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The US Department of Education has released proposed regulations to improve some federal student loan programs, but many people may be confused about how they will help.
How you are affected depends on the loans you have and your repayment plan. Your loans probably won’t disappear, but you may find that you owe less in the long run.
“I believe the proposed student loan regulations by the U.S. Department of Education are a significant step in the right direction and will provide assistance and economic relief to those dealing with student loans,” says Leslie Tayne, debt relief lawyer who owns the Tayne Law. Group, PC, in New York.
However, many Americans hoping for sweeping reform, such as student loan forgiveness, may be disappointed by these more incremental changes. Here’s what you need to know about the proposed settlement.
Interest capitalization would be limited
Limiting interest capitalization should help millions of borrowers save on student loan interest.
Interest capitalization occurs when unpaid interest is added to the principal amount of your student loan. This makes your principal balance higher, and since interest is charged on your principal balance, your loan becomes even more expensive.
The Ministry of Education’s proposal would eliminate interest capitalization when a borrower begins to repay, exits forbearance, leaves an income-based repayment (IDR) plan, or defaults on a loan.
Read more: How capitalized interest affects your student loan payments
If you pay your student loan bill each month, you’re current on your accrued interest; this includes most borrowers who are in Covid-relief forbearance. If you defer payments or have an income-oriented payment plan, you can see your interest capitalized and the amount added to principal.
“It’s possible that some borrowers may be repaying hundreds or even thousands of dollars due to compounding,” Tayne says. “This can be devastating for borrowers, as it can extend their loan repayment period or increase their monthly payments.”
Typically, someone who finds themselves with accrued interest will see their total balance increase by 1%, says Travis Hornsby, chartered financial analyst and founder of Student Loan Planner, a service that helps student borrowers design a plan to get out of debt.
No longer having to deal with accrued interest, says Hornsby, “It’s real savings, but it’s not a game-changer.”
Totally and permanently disabled borrowers would benefit from a break
If you are totally and permanently invalidaccording to the guidelines of the Ministry of Education, you are probably already entitled to forgiveness of your student loans.
The proposed new regulations would do three things, the ministry’s press release explains:
- Expand the parameters for a person with a disability to receive a discharge
- Eliminate the three-year income test period for borrowers with disabilities to receive discharges
- Expand opportunities for borrowers with disabilities to demonstrate they are eligible for relief
Tayne says the existing monitoring system may prevent some low-income disabled borrowers from getting their student loans discharged. A borrower whose annual employment income exceeds the poverty line for a two-person household in their state will automatically have their loans reinstated, Tayne says.
Justice for defrauded borrowers
The Biden administration has taken action against for-profit schools known to provide students with a below-average education for big bucks. The proposed settlement would make it even easier for borrowers to get their loan canceled if they lied or took advantage of their school.
Here are some of the proposed rules for these releases:
- If you enrolled in a school that closed while you were working on your studies, your student debt would automatically be discharged.
- If you signed a contract that prohibits you from continuing with your school, that contract will be void.
- If your college has falsely certified your eligibility for student loans when you should never have been allowed to get the loans, it will be easier for you to get the loans discharged.
These changes have been a long time coming, say some borrower advocates.
“There had been complaints for years that the cancellation of loans under borrower’s defense was difficult and took longer than necessary,” says Michael Kitchen, senior editor of Student Loan Hero, a website that helps students find ways to manage and repay their student loans.
“The idea is to fill in the gaps and get [the federal program] defending the borrower to make the repayment work as intended,” says Kitchen. “I hope this will help ensure justice is served in cases of fraud and bring us closer to a fair system for borrowers and lenders.”
Read more: Borrower defense against repayment: how it could impact your student loans
Simplified procedures for public service workers
Borrowers who work in the public service have more ease have their loans canceled under the proposed settlement.
“Ten years after the [Public Service Loan Forgiveness, or PSLF] program started, when the first people became eligible for a pardon, almost no one received it. There were just too many rules and regulations to get it wrong and nullify your candidacy,” says Kitchen.
More payments would be eligible for the PSLF, including, according to the Department of Education, partial, lump sum and lay payments, as well as certain types of deferments and abstentions.
The department lists examples like working with the Peace Corps and AmeriCorps or joining the Army or National Guard as times when you might get deferments and abstentions to count for the PSLF.
“They seem to apply more generous rules to [university and college] faculty too,” Hornsby says of the proposed rule. “But they don’t go so far as to include 1,099 contractors who work for public sector employers,”
How quickly will the student loan reforms take effect?
At this time, these are proposed changes, not finalized rules. The rules still have to go through a 30-day comment period, with revisions to the proposal expected by November 1, and the earliest the rules could take effect is July 1, 2023.
Some critics believe that the US student loan system needs to be revised and do not consider these proposed rules sufficient.
Others may find the proposal a more reasonable method of reducing the nation’s student debt without providing outright handouts, such as the Biden administration considered.
“Overall, I think these are the least controversial changes that the Negotiated Rules Development Committee reached consensus on,” says Hornsby.