Caroline Brehman | CQ-Roll Call, Inc. | Getty Images The Biden administration announced Wednesday that it is moving to make sweeping changes to the federal student loan system, including making it easier for public employees to write off debt and imposing new limits on accrued interest. “We are committed to fixing a broken system,” US Education Secretary Miguel Cardona said in a statement. Key elements of the proposal include:
Protection for defrauded borrowers: Under the proposed regulations, students who attended for-profit schools that were lied to or taken advantage of could be considered for debt forgiveness as a group, meaning individuals would not be burdened with making their case alone their. Defrauded borrowers would also have more room to file a claim for loan cancellation, and the definition of misconduct by schools would be broadened to include aggressive and deceptive recruitment practices. It could also prohibit many colleges from requiring borrowers to sign mandatory pre-litigation arbitration agreements or class action waivers.
Review of the Public Service Loan Forgiveness Program: The program allows debt forgiveness after 10 years for those who work for the government or certain nonprofit organizations. Debtors who were in certain types of forbearance or deferments could count those months toward their timeline for relief. Currently, these periods do not qualify. Late payments will no longer be excluded from borrowers’ qualifying total payments.
Changes to how interest accrues: The practice of compounding interest on federal student loans, in which accrued interest is added to the principal balance, would also be eliminated in cases where a loan goes into forbearance or defaults.
The public has 30 days to comment on the Department of Education’s proposed regulations, and the final rules will take effect no later than July 1, 2023. As many as 40 million Americans could be affected by the changes. More from Personal Finance: Here’s How to Prepare Your Portfolio as Recession Approaches See When Tax Loss Harvesting Doesn’t Make Sense 5 Steps You Need to Take Now to Prepare Your Finances for a Recession
Federal student loan forgiveness is still undecided
While these changes have long been called for by supporters, the Biden administration is under increasing pressure to respond more deeply to the student loan crisis by forgiving a large amount or all of the debt. The nation’s $1.7 trillion student loan balance exceeds credit card or car debt, more than 10 million borrowers were behind on their payments before the pandemic. On the campaign trail, Biden said he supported clearing $10,000 from borrowers’ accounts. Doing so would cost about $321 billion and fully forgive the loans for about a third of student loan borrowers. As the White House considers how to proceed with loan forgiveness, if any, the amount it would have to write off remains one of the biggest sticking points. The NAACP was vocal about how $10,000 would not go far enough for Black student loan borrowers. Wisdom Cole, national director of the association’s youth and college division, recently said on Twitter that winning just $10,000 would be “a slap in the face.” The top Senate Democrat, Chuck Schumer of New York – along with Sen. Elizabeth Warren, D-Mass. and other Democrats – is pushing the president to cancel at least $50,000 for everyone. However, no forgiveness would leave all borrowers happy. More than 3 million student loan borrowers owe more than $100,000. At the same time, many Americans are outraged by the idea of any student debt forgiveness, including those who never borrowed for their education or went to college. Some Republicans have said they will try to block an effort by the president to cancel the debt. With November’s midterm elections looming, these are all key issues for Biden.
