Education Dept. Seeks to Curb Student Loan Interest

The Education Department is preparing a raft of new rules for federal student loans that aims to expand access to various relief programs and undo changes made during the Trump administration.

The most far-reaching move would affect nearly all the tens of millions of people with federal student loans by limiting interest capitalization — which adds unpaid interest to the borrower’s principal, compounding the total amount owed. Under the Biden administration’s proposal, interest would no longer be capitalized when a borrower either starts repaying or defaults on a loan, as well as in certain other situations.

The Education Department is also planning changes to relief programs that benefit employees who work for the government and at many nonprofit organizations; disabled borrowers; and people who attended schools that closed abruptly or defrauded their students. The changes for defrauded students, in particular, would reverse restrictions imposed by Betsy DeVos, who tried to gut the aid program when she was the education secretary under President Donald J. Trump.

“We are committed to fixing a broken system,” Education Secretary Miguel A. Cardona said. “If a borrower qualifies for student loan relief, it shouldn’t take mountains of paperwork or a law degree to obtain it.”

The proposed changes will be open for public comment for 30 days, after which the department plans to finalize them so they can take effect in July 2023. The proposals include:

  • More generous standards for borrowers seeking relief on fraud claims;

  • A prohibition on mandatory arbitration agreements that prevent borrowers from suing schools that misled them;

  • Expanded eligibility and streamlined requirements for loan forgiveness for people who are permanently disabled;

  • A provision that would allow public service workers to get credit toward loan forgiveness for months that their loans were deferred because of cancer treatment, economic hardship or service in AmeriCorps, the National Guard or the Peace Corps.

President Biden faces heavy pressure from borrowers and progressive Democrats to reform the $1.6 trillion federal student loan system.

He has said he is considering using an executive action to fulfill his campaign promise to eliminate $10,000 per borrower in debt, but high inflation and political concerns have left him leery of doing so. Mr. Biden has promised to make a decision before the expiration of a pause on loan payments, which was imposed to provide relief during the pandemic. The pause is scheduled to expire next month.

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