Federal and State Policy

Income-driven repayment (IDR) plans set monthly student loan payments based on income and family size, allowing borrowers to pay more when their income is higher. Yet, the current array of such plans available today - for which eligibility requirements, costs, and benefits vary - creates barriers to successfully navigating student loan repayment. The variety of available plans can also contribute to under-enrollment in IDR plans by the borrowers who need it the most.

There is broad and bipartisan recognition of the need to simplify and improve IDR, and multiple policymakers have put forth specific proposals to reform and streamline IDR. TICAS has also developed a detailed proposal for a streamlined IDR plan, which including specific examples of the relative cost to borrowers of different IDR design decisions.  

The details of IDR design directly impact policymakers’ ability to simplify student loan repayment while avoiding unintended consequences that increase the cost of student debt, particularly for the lowest income borrowers. The ability of IDR to fulfill its promise as a safety net for borrowers and the degree to which benefits flow to borrowers in the most need of relief depend on specific design decisions. These decisions include fundamentals like how monthly payments are calculated and how long borrowers remain in repayment before the balance of the loan is forgiven. And even more technical design elements, like the treatment of interest, affect the cost of debt repaid in IDR plans.

Several major legislative proposals to establish a streamlined IDR plan have been introduced in the former and current Congress. These include Senator Merkley’s (D-OR) Affordable Loans for Any Student Act (S. 1002, 116th Congress)[1] (a proposal also incorporated in Representative Scott’s comprehensive proposal to reauthorize the Higher Education Act, the Aim Higher Act (H.R. 6543, 115th Congress)); Senators King (I-ME) and Burr’s (R-NC) Repay Act (S. 1176, 115th Congress); Senators Warner (D-VA) and Rubio’s (R-FL) Dynamic Repayment Act (S. 799, 115th Congress); and Representative Zeldin’s (R-NY) ExCEL Act (H.R. 2580, 115th Congress).[2] Representative Foxx’s comprehensive proposal to reauthorize the Higher Education Act (the PROSPER Act, H.R. 4508, 115th Congress) included a reformed single IDR plan, and a single IDR proposal was also included in the last three President’s budgets.[3]

We reviewed the details of the IDR repayment plan in all of these major proposals, [4] as well as the most recently created IDR plan, REPAYE, to identify their approach to key design details and shed light on areas of policy agreement beyond broadly reducing the number of available repayment plan options. The summary table below (click for full size) demonstrates key areas of consensus as well as divergence.

Our analysis of the design details of key proposals identified a number of encouraging areas of full or near consensus, including that:

  • IDR is provided as an option to borrowers rather than mandated or universal;
  • IDR provides debt forgiveness after some fixed period of repayment;
  • IDR is available to student borrowers with federal loans regardless of their debt-to-income ratio;
  • IDR benefits are better targeted to those who need them most:
    • All borrowers in IDR always make payments based on their income;
    • Married borrowers are treated consistently, regardless of how they file their taxes; and
  • Borrowers enrolled in IDR have the option for automatic annual income certification to stay enrolled.

The proposals we reviewed also diverge on a number of key design details that directly impact the cost of student loan repayment, including:

  • The share of income a borrower must put toward monthly loan payments;
  • The number of years a borrower must be in repayment before any remaining debt is forgiven;
  • The treatment of accumulated interest growth;
  • Circumstances under which interest capitalizes during enrollment; and
  • The tax treatment of debt forgiven in IDR.

As Congress continues working towards a comprehensive reauthorization of the Higher Education Act, we’ll be exploring in more detail these key design decisions and releasing a fuller analysis of areas of consensus and divergence.

[1] The Affordable Loans for Any Student Act was also introduced in the House by Representative DeLauro (H.R. 2065, 116th Congress).

[2] The ExCEL Act was introduced prior by Representatives Polis and Hanna (H.R. 2580, 115th Congress).

[3] Several key design details of the President’s proposal are not publically available.

[4] We focus specifically on the design of a proposed income-driven repayment plan. Some of these bills also make other changes to the loan program, including the creation of a new single loan program, inclusive of different interest calculations and changed loan limits, as well as the availability of other benefits like PSLF.

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Yesterday, Senator Jeff Merkley (D-OR), together with Senators Stabenow (D-MI), Gillibrand (D-NY), Baldwin (D-WI), Blumenthal (D-CT), Schatz (D-HI), Cardin (D-MD), and Cortez Masto (D-NV) introduced the Affordable Loans for Any Student Act. At a time when one in four federal student loan borrowers are delinquent or in default on their student loans, this bill makes common-sense and urgently-needed changes to simplify and improve repayment options. If enacted, these ideas will ultimately help reduce default.

The new bill incorporates longstanding TICAS recommendations to streamline today’s multiple income-driven repayment (IDR) plans into a single, improved plan that works better for students and taxpayers. At the same time, it preserves borrowers’ ability to repay their loans through fixed monthly payments over a fixed period of time, if that is what they prefer. While IDR is not the right repayment plan for everyone, it provides more manageable monthly payments for many borrowers because payments are tied to income and family size. Data show that borrowers in IDR are less likely to be delinquent or in default than borrowers in other repayment plans.

