Congressman Drew Ferguson (R-GA) is looking to make significant changes to the way borrowers repay their student loans. He recently introduced new legislation known as the “Help Students Repay Act,” or House Resolution 4372. If approved, this legislation would only apply to new loans issued, but it would greatly switch up the repayment expectations of new borrowers.
Currently, there are nine different student loan repayment plans to choose from, and five of those are income-driven repayment plans.
Each income-driven repayment plan caps payments at a percentage of discretionary income, and they require borrowers to make payments over 20-25 years before the remaining balance will be forgiven.
The remaining plans don’t rely on income to cap payments, but they set payments based on an installment loan payment schedule. Repayment terms range from 10 to 25 years.
Ferguson’s legislation seeks to get rid of all of these plans except for two. Borrowers would be able to choose between a standard 10-year repayment plan and one income-driven repayment plan.
Ferguson’s plan would also eliminate the possibility for new borrowers to receive time-based forgiveness. Instead, borrowers will be required to pay back the entire balance of the loan; however, interest will stop accruing after 10 years.
It should be reiterated that this proposal will not affect any current loan forgiveness programs, including the Public Service Loan Forgiveness Program(PSLF), or any other student loan borrowers in repayment.
When commenting on the legislation, Ferguson bashed the status quo by saying that “our current student loan repayment process is too complex, which only makes it more difficult for borrowers to successfully repay their loans.”
Ferguson also defended his decision to eliminate time-based forgiveness, explaining that it “does not incentivize student borrowers to make significant progress on their loans, when they know that once they reach an arbitrary cut-off year, all borrowers funds will be forgiven.”
If passed, Ferguson’s plan could greatly simplify the student loan repayment system, especially on paper. Nine different repayment options sounds much more daunting than just two. Furthermore, it would eliminate a few problems for the government budget.
The current income-driven programs come with several problems. For starters, many borrowers never really make a dent in their loan balances. Also, taxpayers pay the brunt of the loan forgiveness.
In many cases, income-driven monthly payments barely cover the principal balance, and for every month this happens, less of the principal balance gets paid next time. At that rate, overall balances seem to grow rather than diminish unless the borrower picks up more income.
While borrowers do have the promise of forgiveness after ten years, the government actually taxes the forgiven amount as passive income. This costs the borrower quite a bit over ten years. So far, the impact on the taxpayer and federal deficit hasn’t even been considered.
This new proposal would protect taxpayer money by ensuring debt is repaid.
Additionally, one thing to consider is the lack of flexibility since the bill reduces options for future student loan borrowers. With only two options, it’s easy to surmise what the typical borrower would pick.
Those with high balances and unsubstantial income would choose the income-driven option, especially with the prospect of no interest after ten years. This could still leave borrowers with larger balances after ten years, but no interest would leave a smoother path forward afterwards. Despite that, the borrower will still end up paying more over the life of the loan on the new income-driven plan compared to standard ten-year repayment plan.
The ten-year repayment plan is still the cheapest option, but it is also potentially unmanageable depending on the circumstances. There were no changes made to this plan to help borrowers.
Author: Andrew Rombach
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