Government Issues Second Proposal For Student Loan Forgiveness

The U.S. Department of Education has release draft regulatory language for the President’s Plan B for student loan forgiveness. Plan B is narrower, in part because it is better targeted at borrowers who are experiencing financial distress, but nevertheless might not survive legal challenge.

We went through the language of the latest proposal for student loan forgiveness and here's what you need to know, including what the proposals are, who they are designed to help, and whether the latest proposals could survive a legal challenge.

Student Loan Repayment Has Restarted

Some proponents of forgiveness had suggested that President Biden could extend the payment pause and interest waiver indefinitely. The paused payments count toward forgiveness under income-driven repayment plans and Public Service Loan Forgiveness. 

The Fiscal Responsibility Act of 2023 blocks this approach to forgiveness. Interest began accruing again on Federal student loans on September 1, 2023, and repayment restarted in October 2023.  

The 12-month on-ramp period suspends the negative consequences of delinquency and default through September 30, 2024. But, it is implemented as a series of up to four 90-day administrative forbearances, so interest continues to accrue and it doesn’t count toward forgiveness. 

Instead, the Biden administration is proposing to issue new regulations that will forgive the federal student loan debt of certain groups of borrowers.

Proposal For Student Loan Forgiveness

The U.S. Department of Education released proposed regulatory text on October 30, 2023, ahead of the second negotiated rulemaking session on November 6-7, 2023.

The proposed regulations seek to provide debt relief for four groups of borrowers who demonstrate financial distress:

• Borrowers whose federal student loan balances exceed the amount originally borrowed
• Borrowers who first entered repayment on their loans 25 or more years ago
• Borrowers who attended career-training programs that provide insufficient earnings for their graduates, that result in excessive debt compared with income or that lead to high student loan default rates
• Borrowers who are eligible for loan cancellation under existing loan forgiveness and discharge programs, but who did not apply for this relief

The U.S. Department of Education is trying to align these groups of borrowers with the regulations at 31 CFR 902, which limit waiver and modification authority to:

• Circumstances in which a borrower is financially incapable of repaying the full amount of their debt in a reasonable time
• Enforced collection activities (administrative wage garnishment and Treasury offset) are unable to collect the debt
• The cost of collecting the debt exceeds the amount to be recovered
• There is significant doubt concerning the federal government's ability to win a lawsuit against the borrower.

Related: When Can The Government Modify or Compromise Student Loan Debt

These groups of borrowers represent four of the five groups of borrowers mentioned in an issue paper released by the U.S. Department of Education on September 29, 2023. The fifth group of borrowers, which is not addressed by the current set of draft regulations, involves borrowers who are experiencing financial hardship that is not adequately addressed by the current student loan system. 

In a new issue paper, the U.S. Department of Education suggests that the fifth category of borrowers could be based on ideas from the November 2022 changes to the bankruptcy discharge process for federal student loan borrowers, such as borrowers age 65 or older, disabled borrowers, borrowers who have been unemployed for five of the last 10 years and borrowers who are college dropouts. Other proposals include forgiving the federal student loans of borrowers who received a Federal Pell Grant, borrowers who earn less than 400 percent of the federal poverty line and disabled borrowers who are ineligible for a Total and Permanent Disability Discharge.

Except for the proposal that forgives the loans of borrowers whose loan balance exceeds the original amount borrowed, the number of borrowers eligible for forgiveness will be much more limited than the first attempt at broad student loan forgiveness.

The new regulations would apply not just to Direct Loans, but also FFELP or Perkins Loans held by or on behalf of the U.S. Department of Education. The U.S. Department of Education is basing this on the regulations at 34 CFR 30.70(e)(1), which allow the U.S. Department of Education to "compromise a debt in any amount, or suspend or terminate collection of a debt in any amount” and apply to all three types of federal education loans.

The soonest the new regulations could go into effect is July 1, 2025. A final rule must be published in the Federal Register by November 1 to go into effect the following July 1. In some cases the Secretary of Education can implement new regulations sooner, per the Master Calendar Provisions at 20 USC 1089(c). 

Flaws With The Proposed Regulations

There are several flaws with the proposed changes. 

