ED Releases Proposed Rule Designed to Improve Student Loan Repayment and Relief Programs

The Biden administration released a proposed rule addressing concerns across various student loan programs. The proposed rule would, among other things, cancel student loans for borrowers whose schools closed or whose schools had:

• Substantially misrepresented school information;
• Substantially omitted facts about the school;
• Breached its contract with students;
• Aggressively and deceptively recruited students;
• Had a federal or state judgment or departmental adverse action brought against the institution that could give rise to a borrower defense claim; or
• Had a violation of state law that could form the basis for a borrower defense claim, but only if the borrower or, in the case of a group claim brought by a state requestor, that state requestor requests reconsideration of the Secretary's denial of a claim.

For totally and permanently disabled students, the proposed rule also expanded the definition of health care professionals allowed to provide certification of the student’s total and permanent disability as well as expanded the different types of certifications that would also be acceptable, such as qualifying for Social Security Disability Insurance or qualifying for the Social Security Administration Compassionate Allowance program. Of particular interest in this rule is the provision that would stop many instances of interest capitalization on student loans. The interest capitalization provision has garnered the most public discussion.

Interest capitalization occurs when unpaid interest is added to a borrower’s principal balance, increasing the total amount they owe. Under the proposed rule, where not required by statute, the Department of Education (ED) would eliminate interest capitalization when a borrower enters repayment, exits forbearance, defaults on a student loan and exits most of the income-driven repayment plans. Eliminating the interest capitalization would assist borrowers by lowering their total amount of student loan debt.

There is a 30-day comment period for this proposed rule. Comments are due on Aug. 12, 2022. ED intends to finalize this proposed rule by Nov. 1, 2022, with the expectation that it would go into effect no later than July 1, 2023.