicable dates for a discharge. The Department also proposes to allow for group false certification claims, so that similarly affected borrowers don’t need to individually apply for relief when sufficient evidence exists.

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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