Washington, D.C. - GradFin is closely tracking new legislation (The PROSPER Act) that was approved by the U.S. House Education Committee. The legislation would make several significant changes to the federal student loan program, including capping student loan borrowing limits and modifying repayment programs. The last time any major changes were made to federal student loan laws was in 2008. This post by GradFin is a quick status update and a review of the major changes that would take place if the legislation were signed into law by the President.
Status Update - On December 13, 2017, the House Committee on Education and Workforce passed the PROSPER Act. This is the first step in the reauthorization process; however future action is required in order for these changes to be finalized. The House of Representatives is expected to pass the legislation on the floor by the full House in early 2018. It is unclear if the Senate will take action on a similar bill. In order for new legislation to be passed into law, the Senate and the House must pass identical legislation and send it to the President for his signature. For those interested in learning more about the impact of the proposals on the federal loan program, please read more about these changes below or reach out to GradFin to learn more.
New borrowing limits - The PROSPER Act proposes to cap borrowing limits for several federal loan programs.
Only Two Repayment Options - New Federal loans would come with only two repayment plans, down from the nine that exist today. The first option would be the standard, 10-year loan repayment plan of 120 equal payments and the second option would be an income-based repayment program. Under the new income-based repayment plan, borrowers would pay 15 percent of their discretionary income and the minimum payment allowed would be $25 a month. These borrowers would be required to repay the same amount of principal and interest as they would have repaid under the 10-year standard plan, so there would be no forgiveness of the principal. However, interest loans enrolled in the income-based repayment plan would be capped at whatever the borrower would have repaid under the standard 10-year plan, and any interest that accumulates in excess of that amount would be canceled.
Important Note: Current Federal "Direct" loan borrowers would continue to be eligible for all the income-based repayment options that exist today. Therefore, if you are already enrolled in a plan today, you would presumably be grandfathered in and be able to stay in this plan in the future.
Public Service Repayment Plan - Under the PROSPER Act, any new loans (known as "ONE Loans") issued by the federal government would not be eligible for the Public Service Loan Forgiveness Program, but "Direct" loans would continue to be eligible through the life of the loans. Direct Loans would be phased out after 2019.
Financial Aid Counseling - The PROSPER Act would require all recipients of federal student aid to undergo enhanced financial aid counseling. More specifically, the bill would require loan counseling to be tailored to a borrower’s individual situation as well as improve the timing and frequency by requiring annual loan counseling before an individual signs on the dotted line so the borrower, both students and parents, have the most up-to-date information.
SourceMedia and Employee Benefit News covered the event and provided a nice recap on the GradFin presentation.
Read the article here.
Chris addressed the Student Debt Reduction Coalition, a new coalition launched in May to advocate for federal and state policies to help reduce student debt faster. Chris also discussed a federal student loan proposal that would allow student debt borrowers to access a portion of their unused 401K tax exclusion to use toward their student loan payments. GradFin and the Student Debt Reduction Coalition is pushing this provision as part of tax reform in order to help student loan borrowers repay their loans faster and start saving for retirement.
The housing industry might need to start engaging with policymakers to act on the student loan crisis because the New York Fed recently came out with a study that clearly shows student loan borrowers are less likely to purchase a house than people that do not have student loan debt.
This figure shows that for student loan borrowers with greater than $25,000 in student loan debt, they are less likely to own a home. The homeownership rates are about 2% to 3% higher for every age between 23 and 33 so this clearly shows high debt loads equals lower homeownership.
College graduates are more likely to own homes; however, those with student debt are less likely to own homes than those that are debt free. However, those that have a college graduate degree and student debt are much more likely (about 20%) to own a home than Americans that did not attend college at all.
So what can we learn from these facts by the New York Fed? The answer is simple: If we want homeownership rates to increase, we'll need to address the student loan crisis in the meantime.
This January, GradFin began administering the student loan repayment and financial wellness platform for Liberty Resources, a non-profit based in Philadelphia.
The Philadelphia Business Journal recently covered this new program in an article that can be found here. Below is the quote from Liberty Resources about the program.
The nonprofit was looking for a way to improve retention while easing its employees' financial burdens, so it worked with GradFin to implement an employer match. Workers choose what percent of their paycheck they want contributed to their student loan and Liberty matches that, dollar-for-dollar, up to 5 percent.
“We saw this as an excellent recruitment and retention tool for our business. We have a younger workforce and one of the number one things we heard that was a barrier to that focus on financial planning was they have their student loans to pay off,” Sloan said.
GradFin’s flexibility with a plan was important for them, she said, and while just about five percent of their staff of about 170 people have signed on, word of the program is spreading.
“Our staff is absolutely loving it,” Sloan said.
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