The Biden Administration published its second attempt at broad student loan forgiveness in the Federal Register on April 17, 2024. Although more targeted than the first attempt, which was blocked by the U.S. Supreme Court, the new proposed regulations would forgive all or part of the student loan debt of 27.6 million borrowers, nearly two-thirds of the total number of borrowers.

The draft regulations feature nine separate waivers (a waiver is a specific situation that will allow for student loan forgiveness). The waivers include situations where the borrower’s current balance exceeds the original balance when the loans entered repayment, where the borrower has been in repayment for two or more decades, and where the borrower is eligible for forgiveness under existing loan forgiveness options but never applied.

The draft regulations do not include regulatory proposals for financial hardship, which will come later.

The proposed forgiveness will occur on July 1, 2025, possibly earlier, if the final rule is published by November 1, 2024. This is before the December 31, 2025 sunsetting of the tax-free status of student loan forgiveness and discharge.

Here's a full breakdown of Biden's second try at student loan forgiveness, along with several flaws and problems with the proposed regulations.

1. Forgiving Excess Unpaid Interest

Some borrowers owe more now than when they first entered repayment. The current loan balance can exceed the original loan balance due to capitalized interest.

Only income-driven repayment plans can be negatively amortized, where the required monthly payment is less than the new interest that accrues. This causes the loan balance to increase even when the borrower is making the required payments. More than two-thirds of borrowers in income-driven repayment plans are negatively amortized.

Other accrued but unpaid interest comes from deferments, forbearances, delinquency and default. Interest continues to accrue even if the borrower isn’t making payments on their loans, regardless of whether the suspension of repayment is authorized or not.

The new regulations propose forgiving all or part of the excess of the current balance over the balance when the loans first entered repayment.

The current balance is compared with the balance when the loans entered repayment for loans disbursed on or after January 1, 2005 and the original amount disbursed for loans disbursed prior to this date. This distinction is due to a lack of sufficient loan balance data for loans disbursed before January 1, 2005.

These are the most expensive of the student loan waivers, accounting for half of the cost of the proposed regulations.

There are two different waivers that forgive excess unpaid interest:

Waiver 1: Waive The Full Amount Of Excess Loan Balance For Borrowers Within Income Thresholds

• This plan proposes waiving the full amount of the excess loan balance for borrowers in income-driven repayment plans if the borrower’s income is less than $120,000 (single or married filing separately), $180,000 (head of household) or $240,000 (married filing jointly or surviving spouse).
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• The Saving on a Valuable Education (SAVE) repayment plan already waives the excess interest.
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• As a result, this only affects borrowers in the Income-Contingent Repayment (ICR), Income-Based-Repayment (IBR) and Pay-As-You-Earn Repayment (PAYE) repayment plans, and borrowers who were previously in the Revised-Pay-As-You-Earn Repayment (REPAYE) repayment plan before it was replaced with the SAVE repayment plan.
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• More than three-quarters of these borrowers previously received a Federal Pell Grant, more than two-thirds are female, and more than half have been in repayment for at least 10 years. Nearly one quarter of these borrowers have been in default at some point.

Waiver 2: Cap The Waived Excess Loan Balance At $20,000

This applies when a borrower is not in an income-driven repayment plan or the borrower’s income is above the income thresholds. The lack of an income cap means that even wealthy borrowers can qualify. Although this waiver is limited to excess unpaid interest and a $20,000 cap, it is similar in effect to President Biden’s first broad student loan forgiveness proposal, which was blocked by the U.S. Supreme Court.

Issue: A Higher Loan Balance Does Not Mean A Borrower Cannot Pay

The waiver forgives the excess of the current loan balance over the original loan balance for borrowers who aren’t in income-driven repayment plans or whose income exceeds certain thresholds. The justification for this waiver is weak, since there is no evidence that the borrowers will be unable to repay the debt in a reasonable period of time, other than a past increase in the loan balance. The waiver does not consider whether the borrower is currently unable to repay the debt and whether these circumstances are likely to continue in the future.

