US President Joe Biden delivers an update on the Student Debt Relief Portal Beta Test in the South … [+]
The Biden administration has released final regulations that will provide sweeping changes to the federal student loan system. The new rules will curtail interest accrual and expand relief under several existing student loan forgiveness programs.
The release of these final regulations is the next step in a long process that began last year with negotiated rulemaking, where the Education Department convened key stakeholders to review and approve proposed reforms to student loan programs.
“Today is a monumental step forward in the Biden-Harris team’s efforts to fix a broken student loan system and build one that’s simpler, fairer, and more accountable to borrowers,” said U.S. Secretary of Education Miguel Cardona in a statement on Monday.
Here’s an overview of the major changes that will result from the new regulations.
The new federal regulations will curtail student loan interest capitalization.
In many circumstances, student loan interest can accrue on top of a borrower’s monthly payments, such as when the borrower is in an income-driven repayment plan. In addition, interest can accrue during many periods of nonpayment, such as a forbearance. Over time, this interest accrual can result in steadily increasing balances.
Adding to the problem is that certain events can cause that accruing interest to be added back on to the loan principal balance through a process called interest “capitalization.” Since interest is charged as a percentage of the loan principal, capitalization has a compounding effect, where interest accrues on interest. This can lead to substantial balance increases.
The new federal regulations will eliminate certain interest capitalization events including when a borrower first enters repayment, when a borrower exits a forbearance, and when a borrower leaves most income-driven repayment (IDR) plans such as Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE). Interest will still be capitalized for borrowers who leave the Income-Based Repayment (IBR) plan, however, because changing that rule would require an act of Congress.
The final regulations released on Monday will also streamline and expand student loan forgiveness under several existing programs:
The new federal regulations are expected to be effective by July 1, 2023. In the meantime, there are several other initiatives by the Biden administration that may provide significant relief for federal student loan borrowers by then, as well:
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