With student loan forgiveness stuck in courts, here's how feds are still erasing debt
- The president's plan to forgive tens of billions in student loan debt has been blocked, but the administration has still managed to cancel billions in debt through other relief programs.
- Some planned changes, however, could make it easier for future borrowers to find relief.
- Those changes depend on whether an administration friendly to borrowers remains in the White House.
The complexity of paying student loans starts early: The federal government offers a grace period of six months to fresh college graduates in which they’re free to skip their payments, similar to the student loan moratorium, as they establish themselves in the world.
The price of that postponement, however, at least until now, was that interest kept growing on that debt. The feds then capitalize the unpaid interest, that is, they add it to borrowers’ principal balance. At that point, the loan is often larger than what a borrower first took out. The federal government also has capitalized interest after borrowers paused their loan payments.
The Education Department estimated it charged nearly $22 billion in interest capitalization in fiscal year 2019 alone. (No new interest has been charged on federal student loans since March 2020 thanks to a pause on student loan payments because of the pandemic.)
“It accelerates balance growth and it’s really confusing,” said Sarah Sattelmeyer, a project director studying student loans at New America, a left of center think tank. “So getting rid of it is a win-win.”
The administration intends to do away with that practice almost entirely, one of many changes to the student loan program formalized in recent weeks. The changes come as a federal district judge in Texas struck down the president's broad plan for student debt forgiveness on Thursday. The Education Department has stopped taking applications for the one-time debt relief, though the administration has said it's working to overturn the judge's ruling. About 26 million people had already applied, and the administration said it was ready to erase the debt of 16 million people.
At the same time, the Eighth Circuit Court of Appeals is considering a request from six conservative states to block the plan, and it's unclear when it will issue its ruling. But the states already have indicated they will appeal to the Supreme Court if they don't receive a favorable ruling.
Regardless of what happens with the wider debt relief plan, Sattelmeyer said the new regulations are likely to make it easier for borrowers to navigate paying their student loans and protect students from predatory colleges.
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These changes don’t necessarily come with the multibillion dollar price tag of the wider debt relief plan – though they could be expensive – and they won’t touch every borrower. However, put together, they have the potential to ease paying student loans for hundreds of thousands of Americans in the years to come.
That is, if a friendly president remains in office.
Many of these changes rely on the federal government using the expanded authority that comes with a national emergency. Others have navigated a complicated and esoteric rule-making process that is heavily subject to the whims of the current administration.
“They have not wasted any time or opportunity to make changes that are really beneficial to student loan borrowers,” said Betsy Mayotte, the head of the Institute of Student Loan Advisors, a group that offers free advice in repaying student loans. “They’ve taken advantage of a once-in-a-lifetime opportunity. A lot of consumers don’t understand that.”
The one-time debt relief plan makes borrowers earning less than $125,000 annually – or $250,000 for couples, eligible for up to $20,000 in student loan forgiveness. It’s widely expected to benefit roughly 40 million borrowers. As of November 3, about 26 million people had applied for relief.
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The federal government has frozen student loan payments since March 2020. As part of that, the feds also set interest rates at zero percent and told collection agencies to stop trying to recoup overdue debts. The administration previously encouraged borrowers to apply for relief by mid-November to receive the debt relief before the payment pause ends.
To that end, the administration continues to urge borrowers to apply and has said the Education Department will “process discharges when we are able to do so and you will not need to reapply.”
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The recent changes don't face the legal scrutiny of wide-ranging debt relief, yet. Starting July 1st, 2023, borrowers who are disabled won't have to have their earnings reviewed for three years after they claim relief. Those who attended a school that closed suddenly will have their debt forgiven automatically after a year. The Education Department also streamlined a debt forgiveness program geared toward public service workers and simplified the process for qualifying for relief through income-driven repayment plans.
In addition, the administration has said it will discharge the debts of tens of thousands of students who attended predatory institutions like Corinthian Colleges and ITT Technical Institute. And the new rules will make it easier for borrowers to sue universities that defrauded them.
Previously, borrowers generally had to apply for relief individually through the so-called borrower defense rule. The time-intensive and bureaucratic process has left many behind. As of September more than 392,000 applications were awaiting review by the Education Department. The new rule bars institutions from requiring students to sign non-arbitration clauses and allows legal services groups to take on their cases in class-action suits.
Advocates for students ripped off by predatory institutions, including the National Student Legal Defense Network, have long been pushing for the administration to adopt this practice.
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These changes mean “students will now have an opportunity to hold predatory schools accountable,” said Aaron Ament, president of the National Student Legal Defense Network.
At the same time, the Education Department is set to forgive an additional $6 billion in student loan debt for borrowers who already applied for debt relief under the borrower defense program. That relief will depend on a judge’s approval of a settlement agreement between a group of student borrower advocates representing nearly 200,000 students and the Education Department. The final hearing was Wednesday, and the judge will issue a written decision on that case within a week.
The borrower advocates sued the administration under former Education Secretary Betsy DeVos because of the department’s delay in processing tens of thousands of applications for relief. The final agreement will grant debt relief to students who attended one of dozens of universities – including the University of Phoenix, Grand Canyon University and DeVry University – and had applied for debt relief via the borrower defense rule before June 20, 2022.
