More than 26 million borrowers have submitted the forgiveness application. Of these, 16 million applications have been processed and approved.
However, President’s plan is currently on hold due to multiple lawsuits lawsuits. The lawsuits have been appealed. But, until the Supreme Court rule on these appeals, the future of the President’s plan is uncertain.
However, blanket student loan forgiveness isn't the only program for student loans. Learn about several new student loan options that go into effect in 2023 that borrowers should know about.
Student Loan Moratorium and the Restart of Repayment
The Biden administration has announced an eighth extension to the payment pause and interest waiver. Collection activity will also be suspended.
Repayment will restart 60 days after the lawsuits are resolved or June 30, 2023, whichever comes first.
This extension means borrowers will not have to make payments on federal student loans that have been approved for forgiveness, unless the U.S. Department of Education loses its appeal of the lawsuits.
Borrower Defense to Repayment
If a borrower was defrauded by their college under federal or state law, the borrower’s federal student loans may qualify for a borrower defense to repayment discharge. If the borrower's defense to repayment claim is approved, all previous payments will be refunded to the borrower and the loans discharged, and federal student aid eligibility will be restored.
There are several changes that will take effect on July 1, 2023 and apply to all pending and new claims on or after that date:
- The U.S. Department of Education may decide on a borrower defense to repayment claims on a group basis vs. a case by case basis. This will speed up the processing of borrower defense to repayment claims.
- Borrower defense to repayment claims may be based on an expanded set of claims categories, including substantial misrepresentation, substantial omission of fact, breach of contract, aggressive and deceptive recruitment, and judgments or final secretarial actions.
- The new rules adopt a preponderance of evidence standard, which means there must be a greater than 50% chance that the claim is true.
- The new regulations ban mandatory arbitration clauses and class action waivers in college contracts with students.
- The new regulations require decisions to be made on claims within a certain time period or the loans will be considered unenforceable.
The new rules also establish a process for recovering the cost of borrower defense to repayment claims from the colleges. However, a lack of due process in the recovery of discharged claims from the colleges will likely be challenged in court. Previously, all of the borrower defense to repayment claims were made against colleges that had closed and couldn’t oppose the claims.
Interest capitalization, where interest is charged on interest, will be eliminated except when required by statute. Interest capitalization will no longer occur in the following circumstances:
- The first time a borrower enters repayment
- When a borrower exits forbearance
- When a borrower leaves the Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) Repayment Plans.
- When a borrower is negatively amortized under Income-Contingent Repayment (ICR) or an alternative repayment plan
- When a borrower enters default
Interest capitalization can increase the total interest paid over the life of a loan due to the compounding of interest. This is specifically true when the loan payments are less than the new interest that accrues.
Total and Permanent Disability Discharge
The new regulations for the Total and Permanent Disability (TPD) Discharge eliminate the three-year post-discharge monitoring period. The U.S. Government Accountability Office (GAO) found that borrowers whose loans are discharged almost never earn more than the poverty line during the post-discharge monitoring period. Rather, borrowers had their discharged loans reinstated because of a failure to file the paperwork, not because their income would have been above the threshold.
The new regulations expand the set of Social Security Administration (SSA) determination codes that qualify for a TPD discharge. These include Medical Improvement Possible and Compassionate Allowance, in addition to Medical Improvement Not Expected. Also, if the onset date of the disability, as determined by SSA, was at least five years ago, the loans will qualify for an automatic TPD discharge.
The new regulations also expand the types of allowable documentation and the types of healthcare professionals who can certify that a borrower is totally and permanently disabled. These include licensed nurse practitioners, physician’s assistants, and clinical psychologists.
Closed School Discharge
Borrowers are eligible for a closed school discharge if they were enrolled when the college closed or if they left within 180 days before the closure.
The new regulations provide an automatic discharge one year after the college’s closure date. This applies as long as the borrower did not accept an approved teach-out or continue their education at another location of the college. Borrowers who accepted a teach-out or continuation but who did not finish will receive a discharge one year after their last date of attendance.
Public Service Loan Forgiveness
Some aspects of the Limited PSLF Waiver will be made permanent, expanding the set of qualifying payments to include late payments or partial installments and lump-sum payments.
They also include certain deferment or forbearance periods, such as:
- Military service deferment
- Post-active-duty deferment
- Deferment for active cancer treatment,
- Economic hardship deferment (including service in the Peace Corps)
- AmeriCorps and National Guard service forbearances
- U.S. Department of Defense (DoD) Student Loan Repayment Program forbearance
- Administrative or mandatory administrative forbearances
The new regulations establish a single standard for full-time employment at 30 hours per week. Adjunct and contingent faculty are considered to have at least 3.35 hours of work per credit hour taught.
If a borrower worked for a contractor to a qualifying employer where state law prohibits it, the borrower will be considered to have qualifying employment.
