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Leashing the Monster: The Biden Administration Tackles Federal Student Loan Forgiveness

by Marian Conway | July 25, 2022 | Nonprofit Quarterly

Photo by Alp Ancel on Unsplash

This July, the US Department of Education announced the release of proposed new federal student loan regulations, using language that only a bureaucrat could love, but which nonetheless affect millions of federal student loan borrowers nationwide. (A four-page summary of the proposal is available here.)

According to the press release, the proposed regulatory changes seek to alleviate “student loan debt burdens for borrowers whose schools closed or lied to them, who are totally and permanently disabled, and for nonprofit and public sector workers who have met their commitments under the Public Service Loan Forgiveness (PSLF) program. The regulations also propose stopping many instances of interest capitalization, which occur when unpaid interest is added to a borrower’s principal balance, increasing the total amount they owe.”

What does this all mean? As should be obvious to all, the world of the $1.73 trillion federal student loan market is nothing if not opaque.

An Uncertain Environment

As many NPQ readers know, accumulation of interest on student loans has been frozen since March 13, 2020. The freeze originally was slated to expire in September 2020 but has been extended six times, most recently this past April, when the date to end the freeze was extended from May 1 to August 31.

Might the Biden administration extend the deadline once more? It might. After all, midterm elections are in November, so another extension is certainly a possibility. In June, US Education Secretary Miguel Cardona noted that another extension “could be coming. President Biden has also suggested that a seventh extension might occur, saying last month that the matter was “on the table.”

It is also possible that Biden might offer an across-the-board reduction in loan balances of $10,000 per borrower (provided annual income is less than $150,000). On top of this, there is pressure from Senate Majority Leader Chuck Schumer (D-NY) and others to cancel $50,000 of debt per borrower, while activist groups like the Debt Collective argue for full debt cancellation.

While much can change between now and the end of August, the prospects for across-the-board debt cancellation remain uncertain, and the August 31 date to resume loan payments looms large. How does a borrower prepare for the possibility that payment will soon resume?

The quick answer is that there are some things student loan borrowers should do to at least prepare the possibility. One added wrinkle: loan servicers are changing. If you are one of the 45 million-plus Americans with student loan debt, to check on who is servicing your account, you can go to your federal loan page’s payment history, enter “all” in the timeframe, and print the history out. You may also be able to export your payment history to spreadsheet software, which is a good idea. As servicers change, borrowers need to ensure that their payment history is moved to the new servicer’s platform correctly.

Only a short time is left to prepare to resume making payments for those who haven’t been paying during forbearance. And only a short time remains to make a payment or two that will go entirely toward the principal without the crush of interest.

The Promise of the New Regulatory Framework

While there is no across-the-board cancellation of school loans to date, it appears that the Biden administration and US Department of Education are putting a foot in every door of the student loan programs and policies, hoping to pry open some room to allow—in even the smallest of ways—release from crushing debt for student loan borrowers. The proposed regulation changes were released on July 6, and shortly after the proposed rule is published in the Federal Register, a 30-day comment period will commence. Those comments will be considered and edits made, and the rules will be published in the fall. The Biden administration aims for the new rules to take effect by July 1, 2023.

Limiting Accumulated Interest

In the student loan program, it is often easy to qualify for forbearance. For example, imagine a parent who has a child and leaves the workforce for a few years. The person is not earning income and therefore is granted forbearance. With forbearance, payments are suspended. However—except for the current payment freeze period—typically, interest still accrues when a loan is on deferment or forbearance, and that interest is capitalized, meaning it is added to the principal amount of the total student loan debt. When payments resume, a borrower might find that their loan balance is far greater than it was when that person graduated from college.

There is a better option for these borrowers—namely, income-based repayment plans that might require a “zero” payment and don’t accumulate interest—but for-profit servicers often steer borrowers into the much higher cost forbearance option. As attorney Adam Minsky explains, “Millions of borrowers were improperly steered into forbearance, rather than an income based repayment plan, causing them to lose months or years of progress towards student loan forgiveness.” In other words, millions of borrowers—Minsky estimates at least 3.6 million Americans—owe thousands or even tens of thousands more than the law says they should.

Stacey Cowley of the New York Times contends that fixing this is “the most far-reaching move” of the new rules. At some level, it would “affect nearly all the tens of millions of people with federal student loans by limiting interest capitalization—which adds unpaid interest to the borrower’s principal, compounding the total amount owed. Under the Biden administration’s proposal, interest would no longer be capitalized when a borrower either starts repaying or defaults on a loan.”

Writing in the Washington Post, Danielle Douglas-Gabriel explains that, according to US Education Department survey data, “27 percent of people who started college in 2003-04 had a larger principal balance after 12 years than what they originally borrowed. Black borrowers and those from low-income households were overrepresented in that group.”

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