What To Know About Important Changes Coming to Student Loans and College Financial Aid
The Executive Branch’s federal budget proposal will highlight several recommendedchanges to federal funding designed to assist students with the cost of obtaining a college education. The proposalsuggests altering student loan income-based repayment programs, loan forgiveness options, work study funding, loan subsidies, and Pell Grants. While these recommendations are not the final word, it puts the discussion of paying for college front and center.
Here are the highlights found in the upcoming budget proposal:
Current Student Loan Repayment Options
A decade ago, student loan debt hit the political radar leading to changes to the traditional ten-year repayment schedule. Starting in 2007, students gained the ability to convert repayment to income-based programs, with loan forgiveness at the end of a certain repayment schedule. Today there are five income-basedrepayment programs, which cover nearly every federal loan.
Each of the five selectionsapplies to differentloan types and come with different terms. The payment calculation uses discretionary income, based on tax returns, to establish a payment for the upcoming twelve months. Depending on the programqualifications,the range is between10% and 20% of discretionary income, defined as 150% above the poverty level based on household size. To remain in the program, you must submit tax returns each year to recalculate the payment.
Borrowers achieve loan forgiveness after remaining in the program for its duration.Graduates in public service can apply for forgiveness after ten years of qualifying employment. Depending on the repayment program,others reach the forgiveness threshold in 20 or 25 years..
Here’s The Proposed Changes
One Income Based Repayment Option
- The new budget proposes a simpler system that would eliminate the five different programs and consolidate repayment to a single system for everyone who chooses to repay loans through an income-basedrepayment plan. The proposed changes will cap the discretionary income calculatedat 12.5%, which is an increase for those at the lowest level of 10%, but lower for anyone currently under the 15% or 20% threshold.
Eliminate Public Service Loan Forgiveness
- The public service loan forgiveness option currently allows those serving in a public service job or qualified nonprofit to apply for loan forgiveness after ten years of paymentswith the program. To qualify, you must receive a certification letter verifying you work for a qualified employer each year. The program began in 2007, with the first applicants qualifying for forgivenessat the end of 2017. Eliminating the program could include a clause grandfathering, approximately 550,000 graduatesalready enrolled.
Alter Payment Requirements Before Loan Forgiveness
- Undergraduate students would all fall into the same category, capping loan payments at 12.5% of discretionary income. Recommendations will also reduce the repayment period before qualifying for loan forgiveness to 15 years, instead of the current 20.
- Graduate students would face the same discretionary income threshold of 12.5%, but would require more years of Extending the current schedule from 25 years to 30will double the time required for those obtaining graduatedegrees before loan forgiveness goes into effect.
Currently, to qualify for loan forgiveness, periods of deferment or forbearance do not count towards the number of mandatorypayments qualifying for loan forgiveness. Nor do any payments made under the traditional 10-year plan count towards the total required payments. However, if income-based calculations reduce a payment, sometimes to zero, it does count as payment.
Other Important Changes Coming to Financial Aid
In addition to addressing student loan debt repayment, the budget proposal also includes several changes to college financial aid. Changes which will impact millions of students.
- Reduced work study. The current work study program offers some students accepting aid to use employment as part of the financial aid package. Earnings go towards living costs or tuition, depending on the school’s policy. Any funds earmarked for work study, reduce other forms of aid. Reducing money for work study means fewer employment hours tied to financial aid. It does not impact a student’s ability to obtain work while in school, but the government will no longer pay the wages for the student as a form of financial assistance.
- Reduce or eliminate subsidized student loans. Currently, students coming from low-income households may qualify for subsidized loans, where the government pays the interest payments on borrowed funds while the student remains enrolled in a degree seeking program. Eliminating this subsidy will result in interest accumulation on loans while the student remains in school. Students who fail to make interest-only payments while in school will have higher loan balances at graduation. All students have the option to pay interest while in school to prevent compound interest on loan balances. However, very few take advantage of this option.
- Increase in Pell grant funding and year around Pell grant options. Congress currently uses the Pell Grant to help low and moderate-income students pay for college. Congress currently ties increases in inflation, although it has not kept up with the rising cost of higher education. The Pell Grant does not require repayment and is the largest need-based grant program using federal funds.
The budget proposal will raise the amount of free money available and offer the Pell Grant for three semesters instead of the current two. The latter addition to the Pell Grant program will allow students to attend summer sessions and potentially complete their degree faster. Encouraging students to graduate sooner can reduce reliance on student loans and increase lifetime income.
Student loans and the inflated cost of college have made headlines, prompting these recommendations. However, Congress has the final word on whether these recommendations become law.