When multiple Direct loans are included in a Federal Direct Consolidation Loan, the number of payments will be the weighted average of qualifying payments in the consolidated loans. This is instead of resetting the qualifying payment count to zero.
Fresh Start Initiative
About 7.5 million borrowers were in default before the pandemic. These borrowers are eligible for a fresh start when repayment restarts. The default will be removed from the borrowers’ credit histories and the loans will be returned to a current status when repayment restarts. Borrowers will regain their eligibility for federal student aid.
If the borrower does not choose a repayment plan and starts making payments within one year of the restart, their loans will return to a default status.
The U.S. Department of Justice and the U.S. Department of Education announced a new policy around when they will and will not oppose a borrower’s bankruptcy discharge petition for federal student loans.
The U.S. Bankruptcy Code at 11 USC 523(a)(8) allows student loans to be discharged when repaying the student loans imposes an “undue hardship” on the borrower and his or her dependents. The Brunner Test defines undue hardship as occurring when a three-prong test is satisfied:
- The borrower must be unable to maintain a minimal standard of living for the borrower and the borrower's dependents while repaying the student loans.
- These circumstances must be expected to last for most of the loan's repayment term.
- The borrower must have made a good faith effort to repay the loans.
The new policy is aligned with the Brunner Test for bankruptcy discharge of student loans. It provides detail that illustrates each of these prongs.
For the first prong, the guidance relies on the IRS Collection Financial Standards to assess a borrower's expenses under a minimal standard of living. If these expenses exceed income, the first prong is satisfied. If they don't exceed income, but the addition of student loan payments causes the expenses to exceed income, they will consider a partial discharge.
The guidance includes a rebuttable presumption for the second prong in several circumstances. These may apply if the borrow:
- Is 65 or older
- Has a disability that affects income potential
- Has been unemployed for at least five of the last 10 years
- Did not obtain the degree for which the debt was incurred
- Is in repayment for at least 10 years
For the third prong, the guidance establishes objective criteria based on the borrower’s payment history and participation in income-driven repayment. This is in addition to the historical criteria of “the debtor’s efforts to obtain employment, maximize income and minimize expenses.” Signs of a good faith effort may include:
- Making a payment on the loans
- Using deferments or forbearances, such as economic hardship deferments, unemployment deferments and general forbearances, but not in-school deferments and grace periods
- Applying for income-driven repayment
- Applying for a federal consolidation loan
- Responding to communications from a loan servicer or collection agency or otherwise engaging with them, especially with regard to payment options, deferments and forbearances or loan consolidation
A borrower can also demonstrate a good faith effort by seeking assistance with their loans from a third party, such as a credit or debt counselor.
Borrowers who didn’t enroll in income-driven repayment can present evidence of certain acceptable reasons. These may include:
- Being denied income-driven repayment or discouraged from using income-driven repayment
- Provided with bad information about income-driven repayment
- Plausible belief that income-driven repayment would not meaningfully improve their financial situation
- Being unaware of income-driven repayment (e.g., borrowers who didn’t undergo exit counseling because they dropped out of college)
- Concerns about the tax consequences of forgiveness at the end of income-driven repayment
New Income-Driven Repayment Plan
The Biden administration has proposed a new income-driven repayment plan that will cut the monthly payment in half for undergraduate student loans.
The new repayment plan bases the monthly payment on 5% of discretionary income for undergraduate student loans and 10% of discretionary income for graduate student loans. Discretionary income will be based on the amount by which adjusted gross income (AGI) exceeds 225% of the poverty line. (225% of the poverty line is the equivalent of a $15 minimum wage for single borrowers.)
If the borrower’s original loan balance was $12,000 or less, the remaining debt will be forgiven after 10 years. For all other borrowers, the remaining debt will be forgiven after 20 years.
The federal government will pay any accrued but unpaid interest. This will prevent the loan balance from growing when the borrower’s payment is less than the new interest that accrues.
The need for annual recertification will be eliminated.
Mark Kantrowitz is an expert on student financial aid, scholarships, 529 plans, and student loans. He has been quoted in more than 10,000 newspaper and magazine articles about college admissions and financial aid. Mark has written for the New York Times, Wall Street Journal, Washington Post, Reuters, USA Today, MarketWatch, Money Magazine, Forbes, Newsweek, and Time. You can find his work on Student Aid Policy here.
Mark is the author of five bestselling books about scholarships and financial aid and holds seven patents. Mark serves on the editorial board of the Journal of Student Financial Aid, the editorial advisory board of Bottom Line/Personal, and is a member of the board of trustees of the Center for Excellence in Education. He previously served as a member of the board of directors of the National Scholarship Providers Association. Mark has two Bachelor’s degrees in mathematics and philosophy from the Massachusetts Institute of Technology (MIT) and a Master’s degree in computer science from Carnegie Mellon University (CMU).