Trump’s Student Loan Reform — The PROSPER Act

Today we’re going to discuss President Trump’s Student Loan Reform through the GOP House of Representative’s bill, the PROSPER Act.

Trump's Student Loan Reform

Trump’s Student Loan Reform

 

Trump’s Student Loan Reform- The PROSPER Act

For years, there has been a concern over the complexity of the federal financial aid system. Today, there are 6 types of federal loans, 9 repayment options, 8 forgiveness programs, and 32 deferment and forbearance options out there. President Trump’s Student Loan Reform attempts to simplify and streamline the system.

The GOP House of Representatives is making a push towards streamlining that system. On November 16th, 2017 they passed a bill called the PROSPER Act. It’s Trump’s student loan reform and stands for “Promoting Real Opportunity, Success and Prosperity through Education Reform”.

 The PROSPER Act is, a one loan, one grant program. It’s not even a new concept. It’s an idea that has been circulating for more than a decade.

 In the event of it’s adoption, this one loan, one grant program would change the student loan system as we know it. It could even influence a student’s choice in college and career.

 Here are some of the changes you can expect to see for new student loan borrowers. If you have any questions or something to add, please leave a comment.

 

Trump’s Student Loan Reform: Federal ONE Loans

We currently have 6 types of federal loans. Under a one loan, one grant federal aid system, we’ll only be offered one type of federal loan. That’s going to be Federal ONE Loans. It will replace Direct Loans. New student loan borrowers will only have access to Federal ONE Loans through Trump’s student loan reform.

That raises a bunch of questions in of itself. A lot of programs and benefits we have today only with with Direct Loans. Programs like Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) only work with Direct Loans.

The good news is that if you already have Direct Loans, you’ll most likely be able to keep them. If that’s the case, then you’ll still have access to PAYE, REPAYE, and Public Service Loan Forgiveness (PSLF).

Unfortunately, these programs won’t be available to new borrowers. They won’t exist under Federal ONE Loans.

There will also be One Grant and that’s the Pell Grant, which exists today. The PROSPER Act would phase out all federal grant programs and keep just this Pell Grant.

  

Eliminating Subsidized Stafford Loans

Eliminating Direct Loans also means eliminating Subsidized Stafford Loans. These are Direct Loans currently offered to families with financial need. Subsidized loans help keep your student debt from growing while you’re in school. The federal government pays the interest on these loans during periods of deferment.

Losing this benefit means students that qualify will have more debt upon graduation. Fortunately, it doesn’t affect a lot of students. The average Direct Subsidized Loan for undergraduates is around $3,565. And graduate students can only borrow unsubsidized loans anyway. So this change doesn’t affect them either.

On a positive note, we will no longer have to pay an upfront origination fee to get Federal ONE Loans. Whereas, with Direct Loans all undergraduates have to pay an upfront origination fee of 1.066%. Graduate / Professional PLUS loans have to pay a 4.264% origination fee! Those fees get tacked onto your student loan balance.

 

Changes to Federal Loan Repayment Programs

There are currently 9 repayment options within the federal student loan program. That’s a lot. Trump’s student loan reform would consolidate those, offering just two options. There will only be the Standard Repayment and Income-Based Repayment (IBR) plans. Both of those exist today. However, they will be a little different with Federal ONE Loans.

Trump’s Standard Repayment Plan. This plan is a level, 10-year repayment plan. Borrowers will have to make 120 equal payments. A borrower with $65,000 in Federal ONE Loans, may have to make 120 payments of $738.06 (assuming a reasonable 6.5% interest).

Borrowers might not be able to afford that right out of college. If that’s the case, the only other repayment option will be the new Income-Based Repayment (IBR) Plan.

Trump’s Income-Based Repayment (IBR) Plan. IBR helps borrowers that qualify to keep their payments affordable. Based on your income and family size, there’s a cap (10% of discretionary income) as to how much a borrower will pay. IBR will also forgive remaining debt, after 25 years of qualifying payments.

