On Wednesday, the Department of Education (ED) released a Notice of Proposed Rulemaking (NPRM) for the majority of topics negotiated by the Affordability and Student Loans committee that convened last fall as part of the department’s 2021-22 negotiated rulemaking agenda.
The NPRM covers six of eight topics addressed in the fall rulemaking session: borrower defense to repayment, total and permanent disability loan discharge, closed school loan discharge, false certification loan discharge, student loan interest capitalization, and Public Service Loan Forgiveness (PSLF). Draft rules on two other areas covered by the Affordability and Student Loans committee — Prison Education Programs, where consensus was reached, and income-driven repayment, where consensus was not reached — are currently under review with the Office of Management and Budget (OMB) and are expected to be released at a later date.
Broadly, the NPRM reflects ED’s stated desire to streamline and simplify processes for borrowers, whether that be through adding automation where possible, creating a single federal standard to reduce complexity, or expanding eligibility where statute permits. Greater institutional accountability was also a theme of this rulemaking session and appears in the proposed regulatory text as well.
Borrower Defense to Repayment
The negotiating committee did not reach consensus on borrower defense to repayment. When consensus is not reached, ED is free to draft regulatory language of its own, but typically relies on discussions from rulemaking to inform its draft regulatory language. The proposed rule establishes a single federal standard for borrower defense claims. Currently, there are three sets of borrower defense rules. Which rule applies to a borrower’s claim is based on the loan disbursement date, which was difficult for ED to administer and resulted in disparate outcomes on identical claims, even for individual borrowers.
ED proposes to apply the new federal standard created in this rulemaking process to all new claims filed as of July 1, 2023, as well as to pending claims filed prior to that date. The proposed rule would allow a claim to be filed based on any of the following grounds:
Substantial omission of fact
Breach of contract
Aggressive and deceptive recruitment
A federal or state judgment or departmental adverse action against an institution that could give rise to a borrower defense claim
The rule would not subject borrowers to a limitations period on when they could file a claim and would allow for a group claims process. The rule includes a presumption of the borrower’s reliance on the facts provided by the school that led to their decision to borrow a loan, and includes a rebuttable presumption of full relief.
Additional institutional accountability is factored into the proposed borrower defense rule, with ED enhancing its existing ability to recoup funds from institutions for approved claims and establishing a process by which the department will recoup funds. Institutions would also be required to make disclosures to both the public and to ED on judicial and arbitration filings and awards pertaining to a borrower defense claim.
ED adds its own accountability provision in the proposed rule, allowing for automatic discharge for individual borrower defense claims not adjudicated within three years of the borrower filing a materially complete application.
Finally, the proposed borrower defense rules also include a ban on the institutional practice of requiring students to agree to mandatory pre-dispute arbitration and waiving their right to participate in class action lawsuits.
Elimination of Non-Statutory Student Loan Interest Capitalization
ED proposes to eliminate instances where interest capitalization (the process by which accrued interest is added to the principal balance of a borrower’s loan) is not required in statute.
The proposed language reflects what was agreed to by the committee with their consensus vote and eliminates the practice of interest capitalization in the following instances:
Upon entering repayment
Upon the expiration of a period of forbearance
Annually after periods of negative amortization under the alternative repayment plan or the income-contingent repayment plan
When a borrower defaults on a loan
Upon the borrower’s failure to recertify income under the Pay as You Earn (PAYE) repayment plan, or upon choosing the leave PAYE program
Some statutory interest capitalization events cannot be eliminated through regulation and would require Congress to take action. Those include loan consolidation, the expiration of a period of deferment (excluding the cancer treatment deferment), and upon determination that a borrower paying under the Income-Based Repayment (IBR) plan no longer has a partial financial hardship and/or fails to recertify their income.
Total and Permanent Disability
Negotiators also reached consensus on loan discharges for borrowers with a total and permanent disability (TPD). Among the changes to current regulations, the proposed rule eliminates the three-year income monitoring period during which a discharged loan could be reinstated. The types of Social Security Administration (SSA) disability determination statuses that would qualify a borrower’s loans for TPD are expanded under the proposed rule, as are the types of SSA documentation and the types of medical professionals who can certify TPD status.
The proposed rule also allows for automatic loan discharges in instances where ED has information about disability status from other federal agencies, such as the Veterans Administration and the Social Security Administration.
