How the PROSPER Act Stacks Up for Student Debt: Changes to Loan Repayment Would Weaken Crucial Safety Net for Lower Income Borrowers
This blog post is one in a series that explores how the House proposal to overhaul the Higher Education Act would impact student debt. This bill, the PROSPER Act, was passed out of the Committee on Education and the Workforce in December 2017. Here we focus on the PROSPER Act’s changes to income-driven repayment plans for federal student loans. See our previous post for a discussion of the proposed ONE Loan program.
Income-driven repayment (IDR) plans – which allow students to repay their loans as a share of income – currently help millions of borrowers stay on top of their loans and avoid default. Reflecting broad, bipartisan agreement on the need to simplify IDR, the PROSPER Act streamlines the five existing IDR plans into one new plan. Unfortunately, the design of the new IDR plan would severely undermine the program’s critical role in helping borrowers manage their debt and in reducing default. In addition to increasing the size of monthly payments required of borrowers enrolled in IDR and eliminating Public Service Loan Forgiveness (PSLF), the PROSPER Act includes two less-visible provisions that will increase the risk of default for low-income borrowers, and force some of them to make payments for the rest of their lives.
The PROSPER Act increases monthly payments for all borrowers in IDR and eliminates the Public Service Loan Forgiveness Program.
The required monthly payment in the PROSPER Act’s IDR plan would be calculated as 15% of “discretionary income,” a 50% increase from the 10% payment required under existing IDR plans. For example, a borrower earning $30,000 could see her payments rise by about $600 a year.
Additionally, the PROSPER Act would prevent the Department of Education from improving or creating repayment options that would be better for borrowers. The Department has used this authority to reduce student loan payments while also better targeting benefits to the borrowers who need them the most.
The PROSPER ACT would also eliminate PSLF for new borrowers, without reinvesting any of the savings into students. PSLF works in tandem with IDR but is a forgiveness (not repayment) program and has a different policy goal – to encourage students to enter public service professions, particularly those that offer lower earnings potential and require extensive education and training. Borrowers who would have utilized this program may still enroll in IDR, but will go from anticipating loan forgiveness after 10 years of payments to facing an unknowable and potentially indefinite number of years of repayment.
The PROSPER Act eliminates loan forgiveness so the lowest income borrowers would be required to make payments indefinitely.
Unlike existing IDR plans, the new single IDR plan proposed in the PROSPER Act does not guarantee that borrowers will be able to retire any remaining federal student debt after 20 or 25 years of payments. Instead, the plan would provide a cap on interest payments so that borrowers would be required to repay the equivalent of the principal and interest amount they would have paid under a standard 10-year plan (in addition to interest accrued during any deferments), no matter how long it takes them to do so.
By removing the 20- or 25-year fixed forgiveness point, the lowest income borrowers would no longer see a clear light at the end of the tunnel, and may be stuck repaying their student loans for the rest of their lives. For example, under this plan, it could take a low-income borrower with just $20,000 in student loan debt up to 92 years to repay their student loans.*
Requiring payments for longer than 20 or 25 years would have significant harmful consequences for borrowers. Research has shown that carrying outstanding student debt may affect borrowers’ ability and willingness to make other financial commitments, such as buying a home or a car, opening a small business, saving for their children’s education, or saving for their own retirement. Student debt can also negatively impact borrowers’ access to other credit. Recent reports from the Government Accountability Office and the Consumer Financial Protection Bureau both found that the number of older Americans with student debt has increased sharply, and that their loans are more likely to be in default; removing the existing cap on the number of years a borrower is in repayment would make these problems even worse.
Increasing the minimum monthly payment in IDR from zero to $25 would increase risk of default for the lowest income borrowers.
Under existing IDR plans, monthly payments for the lowest income borrowers can be as low as $0. This is a critical component of IDR that acknowledges the reality that, after paying for their basic needs, some borrowers have no remaining income to cover student loan payments. Under the PROSPER Act’s proposed IDR plan, however, borrowers would be required to make minimum payments of $25. For borrowers with tight budgets, the minimum $25 payment may force them to choose between making a student loan payment and paying for rent or food – and increase the risk that choosing to feed or house a family would result in defaulting on a student loan.
Additionally, raising the minimum IDR payment to $25 would be out of step with the definition of affordable payments established for loan rehabilitation, a process through which student loan borrowers make monthly payments to bring federal loans out of default and back into good standing. For the lowest income borrowers, the “reasonable and affordable” monthly payment for rehabilitation can be as little as $5, which can still prove difficult for them to pay. These borrowers would be at greater risk of defaulting on their loans a second time if once out of default they see their monthly payment increase from $5 in rehabilitation to a potentially unaffordable $25 in IDR.
The PROSPER Act allows for very limited circumstances under which monthly payments could be reduced to $5, but such allowances would be limited to up to three years and would require burdensome documentation. For example, borrowers who are unemployed could reduce their monthly payments to $5 for a limited time by regularly providing evidence of their eligibility for unemployment benefits, as well as a written certification that they have registered with a public or private employment agency within a 50-mile radius of their home address and that they have made at least six “diligent attempts” during the preceding six-month period to find full-time employment.
The multiple existing IDR plans should be streamlined into one plan, but the PROSPER Act’s proposal is not the way to do it. It is critical that any single IDR plan provide loan forgiveness so that borrowers will not bear the burden of federal loan debt until the end of their lives, and include $0 monthly payments for the lowest income borrowers who are living below 150% of the federal poverty level and in no position to afford federal student loan payments. Our detailed proposal for streamlining existing IDR plans includes these and other features to make IDR work better for both students and taxpayers. These features include capping monthly payments at 10% of income, exempting forgiven loan amounts from taxation, and better targeting benefits to borrowers who need help the most.
* Calculations assume that the borrower is making the minimum $25 monthly payment during the entirety of her time in IDR, and continues making payments until she has paid the equivalent of the principal and interest she would have repaid under the 10-year standard plan with a 6.8% average interest rate.