The specifics of an IDR plan directly impact its ability to serve the critical role of a safeguard for borrowers struggling with unaffordable debt. The single IDR plan created in the Affordable Loans for Any Student Act takes important steps to help borrowers manage their student debt, and targets the plan’s benefits to those who need them the most. The proposed streamlined IDR plan includes the following key features:

  • Monthly payments are capped at 10 percent of income. A borrower’s monthly payments are equal to 10 percent of his or her adjusted gross income – as is currently the case in three of the five existing IDR plans. This helps ensure that student loan payments are a manageable share of a borrower’s income.
  • The monthly payment formula protects very low earnings, while targeting benefits to borrowers who need help the most.  All of today’s IDR plans recognize that borrowers must cover basic necessities like housing, food, and transportation before making payments toward student loans. The single IDR plan created in this bill expands this “income exclusion” threshold from 150 percent to 250 percent of the federal poverty level, so that a single borrower earning less than $30,000 a year would not be required to make student loan payments (the calculated payment would be $0). This income exclusion is gradually phased out for higher-income borrowers.
  • All borrowers in IDR make payments based on income. In some of the existing IDR plans, monthly payments are capped at the amount required under a fixed 10-year plan. This allows high-income borrowers to pay a smaller share of their income than lower-income borrowers. Like the REPAYE plan, the IDR plan created in this bill requires all borrowers to make payments based on their income. This increases the plan’s fairness, and would prevent borrowers with high incomes and high debt from receiving substantial loan forgiveness when they could have afforded to pay more.
  • Any remaining balance after 20 years of payments is forgiven. All borrowers in the PAYE and 2014 IBR plans, as well as borrowers with only undergraduate debt in the REPAYE plan, receive forgiveness after 20 years of payments. This represents a critical light at the end of the tunnel for borrowers whose incomes remain very low, relative to their debt, for decades. Maintaining this protection is important, because extending the repayment period for any subset of borrowers in IDR disproportionately harms the lowest income students, who take longer to repay their loans than higher-income borrowers.
  • Automates annual processes so borrowers can more easily continue making payments based on income. The latest Education Department data show that more than half (57 %) of borrowers enrolled in IDR plans miss their annual deadline to update their income information, which can lead to unaffordable spikes in monthly payment amounts and interest capitalization that adds significant cost to a loan. To eliminate this unnecessary burden on both students and loan servicers, this bill automates the annual process by allowing borrowers to give permission for the Department of Education to automatically access their required tax information, with the ability to revoke that permission at any time. The bipartisan SIMPLE Act and the White House’s latest budget request to Congress both propose this same change.
  • Automatically enrolls distressed borrowers in IDR. The bill notifies delinquent borrowers of IDR eligibility, and automatically enrolls borrowers who are severely delinquent (those who have not made any payments for 120 days) as well as borrowers who defaulted and completed rehabilitation into IDR. Borrowers would always have the opportunity to opt out of this process.

Beyond making these critical improvements and simplifications to IDR, the Affordable Loans for Any Student Act makes additional changes that will lower the cost and reduce the burden of student debt. For example, the bill eliminates interest capitalization and origination fees, limits income seizure for loan payments from borrowers in default, and consolidates existing deferment and forbearance options into a single, easy-to-understand “pause payment” process. The bill also requires school certification of private loans, which ensures that students are advised of their federal loan options prior to taking out private loans. Over half of undergraduate private student loan borrowers have remaining eligibility for federal loans, which are less risky and come with important consumer protections, such as IDR.

There is broad bipartisan recognition of the need to simplify the current array of IDR plans and improve the processes by which students repay their debt, and the Affordable Loans for Any Student Act stands out as the reform borrowers urgently need—reducing the costs and burden of student debt, simplifying and improving repayment options, and lowering the risk of default.

We applaud Senator Merkley for his continuing leadership on strengthening IDR to better serve struggling borrowers, and urge Congress to act quickly on this much-needed legislation. 

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The gainful employment rule enforces the Higher Education Act’s requirement that all career education programs receiving federal student aid “prepare students for gainful employment in a recognized occupation.” The rule uses debt-to-earnings ratios to assess whether career education programs at public, nonprofit, and for-profit colleges are leaving their graduates with reasonable debt burdens. Programs that exceed allowable thresholds—those consistently leaving their graduates with more debt than they can repay—must improve or lose eligibility for federal funding. This rule also provides consumers with key information about program costs and outcomes so they can make an informed decision about where to enroll.

The Department of Education has proposed rescinding the gainful employment rule completely, arguing that programs’ performance under the rule can be explained by factors like student characteristics and economic background, program field, and school location. However, similarly located career education programs serving similar students can have very different outcomes.

