PROSPER Act: House HEA Reauthorization Bill’s Impact on Loan Programs

By NASFAA Policy & Federal Relations Staff

Editor’s Note: This article is the second in a series that delves into Title IV-related issues contained in the Promoting Real Opportunity, Success and Prosperity Through Education Reform (PROSPER) Act released by House Republicans on Dec. 1, 2017.

The PROSPER Act would terminate the Direct Loan Programs, with limited grandfathering, provide guidelines for winding down the Perkins Loan Program, and establish a new loan program called the Federal ONE Loan that would ultimately become the only federal loan program available to finance a higher education. The application and selection procedure for institutional participation in the Federal ONE Loan program, and the participation agreement, would parallel those currently operative for the Direct Loan Program.

All Federal ONE Loans would be unsubsidized (except for certain military borrowers for limited periods), and origination fees would be eliminated. The program would encompass loans to undergraduate students, to graduate or professional students, and to parents of dependent undergraduates. Parent borrowers would still be disqualified by an adverse credit history, unless they obtain an endorser. Parents would be subject to the same immigration status and social security number verification required of students; parents with an adverse credit history would have to complete loan counseling as offered by the Department of Education (ED). Parent loans would be limited to an annual maximum, and there would be no equivalent of the current unlimited Grad PLUS program. The program would offer consolidation loans as well.

Effective Dates

New borrowers of loans for which the first disbursement would be made after June 30, 2019, would have access only to Federal ONE Loans. A student borrower who has an outstanding balance on a Direct Loan as of July 1, 2019, would be able to continue borrowing under the DL Program through September 30, 2024, for the same level of education. That is, a student with outstanding undergraduate loans could continue to borrow for any undergraduate program, and a student with outstanding graduate/professional loans could continue to borrow for any graduate or professional program, through September 30, 2024. A parent borrower with an outstanding PLUS balance as of July 1, 2019, could continue to borrow through September 30, 2024, for the same dependent undergraduate child. Direct Consolidation Loans would no longer be made after September 30, 2024.

A DL borrower who voluntarily switches to the new Federal ONE Loan program prior to October 1, 2024, could not switch back to DL.

Interest Rates

Interest rates for Federal ONE Loans would be based on 10-year Treasury notes, subject to a cap. As is the case for current DL loans, the rate for new loans would be determined annually, and remain fixed for the life of the loan. The rate would be determined each June 1 for the upcoming award year by adding a defined percentage to the high yield of the 10-year Treasury note auctioned at the final auction held prior to that June 1. The percentage to be added and the corresponding cap are as follows:

Federal ONE Loan

Add-on

Cap

Undergraduate Loans

2.05

8.25

Graduate/Professional Loans

3.6

9.5

Parent Loans

4.6

10.5

 

For example, if the 10-year Treasury note yield is 2.36 percent on June 1, 2019, the interest rate for undergraduate loans made during the 2019-2020 award year would be fixed at 4.41 percent, well under the cap.

The interest rate for a Federal ONE Consolidation Loan would be the weighted average for the consolidated loans, rounded up to nearest one-eighth.

Loan Limits

Annual and aggregate loan limits would be imposed on all categories of borrower, with the current DL structure largely maintained. Most limits would rise from current DL limits, as the following charts show.

Annual Loan Limits

 

Direct Loan
(Total Subsidized + Unsubsidized)

Federal ONE Loan

First year

Second year

Third year and beyond

First year

Second year Third year and beyond

Dependent undergrad

5,500

6,500

7,500

7,500

8,500

9,500

Independent undergrad or Dependent whose parent cannot borrow

9,500

10,500

12,500

11,500

12,500

14,500

Parent of dependent undergrad (per student)

Cost of attendance under Parent PLUS

12,500

Graduate/Professional student

20,500 Direct Loans; or Cost of attendance under Grad PLUS

28,500

Undergraduate preparatory coursework

 

Dependent student: 2,625

Dependent student: 2,625

 

Independent undergrad or dependent whose parent cannot borrow: 8,625

 

Independent undergrad or dependent whose parent cannot borrow: 8,625

Parent: 6,000

Graduate preparatory coursework / Teacher certification

 

Dependent student: 5,500

12,500

 

Independent undergrad or dependent whose parent cannot borrow: 12,500

 

Aggregate Loan Limits

 

Direct Loan
(total sub + unsub)

Federal ONE Loan (includes any FFEL and DL)

Dependent undergrad

31,000

39,000

Independent undergrad or Dependent whose parent cannot borrow

57,500

60,250

Parent of dependent undergrad (per student)

Parent PLUS: None

56,250

Graduate/Professional student

Direct Loans: 138,500 Grad PLUS: None

150,000

Special provisions to determine Federal ONE Loan limits would apply to parent and graduate student borrowers who also have outstanding FFELP or Direct Loans.

