Closed School Discharges, Interest Capitalization, and PSLF: Neg Reg in Full Swing With Packed Day 2

By Owen Daugherty and Hugh T. Ferguson, NASFAA Staff Reporters

In the second day of the Department of Education’s (ED) second negotiated rulemaking session, before committee members could move on to new topics such as interest capitalization and Public Service Loan Forgiveness (PSLF), negotiators revisited the issue of closed school loan discharge, after failing to reach tentative agreement on Monday.

Several negotiators noted how important a topic closed school discharge is and expressed interest in revisiting discussions surrounding the issue.

Daniel Barkowitz, director of financial aid at Valencia College and a NASFAA member, said it is a misconception that every time a school closes it is a high-profile event impacting thousands of students. Several schools close every year, he added, indicating school closure is a much larger issue than many think it is, and asked ED for data on this issue to provide helpful context.

Some negotiators spoke about the different scenarios in which schools close, pointing out that in many instances restructurings, mergers, and acquisitions are more administrative and don’t have the same impact on students as when a school simply closes its doors.

Jeri O’Bryan-Losee, a negotiator on behalf of student loan borrowers, said the committee shouldn’t be adding hoops for students to jump through, adding that it shouldn’t be up to students to sift through and figure out regulatory language when it comes to seeking out a closed school loan discharge.

“At the end of the day, it's the students who are harmed [when a school closes], regardless of what we think the severity might be,” she said, advocating for streamlining the process for students so they can easily understand it.

The committee did not take a temperature check again on this issue. The further deliberation was meant to provide ED with additional information and feedback on the important topic.

The committee then moved on to discussing the issue of interest capitalization, with Jennifer Hong, a negotiator for the department, noting that nothing has changed since the last session and that the department is looking to eliminate interest capitalization where it isn't required by statute.

However, Hong added that the department is not going to apply the new regulatory language retroactively or cap the amount of interest that is allowed to accrue, to the dismay of Persis Yu, a negotiator representing legal assistance organizations that serve students and borrowers, who expressed her disappointment that ED would not consider applying interest capitalization changes that come out of these negotiations retroactively. ED’s position on retroactivity is that it would be too burdensome and error-prone, and that the department’s resources are better directed toward improving other loan discharge provisions.

O’Bryan-Losee said she hoped ED would consider separating principal from interest, as it would go a long way with helping students understand their loans, considering many don’t understand the difference.

A temperature check on eliminating interest capitalization where possible brought tentative agreement. ED added it is open to additional proposals and that the conversation on this issue will be revisited in the future.

Before the lunch break, negotiators began discussing the issue of PLSF and ED’s proposed regulatory language. In addition to new regulatory language put forward by the department, borrowers hoping to achieve loan forgiveness through the PSLF program could be eligible for a temporary waiver recently issued by ED that allows eligible borrowers to count payments from all federal loan programs or repayment plans toward forgiveness, including those who made payments on loans originated through the now-defunct Federal Family Education Loan (FFEL) program. ED is offering additional flexibilities to borrowers by utilizing emergency authorities related to the coronavirus pandemic to temporarily suspend some of the program's statutory requirements.

A negotiator asked ED to provide an update on the PSLF waiver at some point during the negotiated rulemaking session.

Yu noted that overhauling PSLF needs to be paired with fixing income-driven repayment (IDR), which the department is considering as part of the negotiated rulemaking process.

The afternoon session kicked off by diving into another presentation from advisor to the committee Dr. Raj Darolia detailing interest capitalization, with a detailed borrower scenario in which unpaid interest could accrue over time and applies to the principal of the loan. Darolia’s example was meant to spur thoughts about interest accrual and prompt committee members to submit any specific language ahead of the department finalizing language on interest capitalization.

The conversation then shifted back to PSLF as participants raised questions concerning program eligibility, and the statutory authority related to measuring individual payments against the 10-year period.

Participants also questioned whether some borrowers would be excluded from PSLF benefits due to changes in employment. One participant, who had concern over the proposed language, raised a scenario in which a borrower could miss out on an eligible payment should a payment be made between two eligible jobs when a borrower would technically be unemployed for a short period. 

Ultimately, on a trio of temperature checks which split the PSLF issue paper into three sections, to better garner more targeted feedback, all came back negative with committee members expressing concern over ED’s definition of military service, how forbearance steering — a practice where borrowers are led to choose forbearances when other options would be better for them — should be considered and how ED will use the new FFEL data it is proposing to collect with the aim of communicating directly with those borrowers about PSLF.

Throughout the discussion, ED reiterated that its proposed language was aimed at ensuring that more eligible borrowers would have fewer obstacles to accessing this promised loan forgiveness.

“This is about the borrower, this is about the students and making sure that if you’re eligible, if you work these 10 years of public service that you will get your forgiveness on your loans,” Hong said. “That is the intent behind this rulemaking, that is the intent behind the changes we are making to PSLF. The intent is to remove any barriers that borrowers are facing and to really ensure that if you are entitled to this forgiveness that you receive it and you receive it in a timely way.”

Before concluding the day, ED went over major headings of their borrower defense papers and highlighted a number of regulatory changes that they hope will spur Wednesday’s conversation, beginning at 10 a.m. ET with borrower defense to repayment.

To round out the day’s session, members heard public comments, which delved into spousal consolidation issues, how borrowers’ IDR enrollment made them ineligible for PSLF, a regulatory issue that prevents certain doctors in Texas and California from being made eligible for PSLF, discussions related to ED’s current limited PSLF waiver, borrower challenges with servicers in relation to questions concerning PSLF eligibility, and experiences with borrower defense regulations.


Publication Date: 11/3/2021

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