Attempting to follow developments in the world of student loans can be a dizzying experience these days. That’s because the Trump administration, as well as a GOP-controlled legislature, have proposed a slew of bold moves designed to shake up the industry and weaken the power of regulators.
Some of those ideas are already playing out. Under Secretary Betsy DeVos, the U.S. Department of Education has loosened restrictions on for-profit colleges, which have higher-than-average default rates, and has tried to limit the ability of states to regulate federal loans. The department has even worked to side-step oversight of federal loans by the Consumer Financial Protection Bureau, a move that helped force the resignation of CFPB student loan ombudsman Seth Frotman in August 2018.
GOP lawmakers have successfully enacted more concrete changes, too. Among them: a tax bill that ended the tuition deduction for students who itemize their tax returns (though the bill did uphold the American Opportunity Tax Credit).
The fate of several other potential changes is still up in the air, however. The following are a few of the proposals that borrowers could see in the near future.
Fewer Loan Repayment Options
Students with federal loans, which make up the lion’s share of the market, currently have eight different repayment options. They can choose to make fixed payments over the life of the loan, incrementally increase their payments with a “graduated” plan or choose an income-driven option.
The Trump administration wants to narrow the number of income-based repayment plans to just one, a move it claims will make the decision-making process less complicated for borrowers. The proposal would limit monthly payments to 12.5% of discretionary income and forgive undergraduate debt after 15 years (or 30 years, for graduate students). Currently, those loans aren’t forgiven for 20 to 25 years, depending on the repayment option one selects. (See How Student Debt Imperils Retirement Savings.)
An End to Loan Subsidies
The law that in large part shapes our post-secondary education system, the Higher Education Act of 1965, hasn’t been renewed in more than a decade. A group of GOP congressmen are trying to replace it with the Promoting Real Opportunity, Success and Prosperity through Education (PROSPER) Act, which would have important implications for students and borrowers.
It would simplify the current FAFSA, for example, the financial aid form that many see as unnecessarily complicated. And it would consolidate the various need-based federal grant options into a single program – albeit with fewer overall dollars.
The bill would also end the practice of paying the interest on loans while students are still attending classes. That’s a benefit that recipients of “subsidized” federal loans have enjoyed until now. But if PROSPER becomes the law of the land, all loans would be unsubsidized. This means that all students would owe interest on loans while they are still in college instead of being able to wait until afterwards to start repaying them. (See: Federal Direct Loans: Subsidized vs. Unsubsidized for details.)
Streamlined Federal Loans
The PROSPER Act, in its present form, also includes a provision that would merge all of the federal loan programs for undergrads, grads and parents into a single program as of July 1, 2019. The Republican sponsors again argue that doing so helps simplify the borrowing process.
But given the borrowing caps that the bill puts in place, it’s hard not to see it as a move to reduce the role of the federal government in the student loan market. Under the Federal ONE Loan, dependent undergraduates wouldn’t be able to take out more than $39,000 in federal loans over their lifetime. Undergraduates who aren’t claimed as a dependent by their parents would face a cap of $60,250, and parents themselves would be limited to a lifetime maximum of $56,250 per child in loans.
If passed, that could force less-affluent families to bridge the gap with private student loans, which, unlike federal loans, depend on the applicant’s creditworthiness. Those with poor credit could find it hard to get the financing they need, or could end up paying significantly higher interest rates than they’d get with a federal loan.
Elimination of Loan Forgiveness
For some grads, working for the government or a nonprofit after college is a way to do some good for society – even if it means taking a substantial pay cut to do so. Since 2007, the Public Student Loan Forgiveness (PSLF) program has made that decision a little easier. (See also Student Loan Forgiveness: How Does It Work?)
PSLF eliminates the balance on your student loan if you work in either of these sectors, once you’ve made 120 monthly payments on schedule.The program has been great for the relatively small number of borrowers who qualify, but it’s expensive for the federal government.
In March, Congress passed a spending bill that directed $350 million toward the loan forgiveness program. But the creation of a ONE Loan program would effectively kill PSLF for new borrowers. Doing so would save Uncle Sam on expenses, but advocates of PSLF say ending it would discourage future graduates from serving in the public sector.
The Bottom Line
The mid-term elections are bound to have big implications for any number of policy items. Student loans are no exception. If the GOP is able to retain control of both houses of Congress, it has a much better chance of ushering in changes that will simplify loan options, but also reduce the government’s role in financing college. (See our tutorial: All About Student Loans.)