A Sneak Peek At New Student Loan Rules Coming in July 2023

In November 2022, the Department of Education published final rules that will change regulations governing a variety of federal student loan cancellation programs as well as how interest impacts student loan burdens. The Department made significant changes to the following areas:

• Closed School Discharges, which are available when the borrower was unable to complete their program because their school closed;  
• Borrower Defense to Repayment, which makes cancellation available when the borrower’s school engaged in misconduct during enrollment or when trying to convince them to borrow federal loans;  
• False Certification Discharges, which are available when the borrower’s school falsely certified that they were eligible for or seeking federal student loans even though they were not. 
• Total and Permanent Disability Discharges, which are available when the borrower has a long-term or permanent disability that prevents them from maintaining employment; 
• Public Service Loan Forgiveness, which discharges a borrower’s remaining debt if they make 10 years of payments and are enrolled in a qualifying public service job;
• Interest Capitalization, which is when unpaid interest is added to the borrower’s principal balance, increasing the amount of interest that will be charged going forward. 
• How schools may include arbitration clauses and class action waivers in their contracts with students, which directly affects how borrowers may hold schools accountable for misconduct in court. For more information about how predatory schools have used these contract terms to prevent their misconduct from becoming public, click here. 

The new rules will go into effect on July 1, 2023. 

Across the board, these rules are a huge improvement. The discharge and cancellation program changes expand eligibility for student loan relief and improve access to that relief for eligible borrowers. Both types of changes are critically important: In the past, many borrowers have missed out on much-needed relief due to overly-narrow eligibility rules or unnecessary red tape and paperwork requirements. In addition, the interest capitalization changes will ultimately reduce the amount that student loan borrowers are charged, and will mean that financially struggling borrowers who rely on forbearances or income-driven repayment will be less likely to be punished with ballooning balances. 

NCLC will be posting details about these new rules, and tips about how to use them, from time to time between now and July 1, when they go into effect. In addition, NCLC publishes a Student Loan Law Treatise for attorneys working on student loan issues which discusses these rules in depth.  In the meantime, here is a quick preview of the very significant improvements the new rules will make for student borrowers: 

Closed School Discharge: Borrowers who were unable to complete their program because their school closed are eligible to have the loans they took out to attend the closed school cancelled, to receive refunds of any amounts paid towards those loans, and to have any negative credit history for those loans deleted from their credit report. The new rules will make it easier for borrowers to obtain relief; the Department estimates that it will result in $3.42 billion in discharges for borrowers whose schools closed before 2023. The new rules implement the following changes: 

• Borrowers who did not complete their program at the school, a branch of the school, or a teach-out and attended the school within 180 days of its closure will be eligible for a closed school discharge–even if, after the school closed, they enrolled in a different school. This is an improvement from the prior rules, which denied relief to  some borrowers who withdrew less than 180 days before closure or transferred credits from the closed school to a new school. 
• The new rules significantly expand when the Department will provide automatic relief to borrowers, without requiring that they submit a closed school discharge application, and will provide discharges sooner after the school closes. Under the new rules, the Department will automatically provide a closed school discharge within 1 year of the school’s closure to borrowers who either are not offered a “teach-out” to complete their program or who do not accept a teach-out. Additionally, borrowers who enroll but do not complete their program through a teach-out or by transferring to another branch campus will be given a discharge within 1 year of their last date of attendance. 

• The Department expanded its definition of when a school is “closed.” The new rules state that a school is closed when it stops the programs that enrolled the majority of students.  
• Where a school required the borrower to complete a prerequisite credential (like a certificate program or an associates’ degree) before allowing them to complete the program they intended to enroll in (like a bachelor’s degree program), the new rules allow a borrower to discharge the debt for both the prerequisite program and the program they intended to enroll in. 

Borrower Defense to Repayment Discharge: The new rules increase access to relief for borrowers who were harmed by unfair school recruiting and enrollment. Once they go into effect on July 1, 2023, the new rules will apply to all pending and future borrower defense applications, regardless of when the loan was issued. The rules make a number of changes to who is eligible for relief and the process to obtain relief. 