Consider, for example, that borrowers with income above the specified income thresholds are likely to have attended graduate school or professional school. These borrowers may have had interest accrue on their undergraduate loans during the in-school deferment and grace periods for graduate school, which is not excluded by the current proposed regulations. These borrowers will likely have excess loan balances for a few years after graduating from graduate or professional school.

Although the proposed regulations compare the current loan balance with the balance upon entering repayment, thereby excluding interest that accrued during the first in-school and grace period for each loan, it does not address the interest that accrued during subsequent enrollment in college, such as on undergraduate debt during graduate and professional school.

Issue: Flaws In The Determination Of Income Thresholds

The income thresholds for forgiving excess interest for borrowers in income-driven repayment plans are based on the income level at which the calculated payment on the SAVE repayment plan exceeds the new interest on Federal Direct Stafford Loans.

This calculation involves the following assumptions:

• The proposed regulations assume the maximum of $138,500 in student loan debt, with $31,000 from the aggregate limit for dependent undergraduate students and the rest, $107,500, from graduate student debt.
• The proposed regulations assume the undergraduate debt at 5% of discretionary income and the graduate debt at 10% of discretionary income, yielding a weighted average of 8.88%.
• The proposed regulations assume the average interest rate based on the 10-year period from 2013-14 to 2023-24. This yielded an average interest rate of 4.3% for undergraduate debt, 5.87% for graduate debt and a weighted average rate of 5.52%. $138,500 at 5.52% yields monthly interest of $637.10.
• The proposed regulations used the 2024 poverty line thresholds for a single person, $15,060.
• This yields an income threshold of $119,971, which was rounded to $120,000.

The proposed regulations state, “We did this calculation off a dependent undergraduate maximum because those are the more common types of student loan borrowers, and it allows undergraduate loans to make up a smaller share of the total amount borrowed.” But, this isn’t accurate.

Based on the cumulative undergraduate federal student loan debt at graduation in the 2019-2020 National Postsecondary Student Aid Study (NPSAS):

• 61% of student loan dollars and 55% of borrowers are independent
• 61% of independent students graduating with an average of $24,189 in federal student loan debt
• 46% of dependent students graduating with an average of $18,740

(This analysis is based on the FEDCUM1, DEPEND and PROGSTAT variables.)

The proposed regulations also state, “Using independent limits would produce an unfair income amount for dependent borrowers, while independent students are not harmed by using the dependent limit.” This is also incorrect.

Using the higher aggregate loan limit for independent students would yield a higher income at which the SAVE loan payment exceeds the interest. Independent students are harmed by using the dependent student limit, which yields a lower income threshold and thus excludes some independent students.

It is unclear why the proposed regulations use interest rates from a recent 10-year period, since borrowers have been in income-driven repayment plans for three decades. Using the interest rates from Table 3 of the Federal Credit Supplement Tables for the FY2025 Federal Budget would yield a borrower rate of 6.29% for the weighted average of total obligations. That would yield monthly interest of $725.97, which corresponds to mean income of $131,979, which would round to $132,000.

Doubling the income threshold for borrowers who file as married filing jointly is inappropriate. Forgiving the excess balance in an income-driven repayment plan does not change the monthly payment, just possibly the time until the debt is paid in full. Doubling the income threshold increases the likelihood than the remaining balance will be paid off before reaching the 20 or 25-year mark if only one spouse borrowed. If both borrowed, the income threshold would be about $20,000 less than double the income threshold for a single borrower.

2. Forgiving Debt In Repayment For 20 Years Or More

Some borrowers have been in repayment for 20 or more years, longer than the typical repayment term for more recent student loans.

About three quarters of borrowers who entered repayment 25 or more years ago have been in default at some point. Nearly two-thirds of borrowers who entered repayment 20 years ago have been in default at some point.

