Department of Education Proposes New Rules for Student Loans

Yesterday, the Department of Education proposed new rules to ease and clarify the discharge process for disabled borrowers and create a new income-contingent payment system for borrowers.

The new federal student loan regulations would amend the Federal Perkins Loan program, the Federal Family Education Loan program and the William D. Ford Federal Direct Loan program to help borrowers receive forgiveness on their student loans. In 2011, there were 78,390 disability applications out of the 179,958 loans outstanding.

The federal student loan program forgives student loan debt for borrowers who become permanently disabled and are unable to work. However, a ProPublica investigation from last year found that borrowers have trouble navigating the current system and many do not receive this debt-forgiveness.

In many cases, the Social Security Administration approves the disability claims of borrowers, but the Department of Education rejects the same claim for discharging their student loans. Many borrowers never find out why they were rejected.

In ProPublica’s investigation, they discovered that the evaluation process for whether borrowers qualify for student loan forgiveness is subjective, with “no written medical standards for determining disability” and “no formal appeals process.”

These new regulations are supposed to fix this by clarifying the rules and streamlining the process, as The Chronicle of High Education explains:

Under the proposed rules, borrowers with federally guaranteed loans would have to submit only one discharge application to the Education Department rather than having to notify each lender and guarantee agency separately.

The Department will also send all notifications during the process to both the borrowers and the borrowers’ representative, as many borrowers need help completing the process due to their disabilities. To increase transparency, the proposed rules would also require the Department to send more detailed letters to denied borrowers explaining why they did not qualify for a discharge of their student loans. There was no estimate for how many borrowers it would impact or how much borrowers would save.

The other major new rule in the plan is the proposal of a new loan repayment option based on President Obama’s Pay As You Earn initiative. The President’s plan would cap borrowers’ payments at 10 percent of their discretionary income and would make them eligible for loan-forgiveness after 20 years of payments.

The Department of Education’s plan would cap the payment of borrowers with a direct loan at 10 percent of the difference between the borrower’s annual income and 150 percent of the federal poverty line. After 20 years of payment, the borrower would then qualify for student loan forgiveness. The Department estimates that 1.67 million borrowers will take advantage of this new program, with 400,000 receiving loan forgiveness and borrowers saving $2.1 billion from 2012-2021.

The Department will accept comments until August 16 and will issue the final rules later this year.

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Danny Vinik

Danny Vinik is an intern at the Washington Monthly.