Sweeping new rules will reduce student loan interest and expand loan forgiveness programs

The Biden administration has released final regulations that will make sweeping changes to the federal student loan system. The new rules will reduce accrued interest and expand relief under several existing student loan forgiveness programs.

The publication of these final regulations is the next step in a long process that began last year with the development of negotiated rules, where the Ministry of Education convened key stakeholders to review and approve the proposed reforms. student loan programs.

“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,” he said Monday. US Secretary of Education Miguel Cardona.

Here is an overview of the main changes that will result from the new regulations.

Student loan interest capitalization reform

New federal regulations will limit interest capitalization on student loans.

In many circumstances, student loan interest can accrue in addition to a borrower’s monthly payments, such as when the borrower is in an income-driven repayment plan. Also, interest may accrue over many periods of non-payment, such as forbearance. Over time, this accumulation of interest can cause balances to steadily increase.

Adding to the problem is that certain events can cause accrued interest to be added back to the loan principal balance through a process called “capitalization” of interest. Since interest is charged as a percentage of the loan principal, compounding has a compounding effect, where interest accrues on interest. This can result in substantial balance increases.

The new federal regulations will eliminate certain interest capitalization events, including when a borrower first enters repayment, when a borrower exits forbearance, and when a borrower leaves most interest-based repayment plans. (IDR) such as Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE). However, interest will still be capitalized for borrowers leaving the Income Based Repayment (IBR) plan, as changing this rule would require an act of Congress.

Expanded Student Loan Forgiveness

The final rule released on Monday will also streamline and expand student loan relief under several existing programs:

  • For Borrower Defense Until Repayment – ​​a loan cancellation program for borrowers misled or defrauded by their school – the new rules will strengthen borrower protections and expand avenues of redress. The rules will allow the Department of Education to provide individual or collective relief and expand the categories of academic misconduct that can give rise to a borrower claim. Borrowers will also be entitled to full relief (rather than partial relief, which was previously allowed) for approved borrower defense claims.
  • Borrowers will be entitled to automatic discharges from closed schools “one year after a college’s closing date for borrowers who were enrolled at the time of closing, or [if they] left 180 days before closing and … do not accept an approved teaching agreement or continuation of the program at another location in the school.
  • Borrowers applying for loan forgiveness through the Total and Permanent Disability Release (TPD) program will have an easier process to prove they are disabled under the TPD standard. A greater percentage of borrowers receiving Social Security benefits will automatically qualify for relief, and borrowers will no longer be subject to income monitoring after release.

More student loan relief is coming

The new federal regulations are expected to come into effect by July 1, 2023. Meanwhile, several other Biden administration initiatives could also provide significant relief to federal borrowers by then:

  • The PSLF’s limited relief, which temporarily relaxes key requirements associated with the cancellation of public service loans, ends today. Millions of borrowers have already been approved. But there is still time to apply.
  • The Biden administration is developing a new Income-Based Repayment (IDR) plan, which may be more affordable than current options and will also suspend the accumulation of excess interest during periods when monthly payments fail. not cover all accrued interest.
  • The Department of Education begins rolling out the IDR Account Adjustment Initiative, which will provide retroactive credit on borrowers’ 20- and 25-year IDR student loan forgiveness terms, bringing millions of borrowers closer to possible loan cancellation.
  • The administration is still accepting applications for its unique $10,000 or $20,000 student loan forgiveness initiative. A federal appeals court has temporarily blocked the plan, but the Department of Education is still encouraging borrowers to apply for student loan forgiveness.

Further Reading on Student Loan Forgiveness

Biden makes bold prediction on student loan forgiveness

A new, bigger student loan forgiveness initiative is about to be launched – and it’s not what you think

In Reversal, Biden Administration Announces New Student Loan Forgiveness Eligibility Limits

Apply for student loan forgiveness? Don’t Make These 3 Mistakes

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