Federal Government Proposes to Expand Relief to Student Loan Debtors

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Proposed program would apply to loans disbursed as early as October 2011.

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Washington appears to have noticed the recent clamor surrounding what some have suggested is an impending student debt crisis. The Department of Education (DOE) has issued a proposed rule that, if enacted, would accelerate favorable modifications to a major government loan repayment program. The changes would affect student loans disbursed three years earlier than specified in the Student Aid and Fiscal Responsibility Act (SAFRA).

The proposed rule creates a new repayment plan for new student borrowers who received a federal Direct Loan disbursement after October 1, 2011, and who also did not have an outstanding student loan on or after October 1, 2007. The plan would cap monthly payments at ten percent of the difference between the debtor’s annual gross income and 150 percent of the relevant poverty guideline, and it would promise loan forgiveness after twenty years of qualified payments.

The proposed rule appears to reflect an extension of the spirit behind the Obama Administration’s “Pay As You Earn” approach to student debt by expanding what loans would be eligible for the debt relief program. While the proposal would provide relief for loans disbursed after late last year, SAFRA, as passed in 2010, provides for modifications to the federal Income Based Repayment program only to new borrowers  who receive a direct loan after July 1, 2014..

Neither SAFRA nor DOE’s proposed rule would modify the current Public Service Loan Forgiveness program, which provides for forgiveness of eligible federal student loans after the debtor makes 120 qualifying payments after October 1, 2007, while employed full-time in the government or non-profit sector.