1. The new rules expand the types of misconduct that make borrowers eligible for relief. Under the new rules, borrowers who were harmed by their school’s misrepresentations and omissions related to their education or employment prospects or were subject to aggressive and deceptive recruitment are entitled to relief.  The new rules specify a list of new types of each of these categories of misconduct that will entitle borrowers to relief. 
2. The new rules eliminate restrictions on when a borrower can apply for relief, ensuring that borrowers do not lose out on relief simply because they find out about their rights too late. 
3. If a borrower’s claim is granted under the new rules, their loans taken out to attend that school will be discharged, they will receive a refund of all payments made on that loan, and the Department will delete all negative credit history associated with the loan. 
4. The new rules allow state agencies and legal aid organizations to submit borrower defense claims on behalf of groups of students who went to the same school. 
5. The new rules require the Department of Education to resolve borrower defense claims within 3 years of when the borrower applies. This is in response to the multi-year delays that borrowers have faced in the past. And there are teeth: If the Department fails to resolve the claim in time, the loans covered by the application will be unenforceable. 

Note: The Department of Education is already in the process of providing debt relief to borrowers who attended specific schools. To see more information, see our blog post here. 

Total and Permanent Disability: The Department has made it significantly easier for borrowers to discharge all of their federal loan debt if they are disabled and cannot work.

1. The new rule allows nurse practitioners, physician’s assistants, and osteopathic doctors–not just medical doctors–to attest that a borrower is disabled, making it easier for borrowers to get proof of their disability. 
2. The new rule expands which recipients of Social Security benefits may obtain a disability discharge without additional proof of disability. The existing rules only allow borrowers who are categorized by the Social Security Administration (SSA) as Medical Improvement Not Expected (MINE) to be eligible for a discharge. Under the new rules, additional Social Security statuses will be eligible: 
   1. borrowers whose disability onset date is five years before the total and permanent disability application; 
   2. borrowers who are receive compassionate allowance Social Security benefits;
   3. borrowers who are categorized as Medical Improvement Possible.
   4. borrowers who are receiving Social Security benefits based on a disability or SSDI benefits and are set for a review at 3 or 5-7 years
3. Under the new rule, borrowers will not be subject to income monitoring after they receive a discharge, and will only have their loans reinstated if they borrow new federal loans within 3 years of applying for a discharge. 
4. The new rules also expands the process for the Department to discharge borrowers’ loans without an application when it receives data from VA showing that the borrower is unemployable because of a service connected disability or data from SSA showing that the borrower is eligible for a discharge. 

Public Service Loan Forgiveness: The new rules will reduce some of the barriers that have in the past prevented borrowers working in public service jobs from getting their remaining debts cancelled after 10 years in repayment. The new rules will make permanent some of the elements of the temporary PSLF waiver that ended October 31. 

1. The new rule will count more types of payment towards forgiveness, including payments that are late, payments made in installments, and late payments. In addition, the new rule will count more types of deferment and forbearance towards forgiveness, and creates a process for borrowers to receive credit for periods of ineligible forbearance and deferment if they make payments equivalent to what they would have owed under an IDR plan (including credit for periods where the borrower would have owed $0 monthly payments).  
2. The new rule clarifies which organizations that are not 501(c)(3) organizations are qualifying “public service” organizations, and simplifies what counts as “full time employment.” 
3. The new rule will allow borrowers to count qualifying payments on Direct Loans before they consolidated their loans towards forgiveness, using a new approach to ensure consolidation does not wipe out past progress toward forgiveness.
4. The new rule also formalizes a reconsideration process for borrowers whose applications are denied. 

Interest Capitalization: The new rules reduce the amount borrowers will ultimately be charged on their loans by ending interest capitalization except where it is required by Congress. Interest capitalization is when interest that has not yet been paid is added to the borrower’s principal balance, causing even more interest to be charged going forward because interest is charged as a percentage of the new, higher principal balance. Under the current rules, interest is frequently capitalized in the federal student loan system, but under the new rules interest will no longer be capitalized in the following instances:

• When the borrower first enters repayment;
• After a forbearance;
• When a borrower enters default;
• When switching out of (or not recertifying on time for) a Pay As You Earn, Revised Pay As You Earn, or Income-Contingent Repayment Plan;
• During periods of negative amortization (ie, when the borrower’s monthly payments are less than the amount of interest charged each month) in Income-Contingent Repayment or the alternative repayment plan.

An NCLC representative served on the negotiated rulemaking committee that recommended these rules to the Department, and we applaud the Department for adopting them.  Check back on this site (and, if you’re an attorney, our Student Loan Law Treatise) for more information about these regulatory changes as July 1 approaches.