We recently identified several poorly performing programs that are located near programs that have much lower cost and/or much better outcomes. For example:

  • In Birmingham (AL), graduates from the criminal justice administration bachelor’s degree program at Strayer University typically earned almost twice as much and owed $6,600 (20 percent) less than graduates from the same program at Virginia College.
  • In South Plainfield (NJ), graduates from the dental assisting certificate program at Central Career School typically earned $6,600 more per year and owed about half as much as graduates from the same program at Everest Institute.

In addition to providing the same program in the same city, the schools in each comparison serve demographically similar groups of students, as measured by the share of the student body that receives Pell Grants, is Black, or is Hispanic/Latino.

These examples demonstrate the need for the gainful employment rule to prevent poorly performing programs from continuing to bilk students and taxpayers, and to keep unscrupulous schools from enrolling as many students as possible without regard to the quality of the training or job prospects. They also show that students have alternative options for where to enroll even if poorly performing programs close.

To learn more, check out:

  • Our new analysis for more comparisons. 
  • Our comments on the Department’s proposal to rescind the gainful employment rule.
  • The comment submitted by 68 organizations representing students, consumers, veterans, service members, faculty and staff, civil rights, and college access – demonstrating broad support for affordable, quality career education.

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Congress is preparing to rewrite the Higher Education Act (HEA) for the first time since 2008. While a college degree is more valuable than ever, many students struggle to cover the cost of college, and the lowest income students continue to bear a disproportionate student debt burden. Reauthorization of the HEA presents a unique opportunity to solve widely-agreed upon problems, including a confusing array of student loan repayment options, the need for quality assurance to protect students from low-quality programs and colleges, and college affordability barriers that leave too many students with burdensome debt.

Our recent blog series, How the PROSPER Act Stacks Up for Student Debt, took a deep dive into the HEA reauthorization legislation recently passed by the House of Representative’s Committee on Education and the Workforce. Across five detailed posts, we explored how some of the bill’s major changes would impact student debt.

On whole, the PROSPER Act would do significantly more harm than good, saddling students with more debt and loosening standards in a way that would open higher education and taxpayer dollars up to an unacceptable level of risk. These changes massively overshadow the bill’s attempt to simplify programs, and improve loan counseling and data transparency.

We found that:

  • The ONE loan proposal would increase cost of Federal loans for most borrowers and increase risks of private loan borrowing. More here.
  • Changes to loan repayment would simplify the system, but at the cost of raising monthly payments for all, and increasing the risk of default and weakening a crucial safety net for the lowest income borrowers. More here.
  • Loan counseling and consumer information enhancements are steps in the right direction, but more complete data are needed, and consumer testing will be critical to helping students and families make the most of it. More here.
  • Discarding reasonable accountability standards will lead to a rise in unmanageable debt and more waste, fraud, and abuse in higher education. More here.
  • Narrowing of borrower defense eligibility, limiting of closed school discharge, and preemption of state consumer protections would harm student borrowers attending low-quality or even fraudulent for-profit colleges. More here.

Each of our posts last week focused on provisions in the PROSPER Act that would impact student debt and repayment, highlighting our recommended alternatives along the way (many of which already have bipartisan support). But it is also important to highlight that meaningful investments in the Pell Grant are also urgently needed to lower the burden of student debt, and such investments are noticeably absent from the PROSPER Act. Allowing the grant’s annual inflation adjustment to expire after this year, and freezing the guaranteed maximum award amount (as the PROSPER Act does) will mean that the grant’s already historically low purchasing power will continue to decline, and the already disproportionate burden of debt carried by Pell Grant recipients will continue to grow.

As the process to reauthorize the Higher Education Act moves forward and the Senate continues to shape its own proposal for how it should be improved, we hope Congress will ultimately work together to craft student-centered solutions to today’s problems of college affordability, access, and student success.

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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 protections for students who have been mistreated by their schools or attended schools that closed.

In recent years, a surge in documented cases of deceitful and predatory practices at colleges has harmed tens of thousands of borrowers. Many are now seeking protection from the compounding damage caused by outstanding student loan debts. Rather than strengthening protections that would prevent and address this damage, however, the PROSPER Act makes it more difficult for students to be made whole after they took out student loans under deceptive or other unfair circumstances. Specifically, it narrows the borrower defense rule, makes closed-school loan discharges more difficult to obtain, and preempts states’ rights to legislate student loan protections, each of which leaves student loan borrowers more vulnerable to abuse.

Narrowing borrowers’ eligibility for relief sets unrealistic and harmful standards for mistreated students.

The borrower defense rule authorizes the Department of Education to discharge and refund student loans used to attend colleges that broke their contractual promises or engaged in predatory practices. Under the rules finalized by the Education Department in 2016, borrowers can assert one of three categories of claims: those based on certain types of judgments against their college, a broken contract, or a “substantial misrepresentation” made by the college. The 2016 rule also protects students from predatory behavior, while deterring unscrupulous conduct by giving the Department the explicit ability to hold colleges accountable for the cost of loan relief rather than the taxpayer.

