How To Potentially Implement Broad Student Loan Forgiveness

Although the President does not have the legal authority to forgive all federal student loans with the stroke of a pen, there may be a way for the U.S. Secretary of Education to legally implement broad student loan forgiveness through a regulatory change. 

Remember, the four income-driven repayment plans are also student loan forgiveness programs. The income-driven repayment plans forgive the remaining debt after a number of years in repayment. 

One of the income-driven repayment plans, the Income-Contingent Repayment (ICR) plan, provides the U.S. Department of Education with broad regulatory authority. Congress specifically authorized several key potential changes in ICR. 

This regulatory authority is so broad that the U.S. Department of Education could use the rulemaking process to issue new regulations that transform ICR into a new student loan forgiveness program.

This version of broad student loan forgiveness would be limited to federal loans in the Direct Loan program that had been in repayment for at least 5 years (maybe at least 10 years). It would also have to be means-tested, due to the nature of income-driven repayment plans.

What Is Income-Contingent Repayment (ICR)?

Income-Contingent Repayment, or ICR, was the first income-driven repayment plan. It became available in 1994-95 in the Direct Loan program. Other income-driven repayment plans were added in 2009 (IBR), 2012 (PAYE) and 2015 (REPAYE).

Income-driven repayment plans base the monthly loan payment on a percentage of discretionary income.

With ICR, the monthly loan payment is 20% of discretionary income, where discretionary income is defined as the amount by which adjusted gross income (AGI) exceeds 100% of the poverty line. 

ICR forgives the remaining debt after 25 years’ worth of payments, a total of 300 payments.

Regulatory Authority To Modify Income-Contingent Repayment

The four income-driven repayment plans are, in effect, student loan forgiveness programs because they forgive the remaining debt after a specified number of payments. 

The U.S. Department of Education has the legal authority to modify the Income-Contingent Repayment plan into a new repayment plan with more lenient requirements for student loan forgiveness, as it has already done twice before.

In particular:

• The U.S. Department of Education can specify the repayment term required by the repayment plan. The repayment term must be an “extended period of time not to exceed 25 years” but can be shorter than 25 years. [20 USC 1087e(d)(1)(D)]
  
• The U.S. Department of Education can specify procedures for determining the borrower’s repayment obligation based on the appropriate portion of annual income. [20 USC 1087e(e)(1), (2) and (4)]
  
• The U.S. Department of Education can specify procedures for alternate documentation of income. [20 USC 1087e(e)(3)]
  
• The U.S. Department of Education can specify limitations on the capitalization of interest. [20 USC 1087e(e)(5)]
  
• The U.S. Department of Education can make adjustments to the borrower’s loan payments based on special circumstances, such as loss of employment. [20 USC 1087e(e)(6)]
  
• The U.S. Department of Education may obtain certain information from federal tax returns from the IRS to determine eligibility for and repayment obligations under an income-contingent repayment plan with the approval of the borrower. [26 USC 6103(l)(13)] The information includes tax filing status, adjusted gross income, and number of exemptions, as well as verification of non-filing status.
  

This regulatory authority is broad enough that the U.S. Department of Education was able to use it to implement the Pay-As-You-Earn Repayment (PAYE) and Revised Pay-As-You-Earn Repayment (REPAYE) repayment plans at 34 CFR 685.209(a) and (c), respectively.

These regulations included a smaller definition of discretionary income, a smaller percentage of discretionary income, a shorter repayment terms and various requirements for forgiveness of the remaining loan balance. These changes involve all of the dimensions required to implement a new student loan forgiveness program.

How To Create A New Loan Forgiveness Program

The U.S. Department of Education can use this regulatory authority to issue new regulations that modify Income-Contingent Repayment into a new student loan forgiveness program, as follows.

• The repayment term can be shorter than 25 years. Congress did not define what it meant by an “extended period of time.” However, the repayment term cannot be less than 5 years, per 20 USC 1078(b)(9)(A), unless the borrower specifically requests a shorter period, which would necessitate an application process. The shortest repayment term for an extended repayment plan is 10 years. Public service loan forgiveness requires 120 qualifying payments (10 years’ worth of payments), so it would be odd for an income-driven repayment plan to require less than 10 years. Otherwise, the U.S. Department of Education can define “extended period of time” in the regulations as it sees fit. For example, the U.S. Department of Education could choose to implement a new income-driven repayment plan that forgives the remaining debt after 12 or 15 years of payments, if it so wished. But at a minimum, it could create a loan forgiveness program with as little as 5 years of repayment.
  
