Biden's Education Department just released its 'monumental' plans to make student-debt payments cheaper for borrowers and streamline targeted loan forgiveness programs

• The Education Department released final plans to improve student-loan forgiveness programs on Monday.
• It also included a plan to prevent interest from causing borrowers' debt to balloon.

Beyond broad student-loan forgiveness, President Joe Biden's Education Department has some key improvements in store for millions of borrowers.

On Monday, the Education Department released its final regulations — for implementation July 1, 2023 — aimed to improve targeted loan forgiveness programs, like ones for borrowers defrauded by for-profit schools, along with prevent interest from spiraling on borrowers' balances.

These changes are part of the rulemaking process and received input from industry stakeholders, and they reflect the department's final roster of proposed fixes for this year.

"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," Education Secretary Miguel Cardona said in a statement.

"These transformational changes will protect students who've been cheated by their colleges from the bureaucratic nightmares of the past and ensure that all our targeted debt relief programs live up to the promises made by Congress in the Higher Education Act," he added. "We're also protecting borrowers from higher costs by limiting the practice of tacking unpaid student loan interest onto their principal balances."

Here are the key changes student-loan borrowers should start seeing next summer.

Improvements to targeted loan forgiveness programs

Borrower defense to repayment. When borrowers believe they were defrauded by the school they attended, they can file a borrower defense claim. If they successfully prove fraud, their remaining student debt will be forgiven.

Biden's new rule allows borrowers to file claims individually or as a group. It also requires approved claims to have a conclusion that shows the school acted in such a way that warrants full student-debt relief.

It also lays out a process for the department to go after the school for the cost of approved claims, and for loans issues before July 1, 2023, the department can recoup those funds if the claims would have been approved under the standards in place at the time.

Closed school discharges. If a school shuts down abruptly, many borrowers can be left with student debt they cannot pay off, leading to a default. The new rules will provide automatic discharges one year after a school closes for borrowers who were enrolled at the time of the closure or left 180 days before the closure.

Total and Permanent Disability discharges. Borrowers who prove they are totally and permanently disabled will be getting additional pathways to relief. The new rule allows those borrowers who receive additional types of disability review codes from the Social Security Administration — aside from total and permanent disability — to qualify for a discharge. It also eliminates the three-year income monitoring requirement that previously caused improper denials for relief because borrowers struggled with the paperwork.

Public Service Loan Forgiveness. The department already previewed changes it's making to the Public Service Loan Forgiveness (PSLF) program, which forgives student debt for government and nonprofit workers after ten years of qualifying payments. After the temporary waiver for the program with expanded benefits expires on Tuesday, the new rules will still help borrowers by allowing them to receive credit for late payments, along with counting periods of deferment or forbearance toward forgiveness. More information on those new rules can be found here.

Preventing interest from spiraling

In July, the Education Department previewed its plan to tackle surging interest. Monday's announcement reflects the final version of that plan. Interest capitalization occurs when accrued interest is added to the original loan balance, and future interest grows based on that higher amount. The department plans to eliminate capitalization when it's not required under the Higher Education Act.

Currently, the department capitalizes unpaid interest annually during any period of negative amortization — in which a borrower fails to cover interest due on the loan — but doing so in every instance is not necessarily required. For implementation in July, the department plans to ensure capitalization doesn't happen when a borrower first enters repayment, when a borrower leaves forbearance, when a borrower enters default, and during any periods of negative amortization under an income-based repayment plan.

In the meantime, the department is also working to implement its up to $20,000 student-loan forgiveness plan. While a conservative lawsuit has temporarily halted the administration from actually discharging any student loans until it makes a final decision on the legality of relief, Cardona told reporters on Monday that he is still moving "full speed ahead" with the policy.