20 Years For Undergraduate Debt: This proposal would forgive the outstanding loan balance for borrowers whose loans first entered repayment 20 years ago (prior to July 1, 2005) if the borrower has only undergraduate loans or consolidation loans that repaid only undergraduate loans.

25 Years For Graduate or Professional Debt: This proposal would forgive the outstanding loan balance for borrowers whose loans first entered repayment 25 years ago (prior to July 1, 2000) if the borrower has any graduate loans or consolidation loans that repaid any graduate loans.

For Grad PLUS and Parent PLUS loans, the date the loans were fully disbursed will be considered the date the loans entered repayment.

For consolidation loans made before July 1, 2023, the date the consolidation loan entered repayment will be based on the date the earliest of the loans included in the consolidation loan entered repayment or was fully disbursed, as applicable.

For consolidation loans made on or after July 1, 2023, the date will be based on the latest date instead of the earliest date.

3. Forgive Loans That Would Have Been Eligible For IDR Forgiveness

This proposal would forgive the loan balance for loans that would have been eligible for forgiveness under an income-driven repayment or alternative repayment plan but which are not currently enrolled in such a plan.

It is unclear how this proposal would be implemented operationally, since the U.S. Department of Education does not have income data for borrowers who are not currently enrolled in an income-driven repayment plan.

4. Forgive Loans When Borrowers Did Not Successfully Apply For Forgiveness

Some borrowers were otherwise eligible for forgiveness or discharge of their student loans, but did not apply or did not successfully apply for forgiveness or discharge. This is partly due to the loan cancellation not being automatic.

Examples include closed school discharge, false certification discharge and Public Service Loan Forgiveness. (It is unclear how the U.S. Department of Education would determine that a borrower was otherwise eligible for Public Service Loan Forgiveness if they did not apply for forgiveness. However, they may attempt to use some type of data-matching like they've done in the past with Disability Discharge)

Colleges would not be liable for amounts cancelled under this waiver. This eliminates legal standing for colleges to file lawsuits to block the new regulations.

5. Loan Forgiveness When A College Or Program Subsequently Loses Aid Eligibility

When a college or program loses eligibility for Title IV Federal Student Aid, it applies only on a going-forward basis to future borrowers who are unable to borrow for education at a college that lost institutional eligibility for Federal Student Aid funds.

This proposal would forgive student loans retroactively when the loss of aid eligibility was based on student outcomes or the failure to provide sufficient financial value to the students. It would also forgive the student loans retroactively when the college or program closed after failing to meet these standards and there was a pending review, investigation or action at the time of closure.

Examples include colleges with a high cohort default rate.

Likewise, loans borrowed for Gainful Employment (GE) programs that closed and before closing had a high debt-to-earnings ratio (greater than 8%), a high debt-to-discretionary-earnings ratio (greater than 20%), or median earnings less than or equal to that of high school graduates.

Colleges would not be liable for amounts cancelled under this waiver.

It is unclear if the retroactive forgiveness adequately addresses situations where the college’s performance changed. While substantial misrepresentations may be ongoing in impact, a cohort default rate can change over time. Likewise for a loss of accreditation.

6. Forgiveness For FFEL Program Loans

The proposed regulations would forgive commercially-held FFEL program loans in several situations:

• The FFEL program loans first entered repayment 25 years ago (prior to July 1, 2000)
• The FFEL program loans were eligible for a closed school discharge but the borrower did not apply for a discharge
• The loans were borrowed to attend a college that lost aid eligibility due to a high cohort default rate, if the borrower’s debt was included in the cohort used to calculate the cohort default rate that was the basis for the loss of aid eligibility

The date the FFEL program loan entered repayment is based on the end of the grace period for Federal Stafford Loans and when the loans were fully disbursed for Parent PLUS Loans.

These waivers may provide FFEL program lenders with legal standing to challenge the proposed regulations.

