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The U.S. Department of Education on Monday announced sweeping new changes to the federal student loan system, including additional consumer protections for borrowers and limits on the amount of interest that can accrue on debt.
“Today is a monumental step forward in the Biden-Harris team’s efforts to fix a broken student loan system and build one that is simpler, fairer and more accountable to borrowers,” the official said. US Secretary of Education Miguel Cardona, in a statement.
The new rules should make it easier for students who have been defrauded by their school to have their student loans canceled by the government through the borrower defense process, and allow the Department of Education to decide on these relief requests as a group instead of requiring each borrower to prove individually that they have been sufficiently harmed or misled by their school.
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Under the rules, institutions of higher education that accept federal student aid would be prohibited from requiring borrowers to sign binding pre-dispute arbitration agreements or from waiving their ability to participate in a class action regarding their borrower’s defense claims.
The Biden administration will also limit the practice of compounding interest — where unpaid interest is added to the borrower’s principal.
The Civil Service Loan Forgiveness Program, which allows civil servants and those who work for certain nonprofits to have their debts forgiven after a decade, will also be overhauled. . Months previously ineligible for borrower debt relief, including those in which they were deferred due to financial hardship, are counted. Previously ineligible late payments will now also be eligible.
These changes will come into force on 1 July 2023.
Officials in the Biden administration have described these improvements as necessary and urgent to fix a troubled system.
Before the coronavirus pandemic, when the US economy was in one of its healthiest times in history, only about half of borrowers were repaid. A quarter — or more than 10 million people — were in default or in default, and the rest had requested temporary relief for distressed borrowers, including foreclosures or foreclosures. These grim figures have led to comparisons with the mortgage crisis of 2008.