The public overwhelmingly supports providing relief to mistreated students: 78% of Americans say they support loan relief for borrowers whose schools provided deceptive information about their programs or outcomes, including 87% of Democrats and 71% of Republicans. While the PROSPER Act maintains the three categories of claims, it makes it far more difficult for wronged students to get debt relief in several ways.

First, the PROSPER Act requires borrowers to apply within three years of the time an institution engages in misconduct. But this period is unrealistically short. Many students may not even be aware of the school’s misconduct within three years, and applications supported by successful court judgements are especially unlikely to be completed within three years.

Imagine a student who finished a bachelor’s degree in four years, only to realize that the school lied to them during their recruitment, when they were unable to find a decent job in their field of study. They would have already lost the opportunity to apply for borrower defense with a three year statute of limitations. When the Education Department investigated Corinthian Colleges’ misrepresentations, it uncovered serious, widespread abuse stretching back over five years.

In 2016, based upon a survey of similar state laws, the Department of Education concluded that no statute of limitations was appropriate for cases based on certain judgments or broken contracts. Claims based upon substantial misrepresentations could be brought within six years of the date the borrower reasonably could have discovered the misrepresentation.

Second, the House proposal adds language that stipulates students must submit individual applications for borrower defense. This means that even in instances where the Department has evidence that an institution engaged in widespread misconduct that negatively affected entire cohorts of borrowers, the Department would be precluded from granting them relief as a group – needlessly adding burden and expense to this process. For example, given the overwhelming evidence of widespread malfeasance, the Department granted former students of American Career Institute in Massachusetts automatic loan discharges, without placing the burden on each borrower to apply and justify their application. Because the most socioeconomically distressed borrowers are least likely to be aware of the availability of relief and the least comfortable with navigating individual applications, it is those borrowers who stand to be most harmed by eliminating the Department’s authority to provide group discharges.

Finally, as a condition of applying for relief, the PROSPER Act requires borrowers to convert their existing student loans to the new ONE loan it creates. This requirement would force borrowers to forfeit benefits like interest-free deferment during periods of unemployment and lower monthly payments in order to pursue a borrower defense discharge.

Any steps forward in the bill regarding borrower defense are overshadowed by large, new obstacles to providing full and immediate relief where the Department has evidence to act, and creating a process that is least burdensome for mistreated borrowers, and offering a pathway for group relief.

Codifying new limits on closed school discharges will make it harder for students to get a fresh start when their schools close.

Currently, students who are enrolled in a school within 120 days of its closure may either transfer their credits to a comparable program or seek a discharge of their student loans.  There are several reasons why students might prefer a discharge rather than transferring their credits. A student may have gotten halfway through their program but realized the school was providing a low-quality education by the time the school closed, and prefer to start over. Available comparable programs that will accept all of the students’ credits may have poor student outcomes, and more reputable options may only accept a small fraction of the students’ credits.  

The PROSPER Act would curb the ability of students in these situations to receive discharges, by requiring students to show that they attempted, but were unable, to complete the program elsewhere – even if they had not gained necessary relevant knowledge from the time they spent in a substandard program. When Corinthian closed, many schools did in fact refuse to take students’ transfer credits because of concerns about the quality of that education.

Students who are unfortunate enough to have their schools close deserve a fresh start. Congress should retain the provision in the borrower defense rule finalized in 2016, which would provide automatic closed school discharge to students do not enroll again within three years, with no requirement to attempt to transfer credits.

Preempting states from creating improved protections against misconduct in student loan servicing and debt collection will leave borrowers vulnerable.

The Consumer Financial Protection Bureau (CFPB) has received over 60,000 complaints from borrowers about student loan servicers. These complaints describe loan servicers providing wrong and inconsistent information, losing documents, and charging borrowers random or unexpected fees. The CFPB has even found that through their own misconduct, servicers drive borrowers into default. Unfortunately, the Department of Education recently withdrew its existing policy memoranda to improve student loan servicing, adding even more confusion to loan servicer oversight while the Department undergoes an overhaul of servicing and other student aid systems in its NextGen financial services environment.

In light of lax federal standards currently in place, some states have felt compelled to put in place minimum standards for servicers, and as a result state standards can be more robust than federal protections. For example, several states, including California, Connecticut, and the District of Columbia have given their local agencies authority to assess whether student loan servicers are complying with federal laws.

Yet the PROSPER Act would gut states’ ability to protect student loan borrowers from servicer misconduct. This provision would allow the federal government to preempt state laws governing student loan servicing and debt collection and would also bar states’ ability to govern licensing of these companies. Without the ability of states to create important state-based protections, and with an unclear picture of the future of federal policy on loan servicing, this would create additional opportunities for misconduct on the part of loan servicing companies. States must be allowed to continue to protect borrowers from poor servicing and debt collection practices.

The reauthorization of the Higher Education Act could mean the difference between relief for mistreated borrowers and students attending closed schools, or an increase in the number of borrowers struggling to repay student debt. Instead of making it harder for students to get a fresh start at a high quality, affordable education, Congress should provide meaningful, student-centric pathways for debt relief.

