A Democratic group of senators, led by Sen. Jeff Merkley (D-OR), on Thursday introduced the Affordable Loans for Any Student Act of 2018. The bill tackles several issues related to student loan affordability, complexity, and consumer information—ending federal loan origination fees and the practice of interest capitalization, reducing the number of repayment plans, and simplifying repayment plan enrollment.
The bill—co-sponsored by Sens. Debbie Stabenow (D-MI), Kirsten Gillibrand (D-NY), Tammy Baldwin (D-WI), Richard Blumenthal (D-CT), Brian Schatz (D-HI), Ben Cardin (D-MD), and Catherine Cortez Masto (D-NV)—reduces the number of federal student loan repayment plans to two: an income-based repayment (IBR) plan with a new monthly payment calculation and forgiveness after 20 years, and a fixed 10-year plan with terms identical to the current standard plan, except for a $25 minimum monthly payment instead of the current $50 minimum. Borrowers entering repayment after the bill’s enactment would be limited to these two options, but the bill also adds a 1 percent interest rate reduction as an incentive for borrowers already in repayment to opt into one of these two new options.
Enrollment in IBR would be permitted verbally in addition to other written or electronic means, and the Department of Education (ED) would be given 90 days from the IBR enrollment request to confirm the borrower’s income and family size. The bill includes changes to the Internal Revenue Code (IRC) section 6103—which governs Internal Revenue Service (IRS) sharing of tax return information with other government entities and contractors—to permit automatic verification of income for re-enrollment in IBR (with provisions for the borrower to opt out and to update automatically-retrieved information). It also requires ED and Treasury to conduct a study to determine whether IRS data could also be used to verify family size, which could eliminate the need for borrowers to provide any information for annual re-enrollment in IBR.
Parent PLUS borrowers would be eligible to enroll in income-based repayment under the proposed legislation. IBR monthly payments would also be lower due to changes to the IBR payment calculation, which would be based on the borrower’s (and spouse’s, if applicable) Adjusted Gross Income (AGI) that exceeds 250 percent of the federal poverty line, instead of the current 150 percent income exclusion. The bill includes a phase-out of the 250 percent-of-poverty income exclusion of 5 percent per $1,000 of AGI over $120,000, such that borrowers earning more than $170,000 annually would not have any income excluded from consideration in calculating their monthly payments. Annual payments would be 10 percent of AGI that exceeds the poverty line threshold set in the bill, or, in the case of borrowers with incomes over $170,000, 10 percent of total AGI. Borrowers would not need to demonstrate partial financial hardship to enroll in the new IBR plan and, as such, IBR payments could exceed the monthly payment amount under the standard 10-year or fixed repayment plan.
The bill provides for up to three years of interest subsidy for subsidized loans during repayment when IBR monthly payments don’t cover the interest that has accrued. For unsubsidized loan borrowers in IBR whose monthly payments do not cover interest, as well as for subsidized loan borrowers who have already received the aforementioned three-year interest subsidy, the bill provides for a 50 percent interest subsidy over the remainder of repayment, after which the remaining loan balance would be forgiven.
Direct Loan origination fees and interest capitalization are eliminated under the proposed legislation as well.
Help for Struggling Borrowers
The bill sets limits on wage garnishment and tax refund offsets for defaulted borrowers to the amount the borrower would be expected to pay under income-based repayment. It also permits borrowers to rehabilitate their loans—by making nine consecutive, on-time monthly payments to bring the loan back into current status—twice in each loan’s lifetime, rather than once as is currently allowed. The requirement that borrowers pay their collections costs would also be removed.
The proposed legislation streamlines the current array of deferment and forbearance options into a single “pause payment” process, maintaining all of the current forbearance and deferment eligibility categories, but using a common application form and terminology for the student-facing part of the process.
Borrowers who are more than 120 days delinquent in repayment and borrowers whose loans have been rehabilitated would be enrolled automatically into income-based repayment, using ED’s authority to obtain tax return information per the aforementioned amendments to Internal Revenue Code section 6103 to determine the borrower’s monthly payment.
The bill provides for separation of joint consolidation loans, including a process for an individual with a joint consolidation loan to initiate the separation process without the cooperation of the other loan holder in certain circumstances where it is not possible for them to obtain the necessary information from the other loan holder.
Consumer Information and Counseling
The Master Promissory Note (MPN) would be renamed the student loan contract under the provisions of the bill and would be required to be completed annually, but could be used for new loans within the same period of enrollment in an award year. Loan counseling would also be completed annually, prior to the student loan contract, and counseling would include new consumer protection disclosures such as projected monthly loan payments and recommendations to take advantage of grant aid and work study before borrowing loans, and to exhaust federal loan options before borrowing private loans. Exit counseling would be enhanced to include the borrower’s actual loan balance and loan repayment estimates.
Consumer testing of counseling would be required under the bill, as would a study of the efficacy of student loan counseling. Finally, private loans would require school certification and would be reported to the National Student Loan Data System (NSLDS).Private lenders would also be required under the bill to send quarterly loan statements to the borrower and annual statements to the cosigner, disclosing loan balances and interest rates.
The bill provides many proposals to assist borrowers that NASFAA has long supported, including the consolidation of income-driven plans, elimination of origination fees, required consumer testing of ED’s counseling tools, streamlining annual recertification for income-driven repayment plans, and auto-enrollment in IDR for delinquent borrowers. The bill would also require mandated annual loan counseling, a provision that has raised concerns among some schools. The bill stops short of the House’s PROSPER Act though, which would require mandated annual counseling not just for loan borrowers, but Pell Grant recipients as well. We look forward to working with Congress on the next steps of this important legislation.
Publication Date: 10/16/2018