I’ve been getting a lot of inquiries about possible changes to federal repayment and forgiveness programs proposed by the Obama administration recently. There’s a lot of panic out there. I’ve put together a concise, straightforward summary of the proposals and my own thoughts on it. I hope this will reduce some of the fear and misinformation that’s been circulating.
First, some background. As part of the budget proposal for the 2015 fiscal year, the Obama administration has proposed various reforms to federal student loan repayment and forgiveness programs. Before we even get into the details, let me point out a few important things:
- This is a budget proposal. This is not a bill or a piece of legislation, this is not a court decision, this is not an executive order. In other words, this has no force of law. It is simply a proposal, a starting point, a recommendation.
- This is a budget proposal during an election year with a divided government. This means that, practically speaking, the final product will probably be significantly different. Who knows what the final budget will even look like? I certainly don’t.
- The entire budget process is incredibly slow and tedious. Whatever the final product is, we may not even see it for a year or two, or longer.
- Any substantial material changes to federal student loan programs will require an act of Congress, signed by the President. We are nowhere near that point.
So, with all that being said, let’s get into the details. This specific proposal actually has two very good elements to it, which I think we can all get on board with:
Make the Pay-As-You-Earn (PAYE) plan accessible to everyone. PAYE is a relatively new repayment plan option that is even better than Income-Based Repayment (IBR), as it has a lower payment amount and a shorter repayment term before loan forgiveness kicks in. However, right now, PAYE is only available to “new borrowers” as of late 2012, not people who have already been in repayment. The budget proposal would make PAYE available to all federal student loan borrowers (although it would exempt Parent PLUS borrowers, much like IBR).
Cap interest accumulation for income-driven plans. For PAYE and IBR, it is possible that your monthly payment (which would be based on your income) is less than the amount of interest that accrues each month. If that persists for some time, you might actually see your loan balance increase over time, even while you make on-time payments. This is called negative amortization. The budget proposal would cap the amount of interest that can accumulate, in order to prevent runaway loan balances.
However, the proposal also has some other reforms:
- Standard repayment cap eliminated for the PAYE plan. Right now, for the IBR and PAYE plans, if your calculated income-driven monthly payment exceeds the monthly payment you would have under the 10-year Standard repayment plan, your payment is capped at that amount. The budget proposal would eliminate that cap for the PAYE plan, meaning you would continue to make payments based on your income even if your calculated payment exceeds the 10-year Standard repayment plan amount. It is unclear if the cap would also be eliminated for the IBR plan.
- Joint income will be used for all married borrowers. Right now, for the IBR and PAYE plans, your loan servicer will consider the joint income of you and your spouse only if you file joint tax returns. If you file separate tax returns, your servicer will only consider your income. This gives some married borrowers an incentive to file separately, as it could result in a lower monthly payment (although there’s often a higher household tax burden which can offset the student loan savings). The proposal would treat all married borrowers the same under the PAYE plan, regardless of tax filing status, and spousal income would be considered. It is unclear whether this change would apply to both PAYE and IBR.
- Public Service Loan Forgiveness (PSLF) is capped. This is the proposal that everyone has been panicking about. Right now, if you meet all PSLF requirements, your entire remaining federal student loan balance can be forgiven after 10 years of qualifying payments. Under the new proposal, the maximum loan amount that could be forgiven after 10 years would be $57,500. Borrowers with balances that exceed this limit would get their loans forgiven on a 25-year repayment term. It is unclear to me whether (a) all qualifying borrowers would get $57,500 forgiven first, then get the remaining balance forgiven on a 25-year term, or (b) only those borrowers with balances at or below $57,500 would obtain forgiveness after 10 years, and everyone else would be on the 25-year term.
There are a few other elements to the proposal, but these are the biggest changes. You can read the proposal yourself.
The changes and reduction in benefits outlined in the proposal appear to be limited to “new borrowers” as of a certain date in 2015 in a similar way that the PAYE plan has been presently limited to “new borrowers” as of a certain date in 2012. That means, presumably, that existing borrowers in repayment should be able to access the proposed modified PAYE program with all of the new benefits and restrictions, but they would also still have access to all the other programs and benefits that currently exist now, including (presumably) the 10-year full forgiveness benefit of the PSLF program under IBR. That seems to be what the proposal is saying (but obviously, I haven’t spoken to the President about this, so I can’t make any guarantees).
I don’t want to see any scaling back of loan repayment and forgiveness benefits in any context, particularly when such changes target the people with the highest levels of student loan debt. But, for now, it appears that the proposal does not expressly scale back benefits to most people in repayment now who are already on track for IBR-based public service loan forgiveness. Again, I can’t make any promises here, but that’s how the proposal reads, and that would be consistent with past practices of the federal government with respect to changing federal student aid programs, where changes that restrict currently available benefits tend to be targeted towards new borrowers, and not retroactively applied to everyone else.
Of course, anything is theoretically possible, and there’s no way to predict the final product. Regardless of exactly how this all turns out, the proposal is quite unnerving, and it is a reminder that the federal government can make changes to federal student loan programs, for better or for worse. Readers, I encourage you stay informed, stay involved, and speak up. This is our government, and when we start hearing about these types of reforms, it’s up to us to make our voices heard.
To sign a White House petition that opposes the cap on the PSLF program, click here.