US Department of Education in Washington, DC
Caroline Breman | CQ-Roll Call, Inc. | Getty Images
The Biden administration announced Wednesday that it plans to make sweeping changes to the federal student loan system, including making it easier for public employees to get debt forgiveness and setting new limits on interest.
“We are committed to fixing a broken system,” U.S. Education Secretary Miguel Cardona said in a statement.
Key elements of the proposal include:
- Protection of defrauded borrowers: Under the proposed rules, students who attended for-profit schools that lied to or took advantage of them could be treated as a class for debt cancellation, meaning individuals would not have the burden of making their own case. Defrauded borrowers will also be given more leeway by being able to sue for loan cancellation, and the definition of misconduct by schools will be expanded to include aggressive and deceptive hiring practices. Many colleges may also be prohibited from requiring borrowers to sign binding pre-dispute arbitration agreements or class action waivers.
- Overhaul of the Program for granting loans for public services: The policy allows debt cancellation after 10 years for those who work for the government or certain nonprofits. Borrowers who were in certain types of forbearance or deferment could have those months counted toward their grace period. Currently, these periods are not counted. Delinquent payments will also no longer be excluded from borrowers’ total qualifying payments.
- Changes to how interest is calculated: The practice of interest capitalization on federal student loans, in which accrued interest is added to the principal balance, would also be eliminated in cases where the loan goes into forbearance or defaults on the loan.
The public has 30 days to comment on the Department of Education’s proposed regulations, and the final rules will take effect no later than July 1, 2023.
The changes could affect 40 million Americans.
While supporters have long called for these changes, the Biden administration has come under increasing pressure to respond more deeply to the student loan crisis by forgiving much or all of the debt.
The nation’s $1.7 trillion in student loan debt is more than credit card or car debt, and more than 10 million borrowers were behind on their payments before the pandemic.
On the election campaign, Joe Biden said he supports withdrawing $10,000 from borrowers’ accounts. Doing this will cost approx 321 billion dollars and completely forgive the loans of about a third of student loan borrowers.
As the White House mulls how to move forward with loan forgiveness, the amount it must cancel remains one of the biggest sticking points.
The NAACP has been vocal that $10,000 won’t be significant enough for black student borrowers. Wisdom Cole, national director of the association’s youth and college division, recently said on Twitter that losing just $10,000 would be “a slap in the face.”
The top Senate Democrat, Chuck Schumer of New York — along with Sen. Elizabeth Warren, D-Mass., and other Democrats — are pushing the president to eliminate the $50,000 minimum for everyone.
However, no amount of forgiveness will leave all borrowers happy. More than 3 million student loan borrowers owe more than $100,000.
At the same time, many Americans resent the idea of any student debt forgiveness, including those who never took out student loans or attended college. Some Republicans said they would try to block the president’s attempt to cancel the debt.
These are all key considerations for Biden as November’s midterm elections approach.