As we discussed in Part 1, the Prosper Act is the biggest potential change to federal student loans in years.  The Prosper Act would create the Federal ONE loan program to replace the current Direct Loan program.  The Federal ONE program would drastically change the repayment plans available.

Currently Direct federal loans have a variety of repayment plans available — fixed and graduated balance-driven plans as well as a variety of income-driven plans like IBR, PAYE and REPAYE.

Under the Federal ONE program, there would be only 3 plans available:

  • The standard 10-year fixed repayment plan
  • One income-driven repayment plan
  • A fixed-rate repayment plan with an extended time after consolidation.

The Standard 10-year fixed repayment plan should be familiar to any federal borrower and is the backbone of the current repayment process.  Its terms are not changed under the Prosper Act.

However, the new income-driven plan has several substantial changes:

  • Borrowers would have to pay 15% of their discretionary income, an increase for many borrowers who qualify for current IDR plans that ask for 10% of their discretionary income.
  • The new minimum is $25/month, though this can be temporarily reduced to $5 under certain circumstances
  • There would be no forgiveness after 20 or 25 years, as currently exists under the IDR plans.  Instead, the balance would only be forgiven once the borrower had paid enough to cover the principal and interest the borrower would have paid if they’d entered the 10-year standard repayment plan
  • There is currently no public service loan forgiveness written into the plan

The extended fixed-rate repayment for consolidated loans allows for longer repayment terms under the following schedule.

< $7,500: 10 years
$7,500-$10,000: 12 years
$10,000-$20,000: 15 years
$20,000-$40,000: 20 years
$40,000-$60,000: 25 years
$60,000: 30 years

The decrease in options will certainly simplify the repayment landscape for Federal ONE loans. Notably it will not simplify the options for current Direct Loan borrowers who, as the bill is currently written, will be grandfathered into the Direct Loan plans. However, the more limited options remove affordable alternatives that decrease the cohort default rate.

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