Proposed USED Regulations for Student Loans

Summary:

The Department of Education proposes amendments to the regulations governing the waiver of student loan debts under the Higher Education Act of 1965. These changes aim to provide targeted debt relief by specifying conditions under which the Secretary may exercise discretion to waive student debts. 

The new rules, which will be open for public comment starting April 17, involve nine specific regulations under the Higher Education Act.  A second set of rules will also be introduced soon to help borrowers facing hardship,  including proposals to authorize the automatic forgiveness of loans for borrowers at a high risk of future default as well as those who show hardship due to other indicators, such as high medical and caregiving expenses.

Key provisions include the waiver of outstanding loan balances for borrowers meeting certain criteria related to loan forgiveness eligibility, loans for attendance at institutions affected by specific secretarial actions, and loans linked to institutions or programs with poor financial outcomes.

These proposed regulations would, among other things:

1. Cancel excessive interest accumulation, which has significantly increased the debt for over 25 million borrowers.  
2. Eliminating student debt for borrowers who entered repayment at least 20 years ago  for undergraduate debt and 25 years for graduate debt.
3. Authorizing the automatic discharge of debt for borrowers who are otherwise eligible for loan forgiveness under SAVE, closed school discharge, PSLF, or other forgiveness programs, but have not successfully applied due to paperwork requirements, bad advice, or other obstacles.
4. Waive debts for students who attended institutions that lost eligibility due to failure in accountability standards or that closed following such actions.
5. Include provisions specifically for loans associated with closed Gainful Employment programs known for high debt-to-earnings ratios or low earnings.

The rationale behind these changes is to alleviate the financial burdens of student loans for borrowers, particularly those affected by institutional failures or mismanagement, thereby reducing the risk of delinquency or default for these individuals. The proposed amendments aim to make the process of obtaining relief more transparent and equitable, providing a clearer path for those whose educational investments did not yield the expected financial value.

Commentary:

I remain very proud to have been an alternate on the Negotiated Rulemaking Committee that the Department of Education convened to assist in drafting these regulations and believe that these will provide real and meaningful relief for student loan borrowers,  particularly those in such severe financial distress that they file bankruptcy.

The proposed amendments to the regulations governing student loan debts by the Department of Education are specifically targeted at providing relief from student loans under certain conditions, which can have significant implications for debtors considering or currently in bankruptcy. Here are the main effects these proposed changes could have on such debtors:

• Enhanced Discharge Opportunities: Traditionally, student loans are difficult to discharge in bankruptcy due to stringent requirements to demonstrate "undue hardship". The proposed regulations could provide an alternative pathway for relief, particularly for those who have loans tied to institutions that failed to meet educational or financial standards, or that closed under adverse conditions. This could reduce the need for some debtors to seek a student loan discharge through bankruptcy proceedings.
• Impact on Bankruptcy Proceedings: For those already in bankruptcy or who still need to file due to other debts, having student loans waived could simplify their bankruptcy proceedings. With fewer debts to resolve or reorganize, the process could be quicker and outcomes potentially more favorable.  Coupled with the changes that go into effect on July 1,  2024,  under  34 C.F.R. § 685.209(k)(4)(iv)(K),  which provides that all Chapter 13 Debtors  will receive credit towards their IDR forgiveness period for every month in their case- regardless of payment on the student loans,  bankruptcy provides even greater options for dealing with student loan debt.
• Potential for Financial Recovery Post-Bankruptcy: Debtors who successfully have their student loans waived due to the regulations may find it easier to recover financially post-bankruptcy. Without the burden of student loan repayments, they might better manage their remaining debts and rebuild their credit faster.
• Bankruptcy Filings: If borrowers can have their student loans waived under the new rules, this may reduce the total debt burden that leads some individuals to file for bankruptcy. By decreasing the amount of nondischargeable debt (like student loans), the regulations could lessen the financial strain that compels individuals to consider bankruptcy as a viable option.  
  • That said,  bankruptcy can provide,  with both the Student Loan Adversary Proceeding guidance from the DOJ making discharge easier and because starting very soon Chapter 13 debtors automatically will make progress towards IDR forgiveness,  greater options and relief than these regulations alone.  
  • Further,  while some of these forgiveness and relief programs might trigger state and,  if not renewed before 2025, federal tax consequences,  by incorporating that relief to a bankruptcy plan those taxes might be avoided.
  • Since these new regulations,  together with other programs,  are going to be very complicated for borrowers to navigate successfully on their own.  (Especially as the historically negligent,  if not openly hostile, assistance provided by student loan servicers shows no indications of changing.)  That should lead many consumer bankruptcy attorneys to broaden the scope of their practice and breadth of their knowledge to include student loan relief,  both with and without bankruptcy.