The same annual additional amounts would continue for certain health profession programs, expanded to include programs for physician’s assistant; the total aggregate limit would increase:

Program of Study

Additional Annual Amount
9-Month Academic Year

Additional Annual Amount
12-Month Academic Year

Aggregate Limit
(includes any FFEL or DL)

Doctor of: Allopathic medicine, Osteopathic medicine, Dentistry, Veterinary medicine, Optometry, Podiatric medicine, Naturopathic medicine, or Naturopathy

20,000

26,667

235,500

Doctor of pharmacy, Doctor of chiropractic medicine, Physician’s assistant, Graduate degree in public health, Doctoral degree in clinical psychology, or Masters or doctoral degree in health administration

12,500

16,667

Proration and FAA Discretion

For Federal ONE Loans, only academic programs of less than a year in length trigger required proration. However, financial aid administrators would be given discretion to prorate or reduce annual loan limits institution-wide or by academic program based on certain conditions:

  • Student debt levels are or would be excessive, given the most recent Bureau of Labor Statistics (BLS) data for average starting salaries in the region in which the institution is located for typical occupations pursued by the program’s graduates;
  • Less than full-time or full-year enrollment;
  • Credential level; or
  • Year in program.

The reduced limit would have to apply in the same manner to all students enrolled in the institution or program of study. In individual cases of demonstrated special circumstances or exceptional need, the FAA could grant a student’s request for increased loan amounts up to the statutory limit. NASFAA has long advocated for such authority, which essentially reverses the current approach of entitlement lending with reductions of loan amounts only on an individual case-by-case basis.

Disbursement and Overawards

For both student and parent borrowers, loans would have to be disbursed in substantially equal monthly or weekly installments over the loan period, but unequal disbursements would be permitted to account for unequal costs or unequal financial assistance. Unequal costs include upfront charges such as tuition and fees. The bill retains the 30-day delay for first-year, first-time borrowers, unless the loan repayment rate for each of the institution’s programs is greater than 60 percent. (Loan repayment rates would replace cohort default rates under the bill.) It also retains exemptions from multiple disbursement rules for students in study-abroad programs, if all programs at the institution have repayment rates greater than 70 percent. 

For all other students, first installments could be disbursed up to 30 days before the beginning of the loan period (i.e., the first day of classes), and must be disbursed no later than 30 days after the beginning of the loan period. As is currently the case for Direct Loans, subsequent disbursements are prohibited following a student’s withdrawal.

The bill includes a provision that directs the return of ONE loan funds if the student receives additional aid in excess of need, but excludes the FWS overaward tolerance from that determination. The FWS overaward tolerance allows a student’s earnings to exceed need by a specified amount; the overage cannot be packaged, but is rather a safety net so a student is not cut off from earnings on the dollar. (This provision was the basis for the current overaward provision applicable to all of the campus-based programs that allows some tolerance if a student receives additional resources that were not anticipated when the institution packaged the student’s aid.) The bill thus seems to confirm and continue ED’s current interpretation that overawards in the DL Program are permitted only when the student has FWS in his or her aid package.

Repayment and Deferment

Student borrowers would continue to have a 6-month grace period after ceasing at least half-time enrollment before repayment commences. Parent borrowers would continue to begin repayment 60 days after disbursement.

Federal ONE Student Loans would be repayable under just two repayment plans: 10-year standard plan, and income-based repayment (IBR) plan; borrowers could switch between the two, except that ED could require a previously defaulted borrower to repay under IBR. Consolidation loans could have longer repayment periods, up to 30 years, depending on the amount consolidated. ED would be prohibited from designing any other repayment plans.

IBR repayment amounts would be 15 percent of the excess Adjusted Gross Income (AGI) over 150 percent of the poverty line for the borrower’s family size, subject to a $25 monthly minimum. The minimum could be reduced to $5 for limited periods while a borrower seeks full-time employment or experiences high medical expenses. Repayments are credited first to interest, then to fees, then to principal.

The bill contains safeguards against negative amortization under the IBR plan, which would have no time-based forgiveness provision. Instead, outstanding balances would be forgiven for student loans once an IBR borrower repaid a total amount that is equal to the total principal and interest that would have been paid under the 10-year standard plan, including interest that accrued during periods of deferment.

