The U.S. Department of Education has released proposed regulations to improve some federal student loan programs—but many people may be confused about how they’ll help.
How you’re affected depends on the loans you have and your repayment plan. Your loans aren’t likely to disappear, but you may find you owe less in the long run.
“I think the proposed student loan regulations by the U.S. Department of Education are a meaningful step in the right direction and will provide help and economic relief for those dealing with student loans,” says Leslie Tayne, a debt relief attorney who owns the Tayne Law Group, P.C., in New York City.
However, the many Americans who hope for extensive reform, such as student loan forgiveness, may be disappointed by these more incremental changes. Here’s what you need to know about the proposed regulations.
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Interest Capitalization Would Be Limited
Limiting interest capitalization is expected to help millions of borrowers save on student loan interest.
Interest capitalization happens when unpaid interest is added to the principal amount of your student loan. This makes your principal balance higher, and since interest gets charged on your principal balance, your loan becomes even more expensive.
The Department of Education’s proposal would eliminate interest capitalization when a borrower enters repayment, exits forbearance, leaves an income-driven repayment plan (IDR), or defaults on a loan.
If you pay your student loan bill each month, you’re up to date on your accruing interest; this includes most borrowers who are in Covid-relief forbearance. If you defer payments, or have an income-driven payment plan, you may see your interest capitalized and the amount added to the principal.
“It’s possible for some borrowers to repay hundreds or even thousands of dollars due to capitalization,“ Tayne says. “It can be devastating for borrowers, since it can extend their loan payoff period or increase their monthly payments.”
Typically, somebody who winds up with accrued interest will see their total balance increase by 1%, says Travis Hornsby, a chartered financial analyst and founder of Student Loan Planner, a service that helps student loan borrowers devise a plan to get out of debt.
No longer having to deal with accrued interest, Hornsby says, “That’s real savings, but it’s no game-changer.”
Totally and Permanently Disabled Borrowers Would Get a Break
If you are totally and permanently disabled, according to Department of Education guidelines, you probably are already entitled to have your student loans discharged.
The new proposed regulations would do three things, the department’s press release explains:
- Expand the parameters that allow a disabled person to receive a discharge
- Eliminate the three-year income-monitoring period for disabled borrowers to receive discharges
- Expand avenues for disabled borrowers to demonstrate they’re eligible for relief
Tayne says the existing monitoring system can cause some low-income disabled borrowers to miss out on getting their student loans discharged. A borrower with annual employment earnings above the poverty guideline for a household of two in their state will automatically have their loans reinstated, Tayne explains.
Justice for Defrauded Borrowers
The Biden administration has taken action against for-profit schools known to offer students a subpar education for a lot of money. The proposed regulations would make it even easier for borrowers to have their loans discharged if they were lied to or taken advantage of by their school.
Here are some of the proposed rules regarding these discharges:
- If you enrolled at a school that closed while you were working on your education, your student debt would automatically be discharged.
- If you signed a contract that forbids you from suing your school, that contract will be void.
- If your college falsely certified your eligibility for student loans when you never should have been allowed to get the loans, it will be easier for you to get the loans discharged.
These changes have been a long time coming, according to some borrower advocates.
“There had been complaints for years that discharging loans under borrower defense was difficult and took longer than needed,” says Michael Kitchen, a senior managing editor at Student Loan Hero, a website that helps students find ways to manage and pay off student loans.
“The idea is to close loopholes and get [the federal program] borrower defense to repayment to work as intended,” Kitchen says. “Hopefully it will help make sure justice is served in cases of fraud and get us closer to a system that’s fair for borrowers and lenders alike.”
Streamlined Procedures for Public Service Workers
Borrowers who work in public service would have an easier time getting their loans forgiven under the proposed regulations.
“Ten years after the [Public Service Loan Forgiveness, or PSLF] program started, when the first people became eligible for forgiveness, almost no one received it. There were just too many rules and regulations to get wrong and void your application,” Kitchen says.
More payments would qualify for PSLF, including, according to the Department of Education, including partial, lump sum and lay payments, along with certain kinds of deferments and forbearances.
The department lists examples like working with the Peace Corps and AmeriCorps or going into the military or National Guard as periods when you might get deferments and forbearances to count toward PSLF.
“They appear to be applying more generous rules to adjunct [university and college] faculty as well,” Hornsby says of the proposed rule. “But they don’t go so far as to include 1099 contractors who work at public sector employers,”
How Quickly Will Student Loan Reforms Take Effect?
For now, these are proposed changes, not finalized rules. The regulations still need to go through a 30-day comment period, with revisions to the proposal due by Nov. 1, and the earliest the rules could kick in is July 1, 2023.
Some critics feel that the American student loan system needs to be overhauled and don’t feel that these proposed rules are enough.
Others may find the proposal a more reasonable method of chipping away at the nation’s student debt without providing an outright handout, as the Biden administration has considered.
“Overall, I think these are the less controversial changes that the negotiated rulemaking committee achieved consensus on,” Hornsby says.