The U.S. Department of Education on Monday released final rules affecting key parts of the federal student loan system, including two programs that can clear some borrowers' debts: borrower defense to repayment and closed-school loan discharges.
The changes won't just affect student loan borrowers. They'll shift the landscape for colleges and for-profit operators, in some cases by adding regulatory requirements and in others by modifying when they could be held liable for their actions.
Department officials cast the new rules as replacing a broken student loan system with one that limits red tape, holds problematic colleges responsible for their behavior, and makes borrowing cheaper.
"We must provide equal parts support and accountability," Education Secretary Miguel Cardona said during a call with reporters. "Getting a college degree or certificate is supposed to give you a leg up in our economy, but in recent decades too many students have been left worse off for having gone to college."
The new rules come less than four months after the Education Department released draft versions covering borrower defense to repayment, loan discharges for borrowers whose colleges close, Public Service Loan Forgiveness, interest capitalization, disability discharges, and situations where colleges falsely certify that borrowers are eligible for federal loans. The final rules are set to take effect July 1.
Interest groups dig in
An association representing for-profit institutions, Career Education Colleges and Universities, blasted the new rules and how fast they are being implemented. Just 41 days passed between the Aug. 12 deadline for public comment on the proposals and the date the Education Department submitted final rules for interagency review. That prompts doubts about whether regulators could have meaningfully considered comments submitted, which numbered more than 5,000, CECU said in a statement.
"The Department has cut corners in a rush to ram through a punitive borrower defense rule with serious legal and regulatory flaws that could undermine the American education system," said Jason Altmire, the group's president and CEO, in a statement. "CECU has long supported sensible borrower defense regulations that comply with the law and protect the interests of both students and schools. The new rule fails on both counts."
But a group that advocates for consumer reform, the National Consumer Law Center, praised the new rules. They make more borrowers eligible for debt relief by expanding eligibility criteria, remove application hurdles, ease the process of challenging colleges' misconduct in court, and tackle a problem of loan balances growing because of accrued interest, the group said in a statement.
“We commend the Department of Education for implementing sweeping changes that will make it easier for hundreds of thousands, if not millions, of borrowers to obtain the debt relief they are entitled to under the law," Kyra Taylor, staff attorney at the National Consumer Law Center, said in a statement. "These changes will make it easier for public servants, disabled borrowers, and borrowers harmed by their schools to cancel their student loan debt."
Education Department officials argued that the new rules are a continuation of short-term efforts to give borrowers protections they were due under existing rules.
"Already we've approved $38 billion in discharges for 1.7 million people, eligible because they were cheated by their colleges, worked in public service or who have permanent and total disability," said James Kvaal, under secretary of education, in Monday's call with reporters. "Now we're building upon those efforts with permanent rules."
Rep. Virginia Foxx, a Republican from North Carolina who is the ranking member on the House Education and Labor Committee, issued a statement saying President Joe Biden’s administration failed to address the cost of college with the new rules.
"The administration does not have the authority to enact such fundamental and costly changes to these programs," Foxx said. "Biden is forcing taxpayers to cough up hundreds of billions of dollars to fund a scheme that will encourage more reckless future borrowing."
Borrower defense to repayment
The new borrower defense to repayment rules will affect forgiveness for federal loans for students whose colleges defrauded them.
The final rules differ from drafts in important ways. Where drafts would have allowed for partial debt discharges, the new rules will only allow for full debt relief.
"The Department has tried for years to construct a workable process for determining partial discharge amounts and has concluded there is not a consistent way to achieve that goal," an agency fact sheet says. "Instead, to approve a claim, the final rule will require the Department to conclude that the act or omission caused detriment that warrants a full discharge and refund."
Clawback provisions lay out ways the Education Department can try to recoup the cost of borrower defense forgiveness from colleges. The department will use clawback standards in place when a loan was issued — meaning loans issued before July 1, 2023, won't be covered by the new rules.
For loans issued after the new regulations kick in, claims can be approved where colleges misrepresented or omitted facts, breached contracts, or engaged in "aggressive and deceptive recruitment." The department will use the preponderance of the evidence standard to decide if a violation has occurred, whether it harmed borrowers and if it merits relief. A preponderance of the evidence standard essentially means asking whether it's more probable than not that a violation occurred.
The Education Department struck from its proposed rule parts of a definition of "aggressive and deceptive recruitment," saying it wanted to take out confusing provisions.
The department will be able to review claims individually or as a group, including if a third party asks for a group review. Such third parties can include nonprofit legal assistance organizations and state attorneys general. But the final rules add provisions allowing colleges to respond to a request to form a group. Individuals can opt out of a group discharge.
The final rule also tweaks the standards borrowers must meet to have their claims reconsidered if they’ve been denied relief. And it outlines exactly how the department will try to recoup the costs of borrower defense claims.
Once the Education Department has determined it’s appropriate to recoup costs from a college, the burden to prove otherwise is on that institution. Recoupment is limited to a six-year window starting when a borrower last attended a college.
The new rules include provisions intended to make sure students can take institutions to court. They prevent colleges that participate in the federal Direct Loan program from requiring borrowers to waive their right to join class-action lawsuits covering borrower defense claims or agree to pre-dispute arbitration.
The final rule also requires colleges to disclose when they use arbitration and share related records with the Education Department. The department plans to publish those records in a database.
Borrowers will automatically receive loan discharges a year after their colleges close if they were enrolled at the time and didn’t move to other institutions. They will also qualify for automatic discharges if they were enrolled within 180 days before their colleges closed or didn’t accept teach-out agreements or continuation of their programs at other institutions.
Those who accept teach-outs or program continuations but don't go on to finish programs will automatically receive discharges a year after they last attend classes. The regulations also allow regulators to adjust the official closure dates of colleges to prevent institutions from trying to stretch out their shutdown processes to avoid liabilities from closed-school discharges.
The final rule expands avenues for borrowers to receive total and permanent disability discharges, including by expanding qualifications.
Those who don't qualify based on the Social Security Administration's determination can send more documentation to make their case to the Education Department. Borrowers who get a discharge will no longer have their income monitored for three years. Income monitoring has caused many borrowers to lose their discharges in the past because they missed paperwork requirements, the department said.
Interest capitalization — when unpaid interest adds up and starts accruing its own interest — will be eliminated everywhere it's not required by statute. The final rules call for capitalization to not occur when a borrower:
- First enters repayment.
- Leaves a forbearance.
- Is in the Pay As You Earn repayment plan and no longer has a partial financial hardship.
- Leaves the revised Pay As You Earn repayment plan.
- Is in a period of negative amortization under an alternative payment plan or income-contingent repayment plan.
- Enters default.
False loan eligibility certification
Borrowers will be able to receive discharges more easily if colleges falsely certify they are eligible for student loans. More documentation will be allowed, applicable dates have been clarified, and group discharges can be considered.
Public Service Loan Forgiveness
The new regulations also cover some changes the department announced last week to the Public Service Loan Forgiveness program, which allows borrowers who work in certain fields to have their debts forgiven after making a decade of qualifying payments.
Included among them, borrowers can receive credit for payments made late, in installments or in a lump sum. That eliminates previous rules that payments would only be counted if they were made within 15 days of their due date.
In addition, some deferment and forbearance can also count toward PSLF in cases where borrowers could have been confused about their choices. Such periods can include cancer treatment and military service deferments.
PSLF payment credit will be awarded based on a weighted average when borrowers consolidate direct loans.
Some of the PSLF changes mirror benefits available under a temporary one-year PSLF waiver running through the end of October 2022. But others take a different approach, according to discussion included in the final regulations.