The U.S. Department of Education has released new final regulations that strengthen key protections for distressed borrowers with federal student loans. The regulations also make conforming revisions to reflect legislative changes related to student loans.
The new regulations will make it easier for borrowers to get out of default and repay their loans by ensuring that “reasonable and affordable” payments to rehabilitate a loan are, in fact, reasonable and affordable. Consistent with the law, the final regulations specify that the rehabilitation payment amount must not be a required minimum payment, a percentage of the borrower’s total loan balance, or an amount based on other criteria unrelated to the borrower’s total financial circumstances.
In response to public comments on the draft rules submitted this summer by TICAS and others, the final rules require that borrowers seeking to rehabilitate defaulted loans be initially offered a payment amount based on what they would pay in Income-Based Repayment (IBR), which caps monthly payments at 15 percent of a borrower’s discretionary income. The draft rules would have allowed payments based on the IBR formula only after borrowers were offered and then rejected a different amount calculated by servicers and based on a long and complex form. In a change of course, the Department ultimately required payments based on the IBR formula to be offered first, in response “to the numerous comments we received expressing concerns about the amount of personal financial information a borrower requesting loan rehabilitation would [otherwise] have to provide.”
In addition, the final regulations permit borrowers who have been delinquent on their loans for at least 270 days to be placed in forbearance based on an oral rather than a written request. Borrowers in forbearance don’t have to make payments, but their interest keeps accruing and then capitalizes when the forbearance ends, leaving them owing even more.
To try to prevent institutions from pressuring borrowers to request oral forbearances during the period when institutions are held accountable for student loan defaults, the rules limit any forbearance granted based on an oral request to 120 days and prohibit consecutive 120-day forbearances. In another improvement over the draft proposal, borrowers who are placed in forbearance based on an oral request will receive written information, as well as an oral explanation, of their repayment options and how they can exit forbearance, as TICAS had recommended. The Department is allowing loan holders, colleges, and guaranty agencies to implement this rule on November 1, even though they are not required to comply until next July.
The Department publicly acknowledges the evidence “that some institutions are aggressively pursuing their former students to compel them to request forbearance on their loans, primarily during the cohort period when the institution is accountable for student loan defaults.” As detailed in our public comments, it’s well documented that some for-profit colleges have engaged in such abuses at borrowers’ expense while receiving billions of dollars in federal student aid. TICAS has identified steps the Education Department should immediately take to prevent such abuses.
Soon to be published in the Federal Register, the new rules also improve students’ access to loan discharges when schools shut down before they can finish their studies.