False Certification Discharge
As with borrower defense, ED’s proposed false certification discharge rules — on which the committee reached consensus — would eliminate existing provisions that apply different qualification criteria based on when a loan was disbursed. The same new rules would now apply to all loans regardless of loan disbursement date. ED proposes several changes to false certification discharge that they consider to be overly burdensome to borrowers. For instance, they remove the current provision that borrowers cannot receive a false certification discharge if they lied about having a high school diploma or equivalent, acknowledging the fact that students might lie in the face of coercion by the institution and in those instances should qualify for loan discharge.
Closed School Discharge
For closed school discharges, on which the committee did not reach consensus, ED proposes to update the definition of a school’s closure date to be the earlier of the date that school ceases to provide educational instruction in most programs, or a date chosen by the Secretary that reflects when the school had ceased to provide educational instruction for most of its students. Borrowers who withdraw within 180 days of the school’s closure would qualify for closed school discharge.
ED also proposes to remove the existing limitation that a borrower can only receive an automatic closed school discharge if they don’t re-enroll within three years of the school’s closure date. Automatic discharge would be available within one year of the school’s closure date so long as the borrower did not accept and complete a teach-out.
Students could still apply for and receive a closed school discharge even if they enrolled in a comparable program at another school, provided it was not through an approved teach-out.
Public Service Loan Forgiveness
Many of the changes ED proposes related to PSLF involve new, clarified, or expanded definitions, such as for types of public service employment. ED retains the 30-hour per week definition of full-time work, but removes the provision that the requirement for full-time employment is the higher of 30 hours or the number of hours the individual’s employer considers full-time. ED also adds a method for determining the equivalent of full-time employment for individuals working in postsecondary education in non-tenure track positions (also known as contingent or adjunct positions).
The proposed rules incorporate some aspects of the temporary PSLF waivers that are set to expire on Oct. 31, 2022, such as allowing payments to count toward the required 120 payments for PSLF even if payment is received outside of the currently permitted 15-day window, or was made in multiple installments. The current practice of resetting the number of qualifying monthly payments counted toward PSLF for Direct Loan borrowers who consolidate their loans would be eliminated, allowing past pre-consolidation payments to count toward PSLF. Borrowers would also be permitted to make a payment to cover some or all of the payments they didn’t make while under a deferment or forbearance and have the months covered by the payment count toward PSLF, so long as they otherwise met the employment criteria for PSLF during the period of deferment or forbearance.
ED would also permit lump sum payments to count toward future months’ qualifying payments, and time spent in certain types of deferment such as cancer treatment or military service could also count as months of PSLF qualifying payments. A reconsideration process for denied applications is also proposed.
ED proposes to simplify the PSLF process for borrowers by entering into data sharing agreements with other agencies that would allow ED to automatically grant PSLF in cases where the borrower is a federal employee.
ED considered during negotiations, but ultimately did not include in the proposed language, a provision to permit individuals performing public service work at a for-profit entity (such as a nurse at a for-profit hospital) to qualify for PSLF. ED concluded that it was not administratively feasible to make such a change, which was a significant factor in negotiators not coming to consensus on this topic.
ED does, however, seek public comments on some narrow exceptions to their position that individuals employed by for-profit organizations do not qualify for PSLF. For instance, doctors in California and Texas who work at non-profit hospitals are prohibited by state law from being employees of those hospitals, effectively excluding those individuals from PSLF. ED is also considering an exception to allow for-profit early childhood education organizations to meet the qualifying employer criteria, potentially allowing employees of those organizations access to PSLF.
As a reminder, ED also conducted a separated rulemaking session in early 2022 focusing on Institutional and Programmatic Eligibility. No proposed rules have yet been released from that session and most appear planned for release in 2023, pushing effective dates for those rules to 2024 at the earliest.
Following a public comment period on the draft rules released this week, ED will review comments and make necessary changes to the proposed rules. Any final language published by Nov. 1, 2022 will become effective July 1, 2023 unless specified for early implementation by the department.
Comments are due Aug. 12, 2022. Please share your feedback on these proposed rules with NASFAA to inform the drafting of our comments, as well as any comments you submit on behalf of your institution, by emailing [email protected].
Publication Date: 7/13/2022