On Friday, NASFAA submitted comments to the Department of Education (ED) on a package of proposed regulations that was negotiated in late 2021 related to college affordability and student loans. This is the third in a series of three articles that will be published this week to delve into the details of the proposal. Today’s article will focus on Public Service Loan Forgiveness (PSLF) and interest capitalization. See our previous articles on borrower defense to repayment (BDR), pre-dispute arbitration, and class action waivers; and loan discharges for total and permanent disability, closed schools, and false certification.
Public Service Loan Forgiveness
ED proposes to codify several provisions included in the temporary waivers in place since last October and that are set to expire at the end of this October. Among those provisions are allowing late payments and payments made in installments to count as qualifying monthly payments toward PSLF. While welcome news, this means that borrowers will face an eight-month gap between expiration of the waiver and the effective date of the new regulations, during which they will revert to the original PSLF payment counting rules. NASFAA asks ED in its comments to consider either extending the PSLF temporary waivers until these regulations take effect or implementing the new regulations early, as permitted by the Higher Education Act (HEA).
Borrowers in certain deferment and forbearance statuses, such as the cancer treatment deferment and national guard duty forbearance, would have their time during deferment or forbearance counted toward the 120 qualifying payments toward PSLF. Borrowers in non-qualifying deferments or forbearances would be granted a hold harmless provision, whereby they could make payments during deferment or forbearance that would count toward the 120 qualifying payments. Lump sum payments or monthly payments equal to or greater than the full scheduled monthly payment amount that are made in advance of the borrower’s scheduled payment due date could be counted as installments toward future payments for up to one year under the proposed regulations.
The definition of full-time employment for PSLF purposes would be changed to 30 hours per week, regardless of the number of hours the borrower’s employer considered full-time. A new calculation is introduced for determining whether a non-tenure track faculty member is working full-time as well. The department also adds a reconsideration process for denied PSLF applications.
ED sought comment on whether to extend PSLF eligibility to two groups of public service employees who are currently ineligible for PSLF: physicians in California and Texas who are prohibited by state law from being employed by the nonprofit hospitals where they work, and employees of for-profit early childhood education providers.
While NASFAA expressed support for including these two groups, it reminded ED that the statute makes no distinction between for-profit and nonprofit employers in establishing eligibility for PSLF. It is ED’s own regulations that limit PSLF eligibility to employment at government or nonprofit employers. NASFAA argues that a common theme throughout this rulemaking has been to end disparate treatment of similarly-situated individuals, yet ED continues to treat individuals doing identical work differently with respect to PSLF based on the tax status of their employer.
ED proposes to eliminate all non-statutory student loan interest capitalization events, including areas where capitalization is not required but is at the secretary of education’s discretion. The proposed regulations eliminate capitalization in such instances as when a borrower defaults on a loan, upon exiting forbearance, upon leaving the Pay As You Earn (PAYE) program, and upon no longer meeting the partial financial hardship criteria for PAYE. The statute still requires capitalization in certain cases, such as when a borrower exits deferment or when they no longer demonstrate a partial financial hardship under the Income-Based Repayment (IBR) plan.
ED argues in support of its proposal that interest capitalization is not common with other financial instruments and therefore leaves borrowers confused when it occurs, especially when they make a decision such as changing repayment plans and learn after the fact that they will now pay more on their loans because of interest capitalization.
Separate from the negotiated rulemaking process, Republicans on the House Committee on Education and Labor recently proposed legislation that would, among other things, eliminate all statutory interest capitalization events, covering the areas ED could not address through regulation.
Negotiators reached consensus on interest capitalization, but not on PSLF. As such, ED is free to draft proposed rules on PSLF as it sees fit, but changes to the interest capitalization language would have to be justified in the preamble of the final rule. ED will review public comments and revise the proposed regulations over the upcoming months. It is expected that ED will issue final regulations by Nov. 1, 2022, which will make the regulations effective on July 1, 2023 unless ED uses its early implementation authority.
Publication Date: 8/17/2022