Rules improve borrower defense, ensure borrowers get their day in court, and limit student loan interest capitalization
Today, the U.S. Department of Education (Department) released final regulations that streamline and improve the rules for major targeted debt relief programs. The regulations expand eligibility, remove barriers to relief, and encourage automatic discharges for borrowers who are eligible for loan relief because their school closed, they have a total and permanent disability, or their loan was falsely certified. The rules also establish a fairer process for borrowers to raise a defense to repayment, while preserving borrowers’ day in court by preventing institutions of higher education (institutions) from forcing students to sign away their legal rights using mandatory arbitration agreements and class action waivers. Finally, the rules help borrowers avoid spiraling student loan balances by eliminating all instances of interest capitalization not required by statute, which occur when unpaid interest is added to a borrower’s principal balance, increasing the total amount that borrowers may have to pay.
“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,” U.S. Secretary of Education Miguel Cardona said. “These transformational changes will protect students who’ve been cheated by their colleges from the bureaucratic nightmares of the past and ensure that all our targeted debt relief programs live up to the promises made by Congress in the Higher Education Act. We’re also protecting borrowers from higher costs by limiting the practice of tacking unpaid student loan interest onto their principal balances."
These rules will go into effect July 1, 2023, which is the effective date specified in the Higher Education Act for regulations issued on or prior to November 1 of a given year. They reflect extensive stakeholder input across the higher education community, including from multiple public hearings, three negotiated rulemaking sessions conducted last fall, and more than 5,000 public comments received this summer.
“Borrowers entitled to debt relief under the Higher Education Act should be able to get it without wading through red tape and confusing tricks and traps,” said Under Secretary James Kvaal. “The regulations announced today will streamline a needlessly complicated system and give borrowers a simpler and more often automatic path to the discharges they deserve. They also stop shady schools from forcing students to sign their rights away as part of the price for admission and give the Department critical tools for holding colleges that take advantage of borrowers accountable.”
Borrower Defense to Repayment and Arbitration
The new rule establishes a strong framework for borrowers to raise a defense to repayment if their institution misleads or manipulates them. This includes the ability to decide claims individually or as a group, which can be formed by the Secretary or in response to a request from a state entity, such as an attorney general, or a nonprofit legal assistance organization. Claims may be based on one of five categories of actionable circumstances: substantial misrepresentation, substantial omission of fact, breach of contract, aggressive and deceptive recruitment, or judgments or final secretarial actions. It will apply to all claims pending on or received on or after July 1, 2023.
The final rule includes only the provision of full relief, a change from the proposed rule, which allowed for partial discharges. Approved claims require a conclusion, based upon a preponderance of the evidence, that the institution committed an act or omission which caused the borrower detriment of such a nature and degree that warrant full relief.
The rule also lays out a clear process for the Department to pursue institutions for the cost of approved claims. For loans issued prior to July 1, 2023, the Department may pursue recoupment if the claims would have been approved under the borrower defense standards in place at the time the loan was issued.
For discharges of loans issued before that date, institutions will only face recoupment if those claims would have been approved under the regulatory standards in place at the time the loans were issued.
The final rule also allows borrowers to take their case to court by preventing institutions that participate in the Direct Loan program from requiring borrowers to engage in pre-dispute arbitration or sign class action waivers. The rule creates an easier path for borrowers whose loans were falsely certified to receive a discharge
Closed School Discharges
Too many borrowers have not obtained discharges they were eligible for after their school closed and end up in default. The final rules will provide an automatic discharge one year after a college’s closure date for borrowers who were enrolled at the time of closure or left 180 days before closure and who do not accept an approved teach-out agreement or a continuation of the program at another location of the school. Those who accept but do not complete a teach-out agreement or program continuation will receive a discharge one year after their last date of attendance.
Total and Permanent Disability Discharges
The final rule provides additional pathways for borrowers who have a total and permanent disability to receive a discharge. This includes allowing borrowers who receive additional types of disability review codes from the Social Security Administration (SSA) to qualify for a discharge. This also includes borrowers who later aged into retirement benefits and are no longer classified by one of these codes. Borrowers who have an established onset date of their disability determined by SSA to be at least 5 years in the past can also establish eligibility. The final rule also expands these categories to include borrowers whose first continuing disability review is scheduled at three years, a change from the draft rule, which required such a status to have been continued once. The rule also eliminates the three-year income monitoring requirement that too often caused borrowers to lose their discharges solely because they failed to respond to paperwork requests.
Interest capitalization occurs when borrowers have outstanding unpaid interest added to their principal balance. After interest capitalizes, borrowers are then charged greater amounts of interest on that larger principal balance. The final rule eliminates all instances where interest capitalization is not required by statute. This means interest will no longer be added to a borrower’s principal balance the first time a borrower enters repayment, upon exiting a forbearance, and leaving any income-driven repayment plan besides Income-Based Repayment. This includes the Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) plans.
Public Service Loan Forgiveness
As announced last week, the rules also provide significant benefits for borrowers who are seeking Public Service Loan Forgiveness (PSLF). Further information on the permanent improvements made to PSLF regulations can be found here.
The final regulation streamlines the process for when a college falsely certifies a borrower’s eligibility for student loans when, in fact, the student was ineligible. This rule will provide borrowers with an easier path to a discharge. Improvements expand allowable documentation, clarify the applicable dates for a discharge and allow for the consideration of group discharges.
Building on an Unparalleled Record of Debt Relief
The final regulations build upon the work the Biden-Harris Administration has already done to improve the student loan program, make colleges more affordable, deliver tens of millions in debt relief to over one million student loan borrowers, and most recently provide debt relief to over 40 million eligible borrowers.