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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 accountability requirements for federal student aid.

The reauthorization of the Higher Education Act provides a pivotal opportunity to reaffirm and strengthen the federal government’s commitment to ensuring that students receive a quality, affordable education, and that federal dollars are wisely spent. Instead, the PROSPER Act would eliminate numerous safeguards that protect students and taxpayers from low-quality and even deceptive educational programs that waste taxpayer dollars and leave students with federal loans they cannot afford to repay.

Eliminating the gainful employment rule will reopen the door to waste, fraud, and abuse in career education programs.

The gainful employment rule is designed to ensure that career education programs in all sectors of higher education aren’t leaving students with unaffordable debts relative to their post-college earnings. In addition to protecting students from burdensome debts, the Congressional Budget Office estimates that the gainful employment rule saves $1.3 billion over 10 years because taxpayers’ resources aren’t being spent on poorly performing programs.

The PROSPER Act both eliminates the gainful employment rule and prohibits the Department of Education from writing or enforcing any future regulation with respect to the definition or application of the term “gainful employment” for any purpose under the Higher Education Act. According to 20 state attorneys general, rolling back the gainful employment rule “would open students and taxpayers up to the worst excesses of the for-profit higher education sector.” A group of Brookings Institution economists concluded that the rules “are necessary to help reduce the costs of student loans to taxpayers and to protect students from economic harm.” Eliminating the rule removes incentives for colleges to offer quality programs at reasonable costs, leaving students more likely to leave college with debts they can’t repay.

Loosening standards for program-level federal grant and loan eligibility without sufficient quality guardrails will waste resources on ineffective programs.

Currently, undergraduate programs providing a minimum of 15 weeks of instruction at Title IV eligible institutions are eligible for both federal student loans and Pell Grants. Programs providing at least 300 but less than 600 clock hours of instruction over the course of at least 10 weeks are eligible for federal loans, but not Pell Grants, so long as they have verified graduation and job placement rates of 70% and meet some additional requirements. The Reagan and Bush administrations tightened the current course length minimums after high-profile cases of fraud and abuse of federal aid funds, and years of high student loan default rates.

The PROSPER Act cuts the minimum length of all eligible non-competency-based education programs in half from 600 hours to 300 hours, and opens up all federal student aid funds to these programs. It furthermore removes the graduation and job placement rate requirements currently in place for programs between 300 and 600 clock hours. Some short-term programs that are closely aligned with local employment needs can offer real value to students, but eliminating existing, commonsense standards for graduation and job placement outcomes for such programs is a clear cause for concern for both students and taxpayers. Going even further by shortening existing program length requirements for federal aid eligibility without developing sufficient quality controls risks a new surge of abuse of federal aid funds. We have identified number of critical questions that must be addressed before expanding current program-level federal aid eligibility.

The PROSPER Act also expands federal grant and loan eligibility to programs primarily delivered by unproven higher education providers. These programs are not currently eligible for student aid because federal, state, and accrediting agencies have no proven mechanisms to rely on for assuring quality. Currently, schools have a 50% limit on how much they can “outsource” the provision of academic programming in a given course or program. This cap exists as an essential guardrail against the potential overuse of unproven providers of higher education that have not passed basic evaluations of academic quality.

In 2016, the Department of Education launched EQUIP, an initiative to explore any potential benefits of waiving this 50% limit and facilitating greater partnerships between colleges and non-college education providers. Recognizing the potential for associated risk to students and taxpayers, the eight pilot sites included in the initiative will be required to include new quality assurance processes. However, there are not yet any publicly available data on this initiative, including the types of programs and providers who applied or were approved for the project, let alone any identification of potential costs or benefits for students and taxpayers that may result from such partnerships.

Without even initial pilot program evidence or experience to guide policymakers, the PROSPER Act eliminates the 50% requirement for all colleges while at the same time failing to ensure any adequate oversight or accountability to ensure effectiveness. As a result, the bill would open the spigot of federal financial aid to new education companies, putting students and taxpayers at risk of wasted money and unaffordable loans.

Replacing institutional cohort default rates (CDRs) with program-level repayment rates will make it easier for low-quality schools to evade accountability and continue wasting federal funds.

The Department of Education currently holds schools accountable for default using the cohort default rate (CDR). The CDR measures the percentage of a college’s students entering repayment who default within three years. If a school has a CDR at or above 30% for three years, it is no longer eligible to receive Title IV funds from the government. If its CDR exceeds 40% for a single year, a school is no longer eligible for federal student loans.

The PROSPER Act replaces the CDR with a new program level repayment rate, to be calculated as the share of borrowers who took loans for each respective program and are either fully repaid, not 90 days delinquent, or in deferment after two fiscal years (the amount that a student in repayment has paid doesn’t matter). If a program’s repayment rate is less than 45% for three consecutive years, it would lose eligibility for three years. This specific calculation of the proposed repayment rate is new, which means there is no way to know how programs may fare under this standard.  

