Breaking Down the PROSPER Act: "One Loan"
Tuesday, December 12, 2017
Posted by: Carrie Warick, Director of Policy and Advocacy
This is the fifth installment in NCAN's blog series on various proposals contained in the Promoting Real Opportunity, Success, and Prosperity through Education Reform Act, or PROSPER Act. The bill, introduced Dec. 1 by House Education and the Workforce Committee Chairwoman Virginia Foxx (R-NC), would reauthorize the Higher Education Act by streamlining the federal financial aid system, expanding the programs eligible to participate in it with a focus on workforce development, and reducing regulations.
In alignment with “one grant” and “one work-study,” the PROSPER Act also moves to “one loan.” It would be named the “One Loan,” and would have three parts: One Loan for undergraduates, One Loan for graduate students, and One Loan for parents. This shift would make permanent the elimination of the Federal Perkins Loan Program and also would eliminate the subsidized Direct Stafford Loan that is currently available to students with demonstrated need. The One Loan would determine interest rates in the same way that the current Stafford loan interest rates are determined: by using a market-based rate with a cap.
The One Loan's biggest changes affect loan limits and repayment plans, in addition to moving to an annual student loan counseling from the current model of entrance-and-exit-only counseling.
Chief among those changes is the streamlining of the student loan repayment programs and elimination of virtually all types of student loan forgiveness. Public Service Loan Forgiveness would be eliminated, although students with currently eligible Stafford Loans would still be able to participate (i.e., they would be grandfathered in).
If this bill were to pass, there would be two repayment plans: a standard 10-year plan based on the current market-based student loan interest rates, and an income-based repayment (IBR) plan. This new IBR plan would limit the amount of interest that could accrue over a lifetime to whatever interest a borrower would have accrued under the standard 10-year plan. No time-based loan forgiveness would remain. Participants would also be required to pay a monthly minimum of $25, up from no dollars now.
On the loan limit front, the National Association of Student Financial Aid Administrators has a good summary table of the changes. For dependent students, annual undergraduate loan limits would rise to $7,500 for the first year of study, $8,500 for the second year, and $9,500 a year after that. For independent students and dependents whose parents cannot take one of the redesigned parent loans, the annual loan limits are increased to $11,500 for the first year of study, $12,500 for the second year, and $14,500 after that. Parent loans would have limits for the first time, of $12,500 per year per student.
The bill also raises the aggregate loan limits, but to a level that's lower than the cost of borrowing the maximum amount each year for four years. Dependent undergraduates would have an aggregate loan limit of $39,000, which is $4,000 above the maximum limit for four years of borrowing ($35,000). Independent students and students whose parents cannot take out parent loans would have an aggregate loan limit of $60,250. These students would accumulate $56,250 in debt if they took out the maximum amount each year for four years.
In one of the bigger changes to the student loan program, institutions of higher education would be able to set lower loan limits in certain situations. Colleges could set lower limits for an entire institution, for specific programs of study based on their projected earnings, or based on students' enrollment level (e.g., an institution could choose to only allow part-time students to take partial loans). The bill prohibits institutions from limiting an individual student’s ability to borrow based on other factors, but include exemptions for those students to receive higher limits in certain cases.
This approach to streamlining student loans will make borrowing for college more expensive for students. The increase in loan limits, elimination of the in-school loan subsidy, and elimination of all time-based loan forgiveness will make loans more expensive.
Increasing loan limits is a natural response to the rising cost of college, but the PROSPER Act does not attempt to curtail these rising costs or make an equal investment into need-based grant aid that would support low-income students desiring two- or four-year degrees.
Allowing institutions to adjust loan limits could have mixed effects on students. Some may benefit from lower total debt, but others may be priced out of college completely without access to those loan dollars, particularly if their loans are limited to a level below today's totals.
And finally, time-based loan forgiveness provides a safety net for low-income students who do not have other resources to fall back on, pursued college to improve their lives, and want to repay their school loans once and for all so they can make other investments.
Overall, this loan proposal must be taken in the context of the PROSPER Act as a whole. This loan proposal does not make sense for low-income students without additional investment in need-based grant aid that is not present in this bill.
"We are very concerned that the elimination of the subsidized loan programs will drive low-income students into the private loan market, which is very often unfavorable and unfriendly to the neediest students," 10,000 Degrees said.
"Lower loan limits are a good idea in theory, but they only work if something is done about the cost of attendance as well," College Now Greater Cleveland said. "Otherwise, these changes just leave low-income students with a larger financial aid gap they have to figure out how to fill."
More on the PROSPER Act
NCAN Members Urge Further Examination of HEA Proposals
Breaking Down the PROSPER Act: "One Grant"
Breaking Down the PROSPER Act: "One Work-Study"
Breaking Down the PROSPER Act: Consumer Information & FAFSA Simplification