The U.S. Department of Education (DOE) released today, October 31, 2022, the final rule that aims to clarify, streamline, and expand eligibility for targeted debt relief programs for student borrowers. Primarily, the final settlement increases the number of those who can apply for and receive loan relief for schools that have closed, if the loan was falsely certified, or if the borrower is completely or permanently disabled. The rules also aim to make the process fairer for borrowers to present a repayment defense and potentially have their day in court to seek loan release if their college or lender cheated on them. Finally, the rules will help students avoid taking on more and more debt by eliminating interest capitalization not required by law, which can add ever-higher interest to the principal of their loan balances.
“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,” the official said. US Secretary of Education, Miguel Cardona. “These transformational changes will protect students who have been deceived by their colleges from the bureaucratic nightmares of the past and ensure that all of our targeted debt relief programs deliver on the promises made by Congress in the Higher Education Act. We also protect borrowers from higher costs by limiting the practice of deferring outstanding student loan interest to their principal balances. »
Key points to remember
- The final settlement was announced today, October 31, 2022, to expand eligibility for targeted debt relief for student borrowers.
- The new rules establish borrowers’ defense of repayment and arbitration rights if their lender misleads or manipulates them.
- Students with loans to schools that subsequently closed are eligible for an automatic release if the closure occurred while they were in attendance or within 180 days of leaving the school before it closed.
- The rules also establish loan discharges for those who are totally or permanently disabled.
- Capitalization of loan interest has been eliminated unless required by law.
Elements of the new regulations
Defense of the borrower against reimbursement and arbitration
The DOE regulations establish a framework for student borrowers to present a defense against loan repayment if their lender or bank misleads or manipulates them. This framework includes the ability to adjudicate claims individually or as a group, which may be formed by the Secretary of Education or in response to a request from a government official or entity, such as an Attorney General or a non-profit legal aid organization. Claims may be based on one of five categories of actionable circumstances: lender or school misrepresentation, omission of a material fact, breach of contract, aggressive and deceptive recruitment, or judgments. These criteria will apply to all applications pending or received on or after July 1, 2023.
Exits from closed schools
To address the fact that a large number of borrowers failed to obtain the discharges they were eligible for after their schools closed and ended up having their loans in default, DOE regulations will provide an automatic discharge. These discharges will automatically occur one year after a college’s closing date for borrowers who were enrolled at the time of closing or who left 180 days prior to closing and who do not accept an approved teaching agreement or continuation of the program at another location in the school.
Total and permanent disability exits
The final rule provides more ways for student borrowers who have a total and permanent disability to receive a discharge of their loan balance. This includes allowing borrowers who receive additional types of disability assistance from the Social Security Administration (SSA) to qualify for a discharge. The rule also eliminates the three-year income monitoring requirement that has too often caused borrowers to lose their discharges just because they failed to respond to document requests.
Capitalization of interest
Interest capitalization occurs when unpaid interest is added to the principal balance of a student loan. Once the interest on the loan is capitalized, borrowers must then pay even higher interest on the resulting principal balance. The new regulation eliminates all instances where capitalization of interest can occur as long as it is not required by law. This means that interest will no longer be added to a borrower’s principal balance the first time a borrower begins to repay, when entering into forbearance and exiting any type of repayment plan in addition to the income-based reimbursement. This includes reimbursement programs known as the Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) plans.
Cancellation of civil service loans
The rules also offer major benefits to student borrowers applying for Public Service Loan Forgiveness (PSLF).
The final rules also provide student borrowers with an easier way to obtain a discharge when a college incorrectly certifies a borrower’s eligibility for student loans when, in fact, the student was not eligible. The streamlining will increase the amount of authorized documents, clarify release dates and allow the possibility of loan releases for groups of borrowers.
An unofficial copy of the Ministry of Education’s new final regulations can be found here.