Biden Administration may outline far-reaching changes in student loan issuance and repayment programs
The Biden government is preparing to move forward with a process to potentially make sweeping changes to key federal student loan forgiveness, repayment and assistance programs.
The US Department of Education released Design proposals for reforms to federal student loan programs as part of the negotiated rulemaking process, which is a process to recast federal regulations. The division has also finalized the negotiated rulemaking committee, composed of key stakeholders who will work together over the course of several rounds of public hearings to find consensus. The proposals were initially approved by POLITICO.
The administration’s proposals call for significant changes to a number of federal student loan programs.
Reforms of the discharge in the event of complete and permanent disability (TPD) for federal student loans
The Total and Permanent Disability Discharge Program (TPD) cuts federal student loan debt for disabled borrowers. The ministry proposes several reforms:
- Eliminate post-discharge monitoring. Under current law, borrowers are required to report their employment status and earned income for three years after they are released from the TPD. If they don’t react or if they earn too much, the loans that have been disbursed can be resumed. The Biden government recently suspended the surveillance period through executive action and is now calling for the change to be permanent.
- Make it easier for borrowers receiving Social Security disability benefits to qualify for a TPD initiation by expanding the number of SSA categories that would result in automatic initiation and the type of SSA documentation that can be accepted for discharge approval.
- Ease the eligibility for non-social security recipients. by having a medical service provider other than a doctor certify that they are disabled. Currently, only a doctor or a DO can certify a TPD discharge request. Nurses, medical assistants and therapists cannot do this.
Public Service Lending Reforms (PSLF)
The Public Service Loan Forgiveness (PSLF) program enables borrowers to waive their federal student loans after 10 years or more of skilled public service employment. But the PSLF program has specific and often opaque eligibility criteria that limit the program to direct federal student loans and income-based repayment plans. These criteria have not been well communicated to borrowers in the past, which has contributed to a very low approval rating.
The government proposes many PSLF reforms:
- Automatic PSLF applications. Currently, borrowers must approve PSLF application or certify their employment. The department suggests using data matching tools between different federal agencies to automatically identify qualifying employment and payments, and to reduce the likelihood of human error from manual application reviews.
- More flexibility when paying. The ministry suggests relaxing the stringent requirements for “counting” a PSLF payment by allowing many more payments, “even if the payment is made in multiple installments or outside the 15-day payment window allowed under the PSLF program “. Lump sums would also count towards multiple PSLF payments, reversing previous policies that prohibited this.
- Allow certain deferrals and deferrals to be considered payments in cases where this status would otherwise count towards qualifying PSLF employment, such as
- Eliminate the direct consolidation trap. Currently, federal student loan consolidation is effectively restarting the clock for a borrower’s PSLF repayment period. The ministry is proposing to change this, including for consolidation loans that include FFEL loans that do not count towards the PSLF. It is not entirely clear whether the ministry is also proposing to count FFEL payments against the PSLF after direct loan consolidation.
- Establish objection or review procedures for rejected PSLF applications. This does not currently exist.
- Expand skilled employment to include other private organizations that provide a public service but are not necessarily registered 501 (c) (3) non-profit organizations.
Student loan interest capitalization reforms
One of the most common problems with federal student loans is accrued interest and capitalization, especially for borrowers who are repaying their student loans on an income-based amortization schedule.
According to a congressional budget bureau report Published last year, 75 percent of borrowers with an income-based amortization plan owed more than their original borrower due to accumulating interest. This interest can be capitalized regularly – added back to the capital balance – through a series of triggering events, such as The interest capitalization can have a compounding effect that leads to uncontrolled balance growth.
The Department of Education “proposes that capitalization events be eliminated where authorized,” including for each of the above. However, the ministry notes that it would not be able to eliminate interest capitalization for borrowers specifically with income-based repayment (IBR), one of several income-based repayment options available, since IBR interest capitalization is enshrined in law. That means Congress would have to pass laws to make related changes.
New income-based repayment plan for federal student loans
The Biden government proposes the creation of a new income-based repayment plan. There are currently four income-based plans, each with their own formula and eligibility criteria – Income-Based Repayment (ICR), Income-Based Repayment (IBR), Pay-As-You-Earn (PAYE) and Revised Pay-As-You-Earn (REPAYE).
In contrast to its other proposals, however, the Department of Education formulates its proposal for a new income-oriented plan more openly by asking questions rather than proposing a fixed plan. The ministry is suggesting a more affordable, income-based option, especially for undergraduate borrowers, with a larger income exemption and shorter repayment period for low-income borrowers and a potentially longer repayment period for college loan borrowers.
Other student loan assistance programs
The ministry is also calling for reforms to the closed school layoff program, which allows borrowers to apply for the cancellation of their federal student loans if their school closes and they are unable to complete their degree or certification program as a result.
The department is also proposing significant changes to borrower defense on repayment, a program that will allow borrowers who have been defrauded by their schools to apply for the cancellation of their related federal student loans. The Biden administration aims to simplify standards of evidence and timing previously enacted by the Trump administration and streamline the application process, especially for groups of borrowers who all have similar claims.
Next steps in the event of changes to the student loan program
At this stage, the department’s proposals are just that – proposals. The proposals will be reviewed, evaluated and possibly amended during the next rule-making negotiation sessions. Negotiated rulemaking is a lengthy process that involves multiple rounds of public hearings by a rulemaking committee made up of key stakeholders. It can take a year or two (or more) to finalize new regulations.
The first rule-making negotiations will begin next week, with further hearings planned for November and December. All meetings will be virtual and public. Further information can be obtained here.
This article has been updated to reflect any ambiguity surrounding the Ministry’s proposals for PSLF reform, particularly whether payments for FFEL loans would qualify for PSLF after direct loan consolidation.
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