The federal government still has to decide how to handle borrower defense applications for students who attended a university not included in the settlement list.
Do income-driven repayment plans qualify for student loan forgiveness?
Along with the mass debt relief plan, Biden recently unveiled its plans for a new income-driven repayment program. It will reduce borrowers’ payments to 5% of their discretionary income. The lowest rate offered now is 10%, though it can vary depending on a borrower's specific plan.
the federal government lowers the borrowers’ expected payment to match their wages, though doing so extends the life of the loan, often to 20 or 25 years from the standard 10-year repayment period. Nothing prevents them from paying off their debt more quickly, however.
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Borrowers who make 10 years of payments will have their debts erased so long as their balance is below $12,000. The proposed changes would also cover borrowers’ unpaid interest so long as they make their monthly payments. The exact details of that plan are still being developed, and the administration is expected to release them in the coming weeks.
Republicans including Rep. Virginia Foxx, the ranking member on the House’s committee on education, question the proposal and have requested a full cost of what the income-driven plan would cost.
At the same time, the Education Department plans to conduct a review of payments under income-driven repayment programs that could mean the erasure of some borrowers' balances. Those who have been paying on their loans for 20 to 25 years through these plans at some point will receive automatic forgiveness, even if they’re not enrolled in such a plan now.
This review hasn’t attracted nearly the same level of attention as the president’s attempt at broad forgiveness, but of all the regulatory changes, Mayotte said, the income-driven waiver has the potential to affect the most borrowers.
It depends, she said, on how far back the department goes back when reviewing payments. The feds could start in 1994, when the first income-driven plan was introduced. But Mayotte said the agency hadn’t specified a date, which could mean they’re considering all borrowers for the review.
As of the third quarter of 2022, there were roughly 9 million federal borrowers who are 50 years or older, and about 1.5 million of them were enrolled in an income-driven repayment plan. It's unclear how many have been making payments for more than 25 years.
What has changed and who qualifies for Public Service Loan Forgiveness
One of the department’s most touted accomplishments is the revamp of the Public Service Loan Forgiveness. Top department officials have repeatedly described previous versions of the program as broken. But the agency has said more than 236,000 borrowers with $14 billion in debt have been approved for forgiveness thanks to the changes announced in October 2021.
The program promises debt relief to borrowers who work in the public service sector for 10 years while making payments on their student loans. The Education Department is supposed to discharge the debt after a decade, but many borrowers found it was nearly impossible to access relief. When Biden took office, only a few thousand had ever had their debt forgiven through the program, according to the Education Department.
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The increase in borrowers qualifying comes thanks to loosening some of the strict eligibility requirements that had been associated with that plan. For example, borrowers had to ensure they had the right type of loan and that they were enrolled in a qualifying income-driven repayment plan.
The waiver, which expired Oct. 31, 2022, allowed for all kinds of past payments to count toward a borrowers’ eventual forgiveness.
However, the Education Department says borrowers still have time to take advantage of some of the waiver's flexibility. The agency will count past payments toward a borrowers' eligibility for forgiveness through the same one-time review for income-driven repayment plans.
Borrowers with commercially held FFEL loans looking to benefit from the relief will need to consolidate their debts into a federal Direct Loan by May 1.
Another key change: Borrowers will have to show they currently work in a qualifying public service job to qualify for the debt relief. Those jobs include public school teachers and firefighters, but also government employees and attorneys for nonprofits. (Under the waiver, loan holders only had to prove they had worked in a qualifying job at some point in the past.)
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And starting July 1, 2023 the government will permanently loosen many of the program’s most restrictive requirements. Payments later than 15 days, for example, will now count toward the total required for forgiveness. Borrowers who pause their payment obligations due to cancer treatment, military service or economic hardship will receive credit for the months they miss. Previously, borrowers who consolidated their Direct Loans would lose all progress they had made toward debt relief.
How will the Education Department handle student loans?
All told, the changes made to the department’s current student loan relief programs has meant tens of billions in discharged debt, though that is only a fraction of the hundreds of billions that could be canceled as part of the president’s broad one-time loan forgiveness plan. The regulatory changes are likely to last longer and be available to borrowers who may not benefit from one-time debt relief, including future students.
Some changes, like the Public Service waiver, are possible thanks to the 2003 Heroes Act, which allows the Education Secretary to modify student loan payment requirements during national emergencies.
But the forward-looking policy changes emerged via a complicated process known as negotiated rulemaking. It’s a lengthy ordeal that requires months of public comments and discussions from groups that may be affected by the rules. And the Education Department is required to craft its rules around student loans via this approach.
Sattelmeyer said when Congress passes laws, it can’t account for every permutation of what that law looks like. Negotiated rulemaking, though, allows federal agencies to interpret the intentions of lawmakers.
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The next administration has the ability to undo the rules. The DeVos administration, for example, altered the criteria associated with the borrower defense from the Obama-era and some of the protections tied to the anti gender-discrimination law, Title IX. It’s also the process through which the Biden administration will have to go through to get its new income-driven repayment plan approved.
A more permanent change to how borrowers repay their student loans would require an act of Congress, but with Republicans poised to win the House, and possibly the Senate, that day is likely years away.
Contact Chris Quintana at (202) 308-9021 or firstname.lastname@example.org. Follow him on Twitter at @CQuintanadc