The Department of Education released its new Student Loan Relief Proposal on July 6, 2022. These proposals are the latest action of the Department of Education (DOE) toward the ongoing agenda of supporting a more equitable student aid system. The changes listed below focus on loan interest calculations, repayments, and forgiveness rules. It is still in the early stages but the plan is to have them in place by July 1, 2023, after it processes the new legal proceedings.
The announcement did not address the lump sum forgiveness proposal, other changes to Public Service Loan Forgiveness, bankruptcy, and the new Income-Driven Repayment proposals discussed in other announcements.
Here are the major items that are being proposed under this announcement:
- Public Service Loan Forgiveness (PSLF) Payment Credits
- Student Loan Interest Capitalization
- Total and Permanent Disability Discharge
- Closed School Discharge
- False Certification
- Arbitration and Class-Action Waivers
- Borrowers Defense
Enhancements to PSLF Payment Credits
The current PSLF system has very strict rules which are often hard to understand. This new proposal will ease some of the strict rules related to the 120 on-time repayment rules and allow for credits to be earned under certain deferments.
The on-time payment rules were modified under the recent PSLF Limited Waiver Program that was implemented in October 2021. That program expires on October 31, 2022, and has the most PSLF borrowers approved for forgiveness at this time. This program has given the DOE some insights on possible alternatives, especially due to the upcoming expiration date.
Here are some PSLF changes included
- Some additional forbearance and deferments could be included as PSLF waiver credit payments
- Expansion of some military and special organization (AmeriCorp, Peace Corp) deferments
- Possible inclusions for medical or additional hardship deferments
- Reduction of employment classification as a full-time employee
- Other professional services that do not qualify due to employment or state rules
- Automation of reporting to minimize paperwork due to employment
- Additional review process for denials
Student Loan Interest Capitalization
One of the most confusing aspects of student loan repayment especially under the Income-Driven Repayment (IDR) is Interest Capitalization. This occurs due to unpaid interest being added to the current loan balance. As a result, this increases the loan balance and future interest charges.
The new student loan relief proposal would eliminate this practice and minimize the impact of a ballooning student balance. The current rules are very specific to each IDR method.
Total and Permanent Disability Discharge
This would expand the current rules of the Social Security Administration’s definition of disability to a broader group of individuals. It would eliminate the three-year income monitoring and other rules that are currently in place. It would allow the DOE to make some decisions based on alternative documentation from a physician and other professional sources.
Closed School Discharge
Recently, some institutions have closed leaving student borrowers with debt but no degree. These are often the certification and small technical schools that have short degree programs. Under this proposal, a student with federal student debt that was enrolled within the last 180 days and did not graduate will qualify for automatic student loan forgiveness within one year of closure. This reduces the time frame from three to one year in addition to the 180-day enrollment rule.
This will eliminate the borrower’s federal debt when an institution falsely certifies that they qualified for student loans when they did not. It will reduce the documentation required by the borrower to prove that they were misleading in the approval process.
Arbitration and Class-Action Waivers
This eliminated the schools from requiring students to sign an arbitration and class-action waiver document. Some schools require this document to be signed before any legal action or court proceeding. The new student loan relief proposal would prohibit this practice and the internal review practice is often required before outside action is allowed. It would give the student borrower better protection.
The DOE would create a public database of judicial action against an educational institution for borrowers to review. The goal is to increase public awareness and school transparency. It would also require the schools to disclose any internal process related to loan disputes.
The goal of this change is to hold education institutions more accountable for the marketing of their programs. This would allow the DOE to identify group forgiveness easily, especially when an institution or specific program was found to be misleading or misrepresenting the students.
The DOE would work with state officials to properly identify issues and complaints in the early stages of these situations. The rule is somewhat subjective, the DOE term used is a substantial misrepresentation. The fear is that lawsuits will begin against colleges when a student does not get the job expected with minimal student responsibility.
On the other hand, educational institutions will need to be more transparent and held to more accountability for their marketing claims than ever before. That is a good thing for all involved.
Student Loan Relief Proposal Summary
The Student Loan Relief Proposal has some good ideas and intentions. The concern is that it is adding a level of subjectivity that may cause additional confusion in an already difficult process. One of the other big items is dependence on the Income-Driven Repayment (IDR) methods for the PSLF. That did not change and will probably not. For many borrowers, this is the confusing part since the loan forgiveness is to help borrowers with financial hardship as it should.
The proposals include new steps for more school accountability to both the student and DOE. Many of these quick certification programs took advantage of the financial aid system and many individuals. Having more tools to prevent these situations is a great step in the right direction.
PayForED will be keeping you up to date on all of the upcoming changes. In the coming months, it is expected to be significant with the loan restart, lump-sum forgiveness, and SECURE Act 2.0. For more information on the Student Loan Relief Proposal here is a link to a fact sheet.