Swapping out the CDR for a brand new accountability metric is not a solution to shortcomings of the CDR, which we agree can and should be addressed, and could in fact invite unintended negative consequences for students. While repayment rates hold promise for measuring a broad range of borrower outcomes, eliminating the CDR entirely moves colleges’ attention away from focusing on the most devastating borrower outcome: default. Additionally, while school-level CDRs are not immune to gaming by unscrupulous schools, program-level accountability measures are particularly ripe for manipulation because of how simple it is for schools to make slight modifications to their program offerings in order to make failing programs look like new, untested programs. For instance, the gainful employment rule (also program-based) prohibits colleges from shortening a failing Associate of Arts program to a certificate program to get continued federal aid eligibility. The PROSPER Act does not propose any such protections or prohibitions with regards to how repayment rate accountability would be implemented, opening the door to more gaming of accountability rather than less.

Eliminating distinctions between for-profit and public/nonprofit colleges could have wide-reaching effects.

With some small exceptions, the bill eliminates the distinction between for-profit and other colleges as defined by the Higher Education Act, a longstanding policy priority of the for-profit college industry. All types of colleges should be subject to appropriate oversight and accountability, but the reality is that public and nonprofit colleges are already subject to significant oversight by states, while for-profit colleges – which are almost entirely federally funded – are not. This change would make for-profit colleges eligible for a range of programs across the federal government. According to a 2007 report from the Government Accountability Office, the current definition of “Institution of higher education” – which currently excludes for-profit colleges – was cited more than 350 times across the U.S. Code at the time of the report’s publication. While the full ramifications of this change are unclear, for-profit college advocates believe that the single definition could lead to, among other things, expanded eligibility for state financial aid, and more favorable treatment of their colleges’ credits in transfer policies. According to the GAO, the change could also lead to increased political influence of for-profit colleges within states. Moreover, allowing for-profit colleges to have an even greater share of limited federal dollars would be unwise given ample research about poor outcomes at many of these schools.

Taken together, the accountability-related provisions in the PROSPER Act signal more an assault on reasonable quality assurances in higher education than an attempt to improve and strengthen existing federal efforts to hold colleges accountable. Without the protections singled out for elimination in this bill, we know that students will face higher debt loads to attend programs that are less likely to pay off. Congress must use the opportunity HEA reauthorization presents to strengthen protections for students and taxpayers, not gut them.

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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. 

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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 certain elements of the PROSPER Act’s federal ONE Loan program, as well as the PROSPER Act’s potential impact on private loan borrowing; stay tuned for a deeper dive into its proposed changes to repayment options, as well as additional student debt-related topics.

There is widespread agreement that the current federal student loan program is too complex, resulting in a system that is difficult for students to understand and successfully navigate. The PROSPER Act rightly recognizes the need to simplify federal student loans, but the federal ONE Loan program it creates includes terms that would make federal loans costlier for students while also increasing the already high risks of private loan borrowing.

The PROSPER Act’s elimination of subsidized loans would raise borrowing costs for most borrowers.

Under current law, undergraduates currently receive subsidized loans, unsubsidized loans, or both. Subsidized student loans are allocated on a sliding scale based on financial need and carry valuable benefits: namely, no interest accrual while students are in school, for six months after they leave school, during active-duty military service, and for up to three years of unemployment or other economic hardship.

The PROSPER Act would replace existing loans with a new ONE Loan program that provides only unsubsidized loans.  With three-quarters (67%) of undergraduate Stafford loan borrowers taking out both subsidized loans and unsubsidized loans, it is worth considering whether student loan subsidies could be better designed to have a greater impact on college affordability. However, the PROSPER Act simply eliminates this valuable loan subsidy for undergraduates with financial need without investing the $27 billion dollars saved back into students. This would increase the cost of student loans by thousands of dollars over their lifetimes for many of the six million undergraduates who receive those loans each year. To just disappear this substantial investment in reducing the burden of federal loans is a major blow to student borrowers and college affordability.

TICAS has proposed streamlining the loan program into a new loan – also called a One Loan – that would carry a lower, but nonzero, interest rate for all borrowers on all of their loans while they are enrolled in school. To help students in repayment, our proposal includes interest-free deferments for Pell Grant recipients during periods of unemployment and economic hardship. Borrowers who received Pell Grants, by definition, have significant financial need, and are therefore much less likely to have family members who can support them during periods of unemployment or low earnings. Pell Grant recipients would be eligible for interest-free deferments on all their loans, rather than just their subsidized loans as is this case today, better targeting this benefit to those who need it most, when they need it.