Trump’s IBR plan will work similarly, with some differences. Instead of your discretionary income being capped at 10%, the cap will now be 12.5%. Of course, this will cause your payments to be slightly higher. But with Trump’s IBR plan, balance-based forgiveness for undergraduates looks much better than what’s offered today.

 

Loan Forgiveness Programs

There are a couple of ways to earn forgiveness today with Direct Loans. You can earn it through:

  • Public Service Loan Forgiveness (PSLF).

  • Or you can earn it through an Income-Driven Repayment (IDR) plan. Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE) plans all work.

Unfortunately, Public Service Loan Forgiveness (PSLF) won’t be available through Federal ONE Loans. You need Direct Loans to qualify for PSLF. However, you’ll still be able to earn forgiveness through the Income-Based Repayment (IBR) plan.

Forgiveness under Trump’s student loan reform will be a type of balance-based forgiveness. Make “X” years of payments and any remaining balance will be forgiven. Undergraduates can qualify for forgiveness (not PSLF) after 15 years of payments. Graduates can qualify for forgiveness after 30 years.

Note: If you currently have federal direct loans, you’re most likely not going to lose the PSLF benefit. You’ll likely be grandfathered (as long as you keep your Direct Loans).

 

Student Loan Borrowing Limits

The PROSPER Act would also introduce new and different borrowing limits. This will apply to both graduate and undergraduate students, as well as their parents.

Currently, dependent and independent undergrads are subject to lifetime borrowing limits. The current undergraduate limits are:

  • Dependent Undergraduates. Students can borrow up to $31,000 in federal student loans throughout college.

  • Independent Undergraduates. Students can borrow up to $57,500 as a lifetime cap.

  • The lifetime limit for Direct Subsidized Stafford loans is $23,000.

  • Parents. Parents are able to borrow up to the Cost of Attendenance (COA) (minus any financial assistance).

The PROSPER Act will boost these limits slightly to:

  • Dependent Undergraduates. Students can borrow up to $39,000 (+8,000) in federal student loans throughout college.

  • Independent Undergraduates. Students can borrow up to $60,250 (+2,750) as a lifetime cap.

  • Graduates. Graduate students can borrow up to $150,000 as a lifetime cap ($28,500 per year).

  • Parents. Parents can borrow up up to $56,250 per child (12,500 per year).

  • Subsidized Stafford loans will no longer be available. There will only be one loan — unsubsidized Federal ONE Loans.

Unfortunately, there isn’t a college pre-approval process, like there is with mortgages. Clearly, these new borrowing limits are in response to the out of control student debt. I believe the big issue here is that Graduates can borrow large sums of money up to the Cost of Attendance (COA). Then they can choose an ultra low repayment option under income-driven plans. That was never the intention of Grad PLUS loans.

 

Is Trump’s Student Loan Reform the best way for simplifying financial aid?

The best answer is… maybe.

On the federal level, the PROSPER Act does address how complicated financial aid is. And, on the surface, that makes sense. But one of the things that makes it so complex is the multiple funding streams that goes into higher education.

There has to be complexity at some level. But it doesn’t need to be on the front-end where the schools and students are. I feel that as long as the new federal financial aid system is flexible enough to allow schools to get families financial aid (without it could be a good thing.

How did the federal financial aid system get so complex? There’s not a practical reason for all the different loans and different loan programs. You need only to understand how Congress works.

Congress is biased to adding. And when they add, they never subtract. So when new programs are added, old ones are never taken away. The advocacy world would make Congress pay dearly if they ever tried to take away any program. Advocates are perfectly fine with having access to more money even if it comes with more complexity. And they will oppose any reduction in benefits if it’s to get simplicity.

That’s the dynamics and politics we have in the United States. We have several loan and grant programs running side-by-side that essentially do the same thing. This is why we have campus-based aid and Pell grants. The same thing with Perkins Loans.

I’m looking forward to see how President Trump’s student loan reform unfolds and evolves. What about you? What concerns or questions do you have about how this effects federal financial aid in the future?

 

Tommy Martin

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