New Proposed Student Debt Relief Regulations Offer Forgiveness Based on Hardship Waivers

On October 31, 2024, the U.S. Department of Education released proposed regulations aimed yet again at creating pathways for student loan borrowers to receive relief due to financial hardship. This initiative represents a new effort by the federal government to alleviate debt burdens on borrowers experiencing significant challenges in repaying their federal student loans.

These regulations seek to clarify the process and criteria for loan waivers, representing a shift in federal student loan policy. Though these regulations will likely be tied up in litigation, much like other efforts by the Bide Administration, it’s helpful to understand them because they indicate the Administration’s attitude toward student loan borrowers.

Key Elements of the Proposed Regulations

The regulations present a structured approach for the Secretary of Education to exercise existing authority, as outlined in sections 432(a)(6) and 468(2) of the Higher Education Act (HEA), to forgive federal student loan debt under conditions of hardship. This authority allows the Secretary to “waive or release any right, title, claim, lien, or demand” when borrowers face exceptional difficulty in repayment.

The new rules target borrowers with federal loans under various programs, including:

• William D. Ford Federal Direct Loan Program (Direct Loans)
• Federal Family Education Loan (FFEL) Program
• Federal Perkins Loan (Perkins) Program
• Health Education Assistance Loan (HEAL) Program

These loans have long served as primary means for students to finance higher education. However, increasing educational costs have outpaced income growth, leaving many borrowers unable to keep up with repayment, even with existing relief options like income-driven repayment plans. This regulatory proposal addresses these gaps, focusing on borrowers for whom existing debt relief solutions are insufficient.

Relief Pathways for Hardship

The proposed regulations introduce two main pathways for granting debt relief to eligible borrowers facing hardship:

1. Immediate Relief through Predictive Assessment

This pathway allows the Secretary to provide relief based on statistical models predicting a borrower’s default likelihood. Specifically, if data suggests an 80% or higher likelihood of default within the next two years, the Department may automatically forgive part or all of the borrower’s loan balance. This predictive model considers factors such as the borrower’s income, debt-to-income ratio, and loan repayment history, assessing hardship without requiring borrowers to submit additional documentation.

2. Holistic Assessment for Additional Relief

Borrowers not covered by the immediate relief model can apply for relief based on a comprehensive evaluation of their financial circumstances. This “holistic assessment” examines a broader array of hardship indicators, such as chronic illness, rising costs due to dependent care, or extraordinary medical expenses. Through this process, borrowers can present evidence of long-term hardship directly to the Department. This pathway is particularly geared toward borrowers with specific circumstances that predictive models may overlook.

The Department has also proposed a rebuttable presumption in favor of full waiver of debt in cases of severe hardship, meaning that, unless specific conditions justify partial forgiveness, borrowers meeting the hardship criteria will likely see their loans entirely waived.

Factors Considered in Hardship Determination

The regulations define hardship as situations likely to impair a borrower’s ability to repay their loans fully or where continued collection is not economically justified for the government. Under these criteria, the Department would examine:

• Income trends and employment instability
• Rising medical costs and care for dependents
• Factors indicating likelihood of default
• The high cost to the Department of continued collection efforts

Rationale and Public Involvement

The Department’s decision to release these regulations stems from findings that current repayment plans and discharge options do not fully capture the financial realities faced by some borrowers. Older borrowers, for example, may experience heightened financial strain due to medical expenses, while those with chronic health issues face compounded economic stress not addressed in conventional relief programs.

This regulatory action is part of a broader effort to improve the responsiveness of federal student loan programs to real-world financial challenges. To develop these regulations, the Department engaged in extensive public consultations, including a public hearing and feedback sessions with advocacy organizations, state representatives, and consumer rights groups. The Department has also invited public comments on the proposed regulations, particularly on specific questions such as whether “two years” is an appropriate timeframe for predicting default and if an 80% likelihood threshold is sufficient.

Potential Impacts of the Regulations

These proposed regulations are expected to have significant impacts on both borrowers and the federal budget. For borrowers, the anticipated benefits include:

• Reduced Financial Burden: Debt relief would alleviate stress associated with loan repayment, enabling borrowers to focus on other critical financial needs.
• Improved Access to Basic Needs: By removing debt obligations, borrowers may be better positioned to afford housing, medical care, and family support.
• Protection from Default Consequences: With the elimination of debt, borrowers would no longer face the risk of delinquency, which often leads to long-term credit damage and additional financial strain.

The regulations would also require administrative resources to process predictive assessments and evaluate holistic relief applications, potentially increasing costs for the Department. However, the Department expects these costs to be offset by the reduced expense associated with pursuing uncollectible debt.

Future Steps and Public Comments

The Department is actively seeking feedback on these regulations, encouraging borrowers, advocates, and stakeholders to weigh in through the Federal eRulemaking Portal. The deadline for public comments is December 2, 2024. Key questions under consideration include:

• Is the two-year timeframe appropriate for predicting default?
• What other forms of hardship should be considered as part of the holistic assessment?
• Are there ways to improve the process for borrowers to access relief?

This engagement is a vital component of refining the regulations and ensuring they adequately address the needs of borrowers across diverse financial situations.

A Step Forward for Student Loan Borrowers

These proposed regulations represent a significant step forward in federal student loan policy, acknowledging that a “one-size-fits-all” approach to debt repayment does not meet the needs of all borrowers. The Department of Education aims to provide targeted support for those facing severe financial challenges by establishing clear pathways for hardship relief. For borrowers, this proposal could mean a renewed chance at financial stability and relief from the lifelong burden of student debt. The Department’s efforts mark an ongoing commitment to adapt federal education financing to the evolving economic landscape, ensuring that debt relief remains accessible and equitable.