Our proposed One Loan for undergraduates would also have:

  • A fixed interest rate that reflects the government’s cost of borrowing to provide predictability to students and ensure that the rates for new loans are in step with the economy.
  • A lower interest rate (reflecting only the government’s cost of borrowing) while borrowers are in school to increase affordability and encourage students to stay enrolled and complete, knowing that their interest rate will rise (to the government’s cost of borrowing plus a fixed margin) when they leave school.
  • An overall interest rate cap to ensure that interest rates on student loans will never be too high.
  • An interest rate guarantee to assure borrowers that their rate in repayment will never be too much higher than the rate on new student loans.

The table below summarizes selected features of federal (non consolidation) student loans for undergraduates under current law, the PROSPER Act’s ONE Loan proposal, and TICAS’ One Loan proposal.

Current Law
(New loans in 2018-19)

ONE Loan

One Loan

Number of Loan Types




Interest Benefits for Low-Income Students

Access to subsidized loans for borrowers with financial need


Interest-free deferments for Pell Grant recipients during periods of unemployment and economic hardship

Interest Rate

Fixed rates for new loans are set each year based on the 10-year Treasury note plus a set add-on of 2.05 percentage points, with an overall interest rate cap of 8.25%. Although rates for new loans are set each year, rates are fixed for the life of the loan.

Same as current law

Fixed rates for new loans would be set each year based on a U.S. Government-issued security (e.g., the 10-year Treasury note or 90-day Treasury bill), plus an additional fixed margin to reflect the cost of the student loan program. However, borrowers who are still in-school would have a lower interest rate that only reflects the government's cost of borrowing (i.e., that does not include the add-on).

Loan Limits

For dependent undergraduates:

  • $5,500 in the first year, $6,500 in the second year, and $7,500 in the third year and beyond
  • $31,000 total

For independent undergraduates and dependent students whose parents don't qualify for a parent loan:

  • $9,500 in the first year, $10,500 in the second year, and $12,500 in the third year and beyond
  • $57,500 total

Colleges have ability to deny or reduce loan eligibility on a case-by-case basis for individual students.

For dependent undergraduates:

  • $7,500 in the first year, $8,500 in the second year, and $9,500 in the third year and beyond
  • $39,000 total

For independent undergraduates and dependent students whose parents don't qualify for a parent loan:

  • $11,500 in the first year, $12,500 in the second year, and $14,500 in the third year and beyond
  • $60,250 total

Colleges have ability to deny or reduce loan eligibility for entire groups of students, based on certain characteristics or programs of study. Eligibility increases would be allowed on a case-by-case basis.

Same as current law

The PROSPER Act may lead to riskier private student loan borrowing

Most students borrow their loans directly from the U.S. Department of Education, but private loan volume has been increasing over recent years, to $11.6 billion in 2016-17. Private loans are one of the most dangerous ways to finance a college education. Experts agree that federal student loans should always be the first line of defense for students who need to borrow, because they have fixed interest rates, flexible repayment plans, and other important consumer protections that are not guaranteed by private loans.

The PROSPER Act removes important protections around “preferred lender lists” of private student loan options. Colleges can choose to provide those lists to point students toward private loan options that the college considers to have competitive or favorable terms. In the mid-2000s, Congress added additional protections after some college officials were found accepting lender payments to steer students to less favorable loans.

The PROSPER Act eliminates requirements for colleges to document why specific lenders are included in these lists, disclose to students information about any referral arrangements between schools and lender (arrangements that could include agreements providing material benefits to either or both parties), and to submit annual reports to the Department of Education outlining why these lenders are “beneficial to students.” Such changes would risk the creation of preferred lender agreements that benefit the institutions financially but are not the best terms available to students.

The current statutory requirements for preferred lender lists are critical oversight and consumer protections, and should be maintained. Additionally, Congress should take steps to help students better understand the risks of private loans and encourage students to exhaust their federal loan eligibility before considering private loans.

Ultimately, student-centered simplification of federal student loans demands changes that better support enrollment and completion, rather than simply eliminate or reduce the aid available.

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As Congress works to reauthorize the Higher Education Act, the choices it makes on federal student loans are more important to students and families than ever before. Each year, over seven million undergraduate students take out federal loans. For many, borrowing to go to college may be the best investment of a lifetime. But others struggle to afford monthly payments, and each year more than one million students default on their loans.

In December, the House Committee on Education and the Workforce passed, along party lines, a bill to overhaul the Higher Education Act. The PROSPER Act would make ambitious and far-reaching changes to federal student loans, perhaps more than any other single piece of legislation since federal loans were first created. Despite its recognition of the need to simplify income-driven repayment (IDR) plans and efforts to improve loan counseling, the PROSPER Act would make college debt substantially more expensive and more risky for students.

The PROSPER Act includes a host of problematic provisions that will make it both harder and costlier for students to earn a high-quality certificate or degree. It will increase the cost of borrowing for students by charging interest while students are enrolled and pushing students towards riskier private loans. While it pursues the worthy goal of streamlining income-driven repayment (IDR) plans, its approach will force all borrowers to pay more, and the lowest income borrowers to make payments for a much longer time, potentially for the rest of their lives. At the same time, the bill eliminates student protections against low-quality or even fraudulent colleges - rules designed to protect students and taxpayers from investing time and money into colleges that overcharge and under-deliver - and makes it harder for harmed students to get back on their feet. These changes to accountability only increase the risk that students will default on their loans, and increase the burden taxpayers must shoulder for underperforming schools.

