Evan Vucci/AP Photo
President Joe Biden talks with reporters after delivering remarks on student loan debt forgiveness, in the Roosevelt Room of the White House, October 4, 2023, in Washington.
The Biden administration promised not to give up on debt cancellation after the Supreme Court rejected their first attempt. They promised that a new system of income-driven repayment (IDR) would mitigate the return of student loan payments.
We’re now several weeks into both of those projects, enough time to make some early assessments. The scope for debt cancellation has narrowed, and the savior that IDR was supposed to become has thus far not delivered as advertised. Still, the Education Department is cobbling together a framework for student loans that would be a real improvement, if it follows things through to their logical conclusion.
A week ago, the Education Department released a draft set of rules for student debt relief, arising out of the negotiated rulemaking process under the Higher Education Act. That process, which seeks consensus from a range of stakeholders, continues today as a second round of meetings begin.
The department has proposed four different provisions of debt relief. Borrowers who have federal student loan balances that are higher than the original principal amount because of compounded interest would have them reset to that principal threshold. Borrowers who have been paying for 25 years or more would have their balances fully forgiven. Borrowers whose loans were for career training programs at schools that did not deliver gainful employment would have their balances waived. And those who were eligible for debt forgiveness through existing programs, but never signed up for that relief, would be granted access to that forgiveness.
If you think of this as a system, these elements make a lot of sense, if applied on an ongoing basis. That would mean that student loans would have a 25-year term, that borrowers would effectively be automatically enrolled in forgiveness programs, that balances could not exceed the original principal as long as all payments were made, and that nobody would have to pay for enrolling in a worthless education program.
One of the draft rules, the one about waiving balances for career training that did not deliver, is envisioned as permanent. It would be an extension of the gainful employment rule released this September, which sets minimum thresholds for a successful career training program (at least half of graduates must earn more than a typical high school graduate in their state who never sought postsecondary education). This mainly cracks down on for-profit colleges that churn out diplomas without benefiting graduates. Colleges that fail the gainful employment standard twice in a three-year period lose access to student loans; students in those colleges would get debt relief.
But two of the other rules are one-offs, intended to help prior borrowers while assuming that changes to the system will prevent new borrowers from slipping through the cracks again. That’s an optimistic assumption.
For borrowers whose balances have increased beyond the initial level, the Education Department wants to reset them down to the level of what was borrowed as a one-time intervention. The administration didn’t make this an ongoing provision because they already established the new SAVE program, which has a cap on interest to prevent debt from ballooning over time. That makes sense if everyone is enrolled in SAVE, but so far that hasn’t happened. In September, the Education Department touted four million new enrollees in SAVE, but more than three million of them were carried over from previous income-driven repayment plans. The millions of borrowers remaining in ordinary payment programs can still see interest accumulate, putting them in the same position the administration wants to prevent.
The automatic-enrollment provision suggests a recognition that private student loan servicers are simply unequipped to handle the transfer of mass numbers of borrowers into more favorable programs.
Similarly, forgiveness for those with over 25 years of payment history is a one-time offer, again because the administration expects everyone to enroll in SAVE, which forgives balances after 25 years at most. This actually works together with the provision that makes borrowers who never signed up for forgiveness programs eligible for forgiveness; in theory, that should protect everyone.
But there is a hard cliff in the current proposed 25-year rule. Per the language, if a borrower has reached 300 months of payment as of July 2025, they are eligible for full forgiveness; if they’re at 299 payments at that point, they get nothing. Advocates are sure to argue that an artificial cliff is unworkable and unfair, to get the White House to rethink it.
The Education Department could do a lot with the automatic enrollment in forgiveness programs rule, like using public data matches to identify those eligible for Public Service Loan Forgiveness. But the framework raises three important, and related, points.
First, it’s clear that the Education Department trimmed its sails on mass debt relief in the wake of the first Court ruling. The new plan, which will affect substantially fewer borrowers than the initial plan did, covers what the administration believes are its strongest defenses from the Supreme Court rejecting debt relief again. “These are all about fixing legacy problems with the system, and making sure that borrowers who are not able to navigate this mess have the ability to cancel debt,” said Mike Pierce of the Student Borrower Protection Center.
The Biden administration has already canceled $127 billion in debt for more than 3.5 million borrowers. That massive amount of low-hanging fruit was all based on existing forgiveness programs that haven’t been challenged in court. In his opinion in Biden v. Nebraska, Chief Justice John Roberts acknowledged that the Education Department can cancel or reduce loans “in certain limited circumstances and to a particular extent”; we’ll see if he deems the new plan among the allowable options.
Second, the automatic-enrollment provision in particular suggests a recognition that private student loan servicers are simply unequipped to handle the transfer of mass numbers of borrowers into more favorable programs. It doesn’t seem that they’re able to handle the resumption of payments, either. Last week, the Education Department withheld scheduled October payments from MOHELA, one of the more notorious servicers, after it sent billing statements to borrowers too late, causing over 800,000 delinquencies. All of those borrowers were placed in forbearance (meaning they do not have to pay their loans for a certain period) until the matter is resolved, and those months in forbearance will still count as active months for loan forgiveness programs.
The Education Department also found incorrect billing statements from MOHELA, and other borrowers with pending forgiveness actions being placed back into repayment. But withholding a contractor payment that will inevitably be paid is hardly a major punishment. And the MOHELA mess reveals what has been obvious for months: The servicers have no economic incentives to properly service these loans. In fact, the incentives run in the other direction, toward reducing labor costs, weakening customer service, and papering over serious errors that harm borrowers.
How to deal with this brings us to the third point—the mysterious fifth group of debtors. In its release last week, the Education Department identified a separate group of borrowers who could be eligible for debt relief: “those who are experiencing financial hardship that the current student loan system does not currently adequately address.” It’s unclear what would be offered for this group or how big it would be, as “financial hardship” is pretty nebulous. Maybe it means restoring the right for student loans to be discharged in bankruptcy. Maybe it’s something else.
But it’s clear that the longer someone stays in the student loan system, the more exposed they are to potential servicing errors, meaning that their hardships couldn’t be addressed. And the only way out of that would be either freedom from private servicers, or from the student loan system itself. After all, a 25-year term loan, without accumulated interest, with automatic enrollment in the most favorable plan and extinguishment if the college is predatory, sounds good, or at least better than how things work today. But it’s only as good as the private company administering the program.
