New Legislation Would End Student Loan Forgiveness Programs

Michael Lux Blog, News, Student Loans 0 Comments

Lost in the shuffle of tax reform and former National Security Advisor Michael Flynn entering a guilty plea, House Republicans unveiled far-reaching legislation that would dramatically alter higher education funding in America.  The bill would relax standards on for-profit colleges, change policy regarding sexual assault on campus, make submitting FAFSA applications easier, and impose caps on yearly and total federal student loan borrowing.

[Further Reading: The Full Text of the Proposed Legislation]

Today we will look at one key aspect of the bill: the elimination of student loan forgiveness.  Most borrowers chasing student loan forgiveness have their eye on either Public Service Student Loan Forgiveness or forgiveness through participation in an Income-Driven Repayment Plan.  Both forgiveness provisions would be eliminated.

Public Service Loan Forgiveness

The Public Service Loan Forgiveness Program was created just over 10 years ago and signed into law by President George W. Bush.  The program allows federal student loan borrowers to have their federal student debt forgiven after 10 years of certified payments.

For borrowers currently pursuing PSLF, the good news is that the bill would grandfather in current student loan borrowers.  Meaning if the PSLF program was eliminated, they could still eventually have their loans forgiven.  This protection would extend to all existing student loan borrowers.  The change would only apply to new loans issued once the bill becomes law.

Income-Driven Student Loan Forgiveness

Many student loan borrowers participate in income-driven repayment plans such as Income Based Repayment (IBR), Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE).  These borrowers currently pay 10% to 15% of their discretionary income towards their student loans each month.  After 20 to 25 years of these payments, the remaining debt on the loans is forgiven.

The bill would eliminate all of the existing student loan repayment programs and leave two in place.  One would be the standard 10-year repayment plan.  The other would be an Income Based Repayment Plan that required borrowers to pay 15% of their discretionary income towards their loans.  However, borrowers would never be able to achieve forgiveness on this new IBR plan.  Instead, the loan would be paid off once the borrower had paid the same amount they would have spent on the 10-year repayment plan.

Like the Public Service Loan Forgiveness provisions, these changes to the student loan system would apply only to future borrowers.  Current borrowers will continue to have all the current repayment plans, and forgiveness provisions, at their disposal even if the bill becomes law.

The Next Steps

The bill, named the “PROSPER Act” won’t begin taking meaningful steps for a couple of months.  With Republicans holding a very narrow majority in the Senate and unlikely to generate any support from Democrats, passage is far from certain.

That being said, there will be considerable support to pass the bill from for-profit colleges as well as private banks and lenders who would benefit from caps on total student borrowing.