Federal ONE Parent Loans would be repayable over 10 years. Income-based repayment would not be available for parent loans.

Deferments would be available to both student and parent borrowers while:

  • Enrolled at least half-time in a course of study at an eligible institution;
  • Enrolled in an eligible graduate fellowship program;
  • Enrolled in an eligible rehabilitation training program for individuals with disabilities;
  • Serving on active duty during a war or other military operation or national emergency, and for the 180-day period following the demobilization date for such service;
  • Performing certain National Guard service;
  • Serving in certain medical or dental internship or residency programs;
  • Performing certain service in the Armed Forces; and
  • Certain administrative functions are performed.

Additional deferments would be available to parent borrowers (who, as noted above, do not have access to income-based repayment) for:

  • Economic hardship;
  • Unemployment; and
  • High medical expenses

The bill contains no forgiveness provisions based on public service or other employment-related conditions. It does retain cancellation provisions for death and disability as well as discharges for closed schools, false certification, identity theft, and failure to refund. Parent loans continue to be cancelled if the student for whom the parent borrowed dies.

The bill provides detailed guidelines for ED’s contracts with servicers and endeavors to make loan servicing more uniform. ED must ensure that a common manual is available to provide loan servicers with best practices to ensure adequate and consistent service to borrowers; NASFAA has recommended development of a common manual. The bill would allow a borrower to select which contracted entity will service his or her loans.

The bill also would allow defaulted borrowers to rehabilitate loans twice. Current law permits rehabilitation only once.

Borrower Defenses

The bill lays out certain requirements and stipulations for discharging loans under the “borrower defenses to repayment” provisions. ED’s regulations regarding borrower defenses have been quite controversial and are currently being renegotiated by ED. Under those rules, currently under suspension, a “borrower defense refers to any act or omission of the school attended by the student that relates to the making of the loan for enrollment at the school or the provision of educational services for which the loan was provided that would give rise to a cause of action against the school under applicable State law.” Borrowers can apply for a discharge of outstanding loan amounts as well as recovery of payments made on a loan. The PROSPER bill reinforces some of the regulations, and imposes certain restrictions and limitations.

The bill specifies that borrowers could recover payments made no later than 3 years after the misconduct or breach of contract that gives rise to the defense to repayment assertion. It requires that only administrative law judges or the equivalent may preside over borrower defense hearings, and that borrowers and institutions be given equal consideration of evidence and arguments. ED would not be allowed to withhold from institutions any materials, facts, or evidence used to process a borrower defense application. Borrowers applying for relief would be required to consolidate all of their Title IV loans into a Federal ONE Consolidation Loan, and would have to submit individually-filed applications. The bill would allow group processing of applications with a common basis.

A borrower defense would exist if:

  • The borrower has obtained a non-default, favorable contested judgment against the institution based on State or Federal law in a court or administrative tribunal of competent jurisdiction;
  • The institution failed to perform its obligations under the terms of a contract with the student; or
  • The institution or any of its representatives engaged directly in marketing, recruitment or admissions activities, or any other institution, organization, or person with whom the institution has an agreement to provide educational programs, marketing, advertising, recruiting, or admissions services, made a substantial misrepresentation that the borrower reasonably relied on when the borrower decided to attend, or to continue attending, the institution.

ED would be permitted to recover from the institution amounts resulting from successful borrower defense claims.

Perkins Loans

The bill would continue to require that a school assign Perkins loans to ED if the school decides not to service those loans. Current law directs ED to reallocate net collections on those loans to other schools participating in Perkins. PROSPER would direct ED to deposit net collections into the U.S. Treasury. Repayments on assigned Perkins Loans would thereby be lost to both the school and the student aid programs.

The bill provides that if an institution loaned funds to its Perkins Fund on or after Oct. 1, 2006, and repaid to itself the amount loaned before the date of enactment of PROSPER, the institution collects
any interest earned on the loans made with those funds. In a letter sent to ED this past summer, NASFAA pointed out that institutions would lose a part of their investment on such loans under current law.

 

Publication Date: 12/13/2017


Theodore M | 12/18/2017 3:0:43 PM

Maybe I missed this, but since ONE is all caps, is it an acronym?

Allie B | 12/14/2017 9:47:05 AM

Hi Thomas, the bill has not yet passed through the whole House. It's just been moved out of the House education committee.

Thomas S | 12/13/2017 12:47:05 PM

Hello, so if I am reading this correctly this only passed through House, it has not been voted on the Senate?

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