Student Loan Reform Updates: Agreement Reached on Several Key Changes, But Other Student Loan Reforms Remain Uncertain

For the last several weeks, the Department of Education has been engaged in a process called “negotiated rulemaking” to revamp regulations governing critical federal student loan programs. The Department has indicated that its goal is to improve access to several programs and streamline how they operate to benefit federal student loan borrowers in the long run. But the process can be long and tedious.

What is Negotiated Rulemaking?

Negotiated rulemaking is the procedure through which a federal agency solicits public input on proposed changes to federal regulations. A negotiated rulemaking committee, comprised of key stakeholders, tries to reach consensus on an agency’s proposed changes. In the Department of Education’s case, the current negotiated rulemaking committee is comprised of representatives for student loan borrowers, legal advocacy groups, veterans, disabled borrowers, schools, and government officials, among others.

Rulemakers hold periodic public hearings, called negotiated rulemaking sessions, during which the Department’s regulatory proposals are discussed and debated, and the public is invited to comment. The sessions are grouped by specific proposals to change different elements of the federal student loan system. Importantly, federal regulations can be tweaked, but only Congress can amend underlying federal statutes. As a result, there's only so much that the Department can do to make wholesale changes to aspects of the federal student loan system without Congressional legislation.

If the negotiated rulemaking committee reaches a consensus on proposed changes, the Department can move forward and finalize the proposals, eventually making them into law. If the committee fails to reach consensus, the Department can proceed on its own, deciding what, if any, changes to make to its proposals based on the feedback it received during the rulemaking sessions.

Last week, the Department made key progress in reforming several federal student loan programs but fell short on others. Here’s where things stand.

Student loan interest capitalization

The negotiated rulemaking committee reached a consensus on reforming federal student loan interest capitalization, which will have significant benefits for borrowers going forward.

Interest capitalization occurs when accrued interest increases over time (often due to a deferment, forbearance, or an income-driven repayment plan with payments that are less than monthly interest accrual) and is then added back on to the principal balance. This can cause interest to accrue on interest, accelerating loan balance growth over time.

The negotiated rulemaking committee agreed on the Department's proposals to eliminate certain interest capitalization triggers, including exiting a forbearance, leaving certain income-driven plans such as the Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) plans, failing to re-certify income on time for income-driven plans, and going into default status. The changes would be effective when the regulations go into effect (meaning they would not be retroactive).

Total and Permanent Disability (TPD) Discharge

The Total and Permanent Disability (TPD) program discharges the federal student loan debt for borrowers who are unable to maintain substantial, gainful employment due to a medical disability. The current rules require borrowers to submit a formal application detailing their eligibility either through a physician's certification or through proof of a military service-connected disability or receipt of Social Security disability benefits with a disability review period of five years or longer. Borrowers who are approved for a TPD discharge are subject to three years of post-discharge income monitoring, during which the loans can be reinstated if the borrower fails to respond or earns income from employment that exceeds federal guidelines.

Last week, the negotiated rulemaking committee reached a consensus on reforming the TPD Discharge program. The Department had proposed relaxing the eligibility criteria and application procedures for Social Security disability benefits recipients. The Department had also proposed eliminating post-discharge income monitoring, which can be burdensome for borrowers struggling with physical and psychological impairments and has resulted in thousands of TPD borrowers getting their discharges reversed. The Biden administration had already temporarily suspended post-discharge income monitoring in response to the Covid-19 pandemic, so the Department’s regulatory changes will enshrine that reform into federal law.

A new Income-Driven Repayment plan

The negotiated rulemaking committee failed to reach a consensus on the Department's proposed new income-driven repayment plan, called Expanded Income-Contingent Repayment (EICR).

The Department's EICR proposal provides a unique (and controversial) marginal payment approach, offering a much lower repayment formula for the lowest-income borrowers and then comparatively higher payments for middle and higher-income earners. EICR would largely mirror the REPAYE plan in most other aspects. Still, EICR would be limited to undergraduate federal student loans only – effectively excluding Parent PLUS borrowers (who already have limited options) and borrowers with graduate school loans.

The negotiated rulemaking committee was virtually united in opposing the EICR plan as proposed, with one participant noting that she could not recall another time when there had been such a near-universal rejection of a Department of Education proposal by a negotiated rulemaking committee. Advocates for borrowers have argued for years that there should be a single, new simplified income-driven repayment plan that provides clear benefits for all federal student loan borrowers so that repayment can be fairer and the Department can clean up a messy, multi-part income-driven repayment plan system characterized by an “alphabet soup” of different individual plans (like IBR, ICR, PAYE, and REPAYE). Rulemakers argued that the EICR plan, as proposed, falls far short of what is needed.

Public Service Loan Forgiveness (PSLF)

The Department of Education is proposing more permanent changes to the Public Service Loan Forgiveness (PSLF) program that go beyond the recently-expired Limited PSLF Waiver program, which was temporary and ended on October 31, 2022. The proposals include streamlining the PSLF application process, allowing certain kinds of deferments and forbearances and more kinds of payments to count towards loan forgiveness, and allowing payments made before Direct loan consolidation to qualify in some cases.

Advocates, however, wanted the Department to go further by expanding the kinds of eligible employment that would qualify, such as for healthcare workers employed by a for-profit entity or contractors who do work solely for nonprofit or government entities. The rulemaking committee failed to reach consensus on proposed changes.

What's next?

For proposals that reached a consensus, such as the interest capitalization reforms and changes to the TPD Discharge program, the Department can move forward to finalize those regulations, eventually making them into law. For proposals that failed to reach consensus, however, the Department can choose whether or not to amend its proposals and incorporate changes suggested by members of the negotiated rulemaking committee.

Even in areas of agreement, however, it will take quite some time for new regulations to go into effect; the Department estimated that the rules would be effective in July of 2023.