Time Limits

The proposed regulations for the first two groups of borrowers (balance exceeds amount borrowed, in repayment for more than 25 years) are limited to borrowers who satisfy the eligibility criteria as of July 1, 2025. Accordingly, the proposed regulations provide one-time forgiveness, as opposed to addressing these circumstances on an ongoing basis.

Individualized Review

Some of the proposed regulations will require individualized review of eligibility. If the new regulations involve a case-by-case review of a borrower’s eligibility or require data that the U.S. Department of Education does not already have, it will make implementation more complicated. 

Loan Balance Exceeds Original Debt For Most Borrowers

Loan fees and interest that accrues during the in-school and grace periods cause most borrowers to graduate with a loan balance that exceeds the amount borrowed by as much as a fifth to a third. Depending on the repayment term and interest rate, the loan balance will exceed the original amount borrowed for 2-14 years after entering repayment, even if the borrower makes the required monthly loan payments.

Time spent in deferment, forbearance, delinquency and default may also increase the loan balance, since interest continues to accrue regardless of whether a borrower is making payments on the loan. Repayment plans that are negatively amortized, such as some of the income-driven repayment plans, may also cause the loan balance to increase, or at least not decrease.

Unless they narrow this proposed regulation severely, it is likely to be blocked by the U.S. Supreme Court. 

Loans In Repayment For 25 Or More Years

If the loan has been in repayment for 25 or more years, including periods when the loan was in deferment, forbearance, delinquency and default, the remaining balance will be forgiven.

The economic hardship deferment, unemployment deferment and general forbearances are limited to three years each, yielding a total of nine years. But, if the borrower consolidates their loans, the consolidation loan is again eligible for another nine years of deferments and forbearances, bringing the total to 18 years. (The draft regulations start the clock on a consolidation loan when the loans that were consolidated entered repayment.)

A borrower can be in default for an indefinite amount of time. So, a borrower might qualify for forgiveness after never making a payment on their loans. This proposal effectively implements a 25-year statute of limitations. But, Congress repealed the 6-year statute of limitations on federal education loans in the Higher Education Technical Amendments of 1991 (P.L. 102-26), effective April 9, 1991.

It is therefore likely that this aspect of the regulation will be blocked by the U.S. Supreme Court, as it appears to be in conflict with the intent of Congress in repealing the statute of limitations on federal education loans. 

Woulda, Coulda, Shoulda

There are several regulatory proposals that would forgive the loan if the borrower could have qualified for income-driven repayment (20 or 25 years), public service loan forgiveness, closed school discharge, borrower defense to repayment discharge or other loan forgiveness and discharge programs, but they didn’t apply for these programs.

It is unclear how the U.S. Department of Education will determine that the borrower “otherwise meets the eligibility requirements.” For example, would they require 25 years of payment history and income data? These proposals may be difficult to implement in practice. 

Gainful Employment

The draft regulations would forgive student loans if an education program subsequently failed to satisfy gainful employment rules and the borrower was in one of the cohorts that lead to a loss of eligibility for federal student aid.

Cohort Default Rate

The draft regulations would forgive student loans if the college had a high cohort default rate and the borrower was in one of the cohorts that lead to a loss of eligibility for federal student aid. 

Will These Student Loan Forgiveness Proposals Survive Legal Challenges?

The Biden administrations’ first attempt at broad student loan forgiveness was blocked by the U.S. Supreme Court based in part on the major questions doctrine and the separation of powers. 

The second attempt to implement broad student loan forgiveness is based on the waiver authority in the Higher Education Act of 1965, as opposed to the Heroes Act of 2003. 

Plan B is likely to be blocked for the same reasons as the first attempt, even though the U.S. Department of Education is trying to tailor it to comply with the existing regulations concerning waiver and modification authority at 31 CFR 902 and 903.

The proposed regulations may also be found by the courts to be arbitrary and capricious and an abuse of discretion under the Administrative Procedures Act (PL 79-404). There are also flaws in its reliance on the parallel terms clause of the Higher Education Act of 1965 and the regulations at 34 CFR 30.70(e)(1).