Each day this week, TICAS will publish a new post as part of a series called How the PROSPER Act Stacks Up for Student Debt. Topics will include:

Each post will explore how specific major changes proposed by the PROSPER Act will affect student debt, including how much students have to borrow, how much they have to repay, and how likely it is that they end up in default. The posts will also discuss better ways – many with bipartisan support – to solve some of the problems the bill aims to address, and describe how Congress can make the most of this key opportunity to help students graduate and reach their goals without overly burdensome debt.

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Earlier this week, the Department of Education announced a new process to resolve about 21,000 applications for borrower defense discharges, available to students whose schools have mistreated them in violation of state law. For some of these students, the resolution of their applications will lead to full student loan discharges and allow the students a fresh start. Other students, however, will receive partial discharges, meaning that their loan balances will be reduced but not eliminated. While the resolution of these claims is long overdue, we have both questions and concerns about how the amount of relief provided to each student is being determined.

The announcement explains a new approach for deciding whether students with valid claims will have their loans written off or only reduced. Students’ earnings will be compared against the average earnings of students from comparable programs that passed the gainful employment standard, a rule designed to ensure that career education programs are adequately preparing students for gainful employment in a recognized occupation. In effect, this approach would contrast what harmed students are earning against what they might have been earning had they attended a better program leading to the same credential in the same area, and discharge a proportion of their debt based on how their earnings compare to those of passing programs’ graduates. For example, “students whose current earnings are less than 50 percent of their peers from a passing gainful employment (GE) program will receive full relief.”

Even conceptually, this approach is highly problematic. A student lured into enrolling in and borrowing for a worthless program might see minimal to no relief if they were paying their bills by working in a completely unrelated job, earning minimum wage. This effectively punishes borrowers who manage to stay afloat despite being mistreated by their schools, akin to a “lemon law” that doesn’t require manufacturers to reimburse or replace cars if consumers can afford to buy a replacement car themselves.

Yet practical questions remain about how this process will work, and the answers may raise additional concerns.

First, how will the Department consider the borrower’s earnings, when calculating relief? The wording of the announcement seems to suggest that an individual student’s actual earnings would be used to determine the relief amount, but several news stories have indicated that the Department will instead consider the average earnings of graduates from the program the student had attended. But individual students may have different experiences, and many students will have incomes far lower than the program mean or median. This variation in students’ experiences is likely particularly common within gainful employment programs because the Department’s data sometimes combine multiple campuses.

Including only students who completed their program will likely overstate the earnings for all students who attended that program. Because noncompleters are likely to have lower earnings on average than the completers in the earnings data the Department is reportedly using to calculate relief, using completers’ earnings will drastically minimize the amount of relief being made available. This is an especially concerning issue for borrowers who attended Corinthian Colleges (a chain of for-profit schools known more commonly as Everest, Wyotech, and Heald) because a clear majority of Corinthian borrowers did not complete their programs. For example, College Scorecard data show that 61% of students borrowing federal loans to attend Corinthian schools left their programs without completing. 


The Majority of Students who borrowed to attend Corinthian schools never finished their program


Moreover, earnings data are not available for all programs. Most of the nearly 100,000 pending borrower defense claims come from former students of Corinthian Colleges, where the Department itself helped to document widespread, substantial misconduct of the sort that makes students eligible for loan discharges. In fact, the misconduct was so pronounced that the Department created an expedited borrower defense application process for students who had borrowed to attend over 700 Corinthian programs.  

The Corinthian Colleges schools that remain open were purchased by a nonprofit, Zenith Education Group, in 2015. This distinction between for-profit and nonprofit status is relevant because the gainful employment rule – data from which borrower defense discharge amounts will reportedly be pegged – applies to virtually all programs at for-profit colleges as well as certificate programs at public and nonprofit colleges. Despite the fact that Zenith agreed that the purchased schools would continue to comply with the gainful employment rule as a condition of the sale, the Department’s gainful employment data exclude virtually all degree programs from former Corinthian schools. As a result, there are no publicly available earnings data from these programs. Hundreds of the programs for which the Department had created an expedited borrower defense process were degree programs, and this week’s announcement is silent on how discharge amounts would be determined in cases where program-level earnings are unavailable.

If the Department’s process is intended to adjudicate borrower defense claims from mistreated students in a way that “makes them whole,” this approach misses the mark. It is also important to remember that even full loan discharges and refunds are still only partial relief for students who, in addition to having borrowed federal loans, may have used up eligibility for time-limited grants, taken out private loans that can’t be discharged, and invested their own time and money into their education. These are resources that students can’t get back. Figuring out ways to pinch pennies out of students’ federal loan discharges is ill-advised, and the Department’s plan for doing so is ill-conceived. 



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