Even though, to some extent, the regulations are targeted at borrowers who are unable to repay their debts in a reasonable period of time, the FFEL lenders would experience financial harm when the debt is canceled, since the lender would not receive the future interest payments that would accrue and eventually be paid to the lender when the borrower eventually defaulted or died. Likewise for the loss of FFEL program loans due to consolidation into a Federal Direct Consolidation Loan.

This is similar to the considerations that were raised before the U.S. Supreme Court when Missouri argued that MOHELA, a FFEL program lender established by the state, would be harmed by the President’s broad student loan forgiveness plan.

Impact Of The Proposed Student Loan Forgiveness Regulations

This table summarizes the impact of each of the proposed waivers through 2034.

The aggregate forgiveness represents 9.2% of $1.602 trillion in total federal student loan debt outstanding and 63.9% of the 43.2 million borrowers as of Q4 of FY2023.

The average amount of forgiveness is $5,341 per borrower.

The Gainful Employment cost and number of borrowers figures are as specified in the proposed regulations. However, there is clearly an error in these figures since it would yield an average forgiveness of $2.7 million per borrower.

What Authority Is Being Used For These New Student Loan Forgiveness Proposals?

The proposed regulations are based on the waiver authority in the Higher Education Act of 1965, as opposed to the Heroes Act of 2003. This attempt at student loan forgiveness is also implemented through the rule-making process, as opposed to an executive order.

The waiver authority, which appears at 20 USC 1082(a), states:

1. General powers.

In the performance of, and with respect to, the functions, powers, and duties, vested in him by this part, the Secretary may— … (6) enforce, pay, compromise, waive, or release any right, title, claim, lien, or demand, however acquired, including any equity or any right of redemption.

The preamble quoted here limits the scope of the waiver authority to functions, powers and duties authorized by Congress, such as loan cancellation provisions that appear at 20 USC 1087. Forgiveness that is beyond this scope may be blocked by the courts.

Notably, the proposed regulations do not refer to 20 USC 1082(a)(4), which states:

... subject to the specific limitations in this part, consent to modification, with respect to rate of interest, time of payment of any installment of principal and interest or any portion thereof, or any other provision of any note or other instrument evidencing a loan which has been insured by the Secretary under this part.

This may influence the interpretation of paragraph (a)(6).

The proposed regulations may give rise to the same major questions doctrine issues that lead the U.S. Supreme Court to block the President’s first attempt at broad student loan forgiveness. The major questions doctrine requires clear and unambiguous statutory text authorizing a specific agency action in cases involving “vast economic and political significance” such as “massive spending.”

The waiver authority in the Higher Education Act of 1965 does not differ in any meaningful way from the Heroes Act of 2003 that would lead one to believe that the U.S. Supreme Court would rule any differently on a challenge to the proposed regulations.

The statutory text from the Heroes Act of 2003 states:

Notwithstanding any other provision of law, unless enacted with specific reference to this section, the Secretary of Education (referred to in this Act as the “Secretary”) may waive or modify any statutory or regulatory provision applicable to the student financial assistance programs under title IV of the Act as the Secretary deems necessary in connection with a war or other military operation or national emergency to provide the waivers or modifications authorized by paragraph (2).

Moreover, while the Heroes Act of 2003 had a provision that eliminated the requirement that the U.S. Secretary of Education exercise the waiver or modification authority on a case-by-case basis, there is no similar exception for the Higher Education Act of 1965’s waiver authority.

Yet, the proposed regulations state:

Nevertheless, by providing greater clarity regarding the Secretary's waiver authority, these regulations are beneficial to inform the public about how the Secretary may exercise waiver in a consistent manner to provide appropriate relief to borrowers in accordance with the provisions and purposes of the HEA.

This stated intent to establish a uniform standard for forgiveness would appear to run contrary to a requirement to exercise waiver authority on a case-by-case basis.

Likewise, the proposed regulations pursue “an automatic and universal approach” because it is simpler to administer and streamlines the process. While automatic forgiveness and cancellation of debt, such as through a data match with the Social Security Administration and the VA for a Total and Permanent Disability Discharge, is desirable, the waiver authority in the Higher Education Act of 1965 does not exclude the requirement to consider such waivers on a case-by-case basis.

