Prosper Act, Part 2: Repayment Plans

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.

Prosper Act, Part 1: Loan Programs

The biggest potential change to federal student loan policy in years, — The Prosper Act — is out of committee and could go up for a vote before the full House in the coming months.  This is Part 1 in a series of deep dives on the effect of the Prosper Act.  Today we will start with a summary of the new student loan program.

If you’re a devoted reader of this blog, or just a student loan wonk, you’ll know that there have been two major federal student loan programs: The Federal Family Education Loan (FFEL) Program and the Direct Loan Program.

Until the FFEL Program was sunsetted on July 1, 2010, the program provided for private lenders to issue federally-backed student loans.  Millions of dollars worth of FFEL loans are still on the books of borrowers all over the country.

Since 2010, most borrowers get their loans under the Direct Loan program, where the Department of Education funds and issues the loans rather than private lenders.

The Prosper Act would sunset the Direct Loan Program and replace it with the Federal ONE Loan Program.   

Since the Perkins program already expired in September 2017, Federal ONE Loan would be the main lending program if the Prosper Act passed.  Any new borrowers after June 30, 2019 would be issued Federal ONE loans, not Direct Loans.  Certain borrowers, such as those already enrolled in a program, would be grandfathered into Direct Loans until September 30, 2024 at the latest.

So what will a Federal ONE loan look like? It will be issued by the Department of Education — much like the Direct Loan — and will have similar interest rate caps based on the 10-year Treasury plus a spread.

The Federal ONE loan will impose annual caps on borrowing for graduate students and parents based on hard limits rather than the cost of attendance, which is currently used to create a cap under the Direct Loan program.  For instance, Parent loans will be capped at $12,500 annually rather than whatever is needed to meet the cost of attendance.

The biggest change will be in the repayment plans available.  We’ll cover that in the next post.

Changes to PSLF in the Omnibus Spending Bill

In late March 2018, Congress passed H.R. 1625, the Consolidated Appropriations Act, 2018 otherwise known as the omnibus spending bill.  Contained deep in the thousand-page document was a provision that could potentially change how Public Service Loan Forgiveness is handled.  If you want to follow along with me, the relevant text of the spending bill is available here by searching for “Sec. 315”.

Before we get into the weeds on what Congress actually did, you need to remember that to qualify for the elusive Public Service Loan Forgiveness a borrower must make 120 on-time payments on qualifying loans under a qualifying plan.

Only income-driven plans and the 10-year standard repayment plan qualify.  (Of course, if you made 10 years worth of payments on the 10-year standard plan, you would have no loans left to forgive).

This limitation left many borrowers unknowingly out of luck.  They made low monthly payments on, for instance, the graduated extended plan and didn’t realize they were not making qualifying payments towards their 120 for forgiveness.  In one high-profile case, a teacher made 120 payments under a graduated plan only to learn she was not eligible for forgiveness.

Some members of congress have been interested in changing this obvious loophole — after all, what’s the point in excluding graduated repayment plans rather than income-based plan? The payments can be similar.  If anything, borrowers on graduated plans can often end up paying back more.

Now the omnibus bill does something about it.  The loan provides $350 million

for borrowers of loans . . . who would qualify for loan cancellation . . . except some, or all, of the 120 required payments . . . do not qualify for purposes of the program because they were monthly payments made in accordance with graduated or extended repayment plans

Congress does put in some caveats.  I’ll translate each of these into English as we go:

Provided that the monthly payment made 12 months before the borrower applied for loan cancellation as described in the matter preceding this proviso and the most recent monthly payment made by the borrower at the time of such application were each not less than the monthly amount that would be calculated under, and for which the borrower would otherwise qualify for, clause (i) or (iv) of section 455(m)(1)(A) regarding income-based or income-contingent repayment plans, with exception for a borrower who would have otherwise been eligible under this section but demonstrates an unusual fluctuation of income over the past 5 years

In English: For the 12 months before an application for PSLF, the borrowers monthly payment must be at least as much as he or she would have paid under an eligible income-driven plan.  This is supposed to stop people with higher incomes from utilizing PSLF without making at least 1 years worth of payments at the amount required by an IDR plan

Provided further, That the total loan volume, including outstanding principal, fees, capitalized interest, or accrued interest, at application that is eligible for such loan cancellation by such borrowers shall not exceed $500,000,000:

The max cancellation under this program is $500,000 (there’s a comma rather than a decimal, nominally making the limit $500 million.  But this may be changed as a ministerial error during the codification process)

Provided further, That the Secretary shall develop and make available a simple method for borrowers to apply for loan cancellation under this section within 60 days of enactment of this Act

There should be an application process available within 60 days.  Once I find out about it I will post an update.

Provided further, That the Secretary shall provide loan cancellation under this section to eligible borrowers on a first-come, first-serve basis, based on the date of application and subject to both the limitation on total loan volume at application for such loan cancellation specified in the second proviso and the availability of appropriations under this section:

This one at least is straight forward and important.  The money is first-come-first-serve.  

Provided further, That no borrower may, for the same service, receive a reduction of loan obligations under both this section and section 428J, 428K, 428L, or 460 of such Act

These citations refer to loan forgiveness for teachers, loan forgiveness for service in areas of national need, loan repayment for civil legal assistance attorneys and a separate loan cancellation for teachers program, respectively.  So, no double dipping.

All things considered, this is great news for borrowers who were near the end of the process when they realized they’d made the wrong payment under the wrong plan.  Unfortunately because the money is first-come-first-served, there will need to be a more permanent solution before borrowers who are years away from PSLF-eligibility can be assured that their years on graduated plans will count.