New student loan rules will reduce the cost for borrowers — what you need to know

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On Monday, the Education Department made adjustments to its student loan programs, and these new rules will reduce the amount many borrowers will owe. These changes are part of an attempt to protect borrowers by establishing a fairer and more accountable student loan system.

It is hoped these adjustments will streamline and improve the rules for major targeted debt relief programs, according to a press release issued on Monday, October 31.

“Borrowers entitled to debt relief under the Higher Education Act should be able to get it without wading through red tape and confusing tricks and traps,” said Under Secretary James Kvaal. “The regulations announced today will streamline a needlessly complicated system and give borrowers a simpler and more often automatic path to the discharges they deserve. They also stop shady schools from forcing students to sign their rights away as part of the price for admission and give the Department critical tools for holding colleges that take advantage of borrowers accountable.” 

Here are the changes scheduled to take effect July 1, 2023. 

Eliminate interest capitalization 

Interest capitalization is when borrowers’ unpaid interest is added to their principal. This increases the total amount owed, which in turn increases the amount of interest owed. Overtime, this can cause someone to owe more than what they borrowed in the first place. However, with these new changes, unless it is required by statute, interest capitalization will be eliminated.  

More Public Service Loan Forgiveness Benefits  

More benefits will be provided for borrowers seeking Public Service Loan Forgiveness. These benefits will let borrowers receive credit for late payments and count certain periods of deferment or forbearance toward forgiveness. Additionally, this change will simplify criteria to help borrowers certify employment, as well as provide more opportunities to correct problems.  

Borrower defense to repayment and arbitration 

This rule establishes a way for borrowers to seek repayment if misled or manipulated by their institution, and it includes the framework to decide claims individually or as a group. Basically, if borrowers were defrauded by an institution, they can file a claim. If they can prove fraud with this borrower defense claim, they’ll receive a repayment of their student loans. 

This rule also lays out rules for when the Department to recoup the cost of claims from schools. According to the Education Department, “For loans issued prior to July 1, 2023, the Department may pursue recoupment if the claims would have been approved under the borrower defense standards in place at the time the loan was issued.”

Total and permanent disability discharges 

This change gives more options for student loan borrowers to receive a discharge of their loans if they have a total and permanent disability. Borrowers who receive additional types of disability review codes from the Social Security Administration are now qualified for a discharge as well. Further, the three-year income monitoring requirement will now be eliminated, as it caused borrowers to lose discharges solely because they did not respond to paperwork requests. 

Closed school discharges

According to the Department, many borrowers who were eligible for discharges after their school closed did not obtain them, causing their loans to end up in default. This new rule will “provide an automatic discharge one year after a college’s closure date for borrowers who were enrolled at the time of closure or left 180 days before closure and who do not accept an approved teach-out agreement or a continuation of the program at another location of the school.” 

False certification

Finally, this rule addresses the problem when a student who was ineligible for loans had their eligibility falsely certified by a college. It creates a more streamlined path to a discharge for borrowers.  

Erin Bendig
Staff writer, personal finance

Erin pairs personal experience with research and is passionate about sharing personal finance advice with others. Previously, she was a freelancer focusing on the credit card side of finance, but has branched out since then to cover other aspects of personal finance. Erin is well-versed in traditional media with reporting, interviewing and research, as well as using graphic design and video and audio storytelling to share with her readers.