Plan B For Student Loan Forgiveness

The Biden administration’s efforts to provide student debt relief continue with the announcement of a Plan b for student loan forgiveness.

On Friday, September 29, 2023, the Biden administration announced the start of negotiated rulemaking for new regulations to enable broad forgiveness of federal student loans. They also released an issue paper that suggests some details of their proposed path to forgiveness.

The previous attempt at broad student loan forgiveness was based on the waiver authority in the Heroes Act of 2003. This attempt at forgiveness was blocked by the U.S. Supreme Court on June 30, 2023, based in part on the major questions doctrine and the separation of powers. The court said that the Heroes Act of 2003 allows simple modifications, not a “whole new regime.”

After the U.S. Supreme Court ruling, President Biden vowed to seek other ways of providing student debt relief. Here’s what they are proposing as a Plan B for student loan forgiveness.

Roadblocks To Broad Student Loan Forgiveness

The President cannot extend the payment pause and interest waiver indefinitely, since the Fiscal Responsibility Act of 2023 blocks further extensions unless authorized by a subsequent Act of Congress. In any event, such extensions would not provide permanent student loan forgiveness. 

That leaves financial relief implemented through new regulations. The Biden administration has already used new regulations to replace the REPAYE repayment plan with the new SAVE repayment plan. The SAVE repayment plan cuts the monthly payments on undergraduate debt in half. It also cuts the number of years required for student loan forgiveness for borrowers who start off with less debt.

The Biden administration is now seeking to use the waiver authority under the Higher Education Act of 1965 to forgive student loan debt. This waiver authority is taken out of context, since it is limited to loan forgiveness and discharge programs already authorized by Congress. It is also limited to Part B of the Higher Education Act of 1965, namely the Federal Family Education Loan Program (FFELP), so the Biden administration has to rely on the parallel terms clause to assert that the waiver authority applies to the Direct Loan program, even though the waiver authority is not a term and condition of the loans. 

The U.S. Department of Education is also relying on the regulations at 34 CFR 30.70(e)(1), which allow the U.S. Department of Education to “compromise a debt in any amount, or suspend or terminate collection of a debt in any amount” for debts under the FFEL, Direct Loan and Perkins Loan programs. These regulations are subject to the provisions of 31 CFR 902 and 903.

The regulations at 31 CFR 902.2 limit waiver and modification authority to situations in which:

• a borrower is financially incapable of repaying the full amount of their debt in a reasonable time
• the federal government is unable to collect the debt through wage garnishment and Treasury offset of Social Security benefit payments and income tax refunds, or other enforced collection proceedings
• the cost of collecting the debt exceeds the amount to be recovered
• there is significant doubt concerning the federal government’s ability to win a lawsuit against the borrower

The latter, for example, was used to justify the Sweet Settlement concerning the borrower defense to repayment discharge.

Plan B For Student Loan Forgiveness

The new path to forgiveness is much more limited than the previous attempt. However, this plan may have more success as a result of both the limitations and the path the Biden Administration is taking to implement it.

Generally, the borrower must be experiencing some kind of financial difficulty. If the Biden administration were to seek an expansive interpretation of the law and regulations, it would likely be found to be arbitrary and capricious and an abuse of discretion under the Administrative Procedures Act (P.L. 79-404). It might also be blocked by the U.S. Supreme Court for the same reasons as the previous attempt at broad student loan forgiveness, as well as the reliance on the parallel terms clause. 

During a press conference on Friday, September 29, 2023, the Biden administration said that they are not proposing to change the regulations at 31 CFR 902 and 903, so these limitations to the waiver and modification authority will still apply. 

Even if they were to change the regulations at 31 CFR 902 and 903 to expand the waiver and modification authority, such changes would conflict with the plain language of the Debt Collection Improvement Act of 1996 (P.L. 104-134) and the General Accounting Office Act of 1996 (P.L. 104-316).

Federal agencies are required by 31 CFR 901.1(a) to “aggressively collect all debts,” so the Biden administration cannot exercise any kind of discretion to stop collecting federal student loan debt as an alternative to exercising the waiver authority.

Five Groups Of Borrowers That May Benefits

The issue paper identifies five potential categories of borrowers who might qualify for forgiveness under new regulations to be issued by the U.S. Department of Education.

• Borrowers whose balances are greater than what they originally borrowed
• Borrowers whose loans first entered repayment decades ago
• Borrowers who attended programs that did not provide sufficient financial value
• Borrowers who might have been eligible for relief under income-driven repayment but who did not apply to repay their loans under income-driven repayment
• Borrowers who have experienced financial hardship, but for whom the current student loan system does not provide adequate support

These proposals are not well defined and will presumably be refined by the negotiated rulemaking committee.

For example, how will “sufficient financial value” and “financial hardship” be defined? How will it be implemented operationally? How will the proposals interact with the undue hardship requirements for bankruptcy discharge of student loan debt? 

Likewise, most borrowers initially owe more than what they originally borrowed because loan fees and the in-school deferment and grace period increase the debt at graduation by about a fifth. Perhaps the U.S. Department of Education is referring to borrowers whose loan balances increased after entering repayment. Deferments, forbearances and periods of non-payment can also cause loan balances to increase, as can late fees and collection charges. 

What Will Happen?

How will the new regulations distinguish between borrowers who are incapable of repaying their debt, as opposed to borrowers who are unwilling to repay their debt? Will borrowers be required to have made a good faith effort to repay their debt? 

The negotiated rulemaking committee will meet on October 10-11, 2023, November 6-7, 2023 and December 11-12, 2023. Members of the public may provide public testimony at the end of each day.

If the committee reaches consensus, the consensus opinion will form the basis for a Notice of Proposed Rulemaking (NPRM). Otherwise, the U.S. Department of Education can specify the details of the NPRM. 

The NPRM will be published in the Federal Register, followed by a public comment period of 30-90 days. The new regulations are likely to receive more than 10,000 public comments. The U.S. Department of Education will then publish a final rule in the Federal Register. The final rule must address the substantive public comments received during the public comment period.

The master calendar provisions require a final rule to be published by November 1 for the new rules to become effective by the following July 1. Thus, the soonest the new rules can go into effect is July 1, 2025. In some circumstances, the U.S. Department of Education may be able to implement the new rules sooner. 

The Biden administration has already provided $126 billion in financial relief to more than 3.5 million borrowers through existing student loan forgiveness and discharge programs, about 8% of the total. This includes the cancellation of federal student loan debt after 20 or 25 years of payments in the income-driven repayment plans, public service loan forgiveness, total and permanent disability discharges, and borrower defense to repayment discharge.