The waiver authority appears in part B of the Higher Education Act of 1965, which relates to the Federal Family Education Loan Program (FFELP), and not the William D. Ford Federal Direct Loan Program (Direct Loans). The proposed regulations claim that the waiver authority applies to the Direct Loan program because of the parallel terms clause at 20 USC 1087a(b)(2), which states:

Notwithstanding any other provision of this part, loans made to borrowers under this part that, except as otherwise specified in this part, have the same terms, conditions, and benefits as loans made to borrowers under section 1078 of this title.

But, the parallel terms clause does not refer to the waiver authority in section 1082 of the Higher Education Act of 1965, but to section 1078, and a waiver of a “right, title, claim, lien, or demand” is not a term, condition or benefit of a loan. The regulations at 34 CFR 30.70(e)(1) rely on this interpretation, which has not been reviewed by the U.S. Supreme Court, to extends authority to compromise debt under the Direct Loan program, not just the FFEL and Perkins loan programs.

The proposed regulations also claim that Federal Claims Collection Standards, which appear in 31 CFR parts 900 to 904, do not apply. The proposed regulations change the language in 34 CFR 30.70(a) from “uses the standards in the FCCS, 31 CFR part 902” to “may use the standards in the FCCS, 31 CFR part 902” to emphasize the optionality of this new interpretation of the Federal Claims Collection Act of 1996 and the associated regulations. The regulations at 31 CFR 902 have not changed.

In particular, the regulations at 31 CFR 902(a) limit the compromise of debt to situations in which the federal government cannot collect the full amount because:

The regulations at 31 CFR 902(b) also specify factors that should be considered in determining a debtor’s inability to repay, such as the age and health of the debtor, the debtor’s present and potential income, and the availability of assets or income that may be realized through enforced collection proceedings, among other factors.

Despite the changes to 34 CFR 30.70(a), the proposed regulations use similar arguments in favor of the forgiveness proposals, such as “loans that are unlikely to be otherwise repaid in full in a reasonable period” (in regard to benefits to the U.S. Department of Education from no longer having to service or collect on loans that would be forgiven).

While some of the proposed waivers might survive court challenge, by bundling the proposed waivers with others that might not survive court challenge, the proposed regulations present a risk that the entire set of waivers may be blocked, despite the inclusion of severability clauses among the proposed waivers.

Final Thoughts

The administration is clearly trying to find a way to provide as much loan forgiveness as possible. They are using the rule-making process to push the boundaries of the current regulations. But there may be simpler and easier ways to implement some of these same ideas.

For example, why don’t the proposed regulations forgive all student loans of borrowers who have reached retirement age, or who have defaulted on their student loans or filed for bankruptcy? This is clear evidence of an inability to repay the debt in a reasonable period of time.

Or, why doesn’t the U.S. Department of Education stop the offset of Social Security disability and retirement benefit payments? These individuals are clearly facing financial hardship, and the government already has the data. In fact, collection activity in this regard was paused during the pandemic and the Fresh Start on-ramp period.

Finally, the proposed regulations forgive the excess loan balance even though the excess loan balance will eventually be forgiven anyway as part of the remaining debt after 20 or 25 years. The result is that these proposals mainly affects the timing of the forgiveness.

Due to the way the cost is calculated using a net present value analysis, this makes forgiveness now appear to be more expensive than forgiveness years in the future. The only apparent benefit is that this prevents balances from increasing in the income-driven-repayment plans, which can be distressing to borrowers. While this problem has been addressed in the SAVE plan, the proposed regulations offer one-time forgiveness of the excess loan balance and do not address it on an ongoing basis.

While student borrowers can switch into the SAVE repayment plan to avoid accumulation of unpaid interest over required payments, this is not true of parent borrowers whose only option may be the income-contingent repayment plan after consolidation.