• When determining whether the end of the repayment term has been reached, the U.S. Department of Education must count all time periods during which the borrower was in an economic hardship deferment, a standard repayment plan or a reduced payment under an income-driven repayment plan, or making payments of at least the standard repayment amount under other repayment plans, except for periods when the borrower was in default on their loans. This includes time periods during which the borrower made payments on loans in the Federal Family Education Loan Program (FFELP) and Federal Perkins Loan Program, not just the Direct Loan Program. [20 USC 1087e(e)(6)]. Due to the CARES Act, the suspended payments during the payment pause and interest waiver do count as payments on an income-driven repayment plan.
  
• The repayment obligation must be based on a portion of the borrower’s income. This portion can be zero, as is currently the case for borrowers with income under 100% or 150% of the poverty line in the current income-driven repayment plans. The U.S. Department of Education could provide full forgiveness of the remaining debt to low-income borrowers whose income falls below a specific dollar threshold (e.g., $50,000), a specific multiple of the poverty line (e.g., 250% of the poverty line) or a specific multiple of the borrower’s student loan balance, or through a similar change in the definition of discretionary income.
  
• Although the repayment obligation must be based on a portion of the borrower’s annual income, this does not prevent the consideration of several years’ worth of income.
  
• If the U.S. Department of Education bases the repayment obligation on a percentage of discretionary income, they could choose high enough of a percentage of discretionary income to prevent wealthy borrowers from qualifying for full student loan forgiveness. For example, if the annual loan payments were based on 20% of the amount by which income exceeds $50,000, over five years the total payments would equal the amount by which income exceeds $50,000. Someone earning $100,000 would have to pay at least $50,000 toward their student loans.
  
• Because the borrower’s approval is required for the U.S. Department of Education to obtain information from the IRS, obtaining financial information from the IRS to implement loan forgiveness might require an application process, preventing automatic implementation. But, given the strong financial incentive of loan forgiveness, this should not be a significant problem.
  
• Nothing prevents the U.S. Department of Education from establishing a deadline by which the borrower must apply for the student loan forgiveness.
  

Although loan forgiveness programs based on Income-Contingent Repayment are limited to loans in the Direct Loan program, borrowers could consolidate FFELP loans and Federal Perkins Loans into a Federal Direct Consolidation Loan to qualify (similar to the Biden Waiver in effect now for PSLF). Parent PLUS loans are not directly eligible, per 20 USC 1087e(d)(1)(D), but a Federal Direct Consolidation Loan that repaid a Parent PLUS loan would qualify.

The new regulations could be implemented either through the traditional notice-and-comment rulemaking process, or as an interim final rule.

Will It Survive Legal Challenge?

Proposals for broad student loan forgiveness are likely to face legal challenge. But, student loan forgiveness that is implemented by issuing new regulations is more likely to survive legal challenge than student loan forgiveness implemented through executive order.

The Congressional Review Act of 1996 (P.L. 104-121) allows Congress to overturn new federal regulations in their entirety by passing a joint resolution within 60 legislative days after publication of the new rule. Passing the joint resolution requires a simple majority vote of the House and Senate, but can be vetoed by the President, in which case a two-thirds supermajority will be required to overturn the veto.

The joint resolution is generally not subject to filibuster. This is in contrast to regular legislation to modify or block all or part of a new regulation, which is subject to filibuster and does not benefit from expedited consideration.

The 60-day period resets if Congress adjourns in the middle of the 60-day period. Since 60 legislative days generally spans 4-5 months, this allows a new session of Congress to overturn regulations issued during the last several months of the previous session of Congress.

Congress is unlikely to overturn regulations when there is split control of Congress or when Congress is controlled by the same party as the President.

If Congress does not use the Congressional Review Act to overturn a new regulation, it significantly weakens the argument that the new regulations are contrary to the intent of Congress. After all, Congress had the opportunity to overturn the new regulations through the Congressional Review Act, but did not do so. This is in contrast with executive orders, which cannot be overturned through the Congressional Review Act.

Regulations can also be challenged by bringing a lawsuit under the Administrative Procedures Act (P.L. 79-404), if the court finds that the regulation is "arbitrary and capricious, an abuse of discretion, or otherwise not in accordance with the law” [5 USC 706(2)(A)]. If a regulation is the result of reasoned consideration of the facts and law, as well as adequate consideration of the consequences of and potential alternatives to the proposed rule, it is likely to survive such a challenge. The judicial system provides a lot of deference to regulations established by the executive branch, provided that the executive branch follows proper procedure.