Sen. Jeff Merkley (D-OR) introduced the Access to Fair Financial Options for Repaying Debt (AFFORD Act) on August 5, which would replace all current Direct Loan repayment plans with two: an income-based repayment (IBR) plan that is modeled on, but differs from, Pay As You Earn (PAYE), and a fixed repayment plan that would provide up to 25 years to repay depending on the amount borrowed. The bill would add a new element to entrance counseling, to give affected borrowers information about the two available plans. It would also provide an opportunity for annual loan counseling, as a borrower choice.
The annual financial counseling would have to be offered on an invitational basis to enrolled borrowers who have student loans, including loans from previously attended institutions if the current institution knows about them. The annual counseling would include information on each loan that the institution knows that the student has (federal loans, private loans, or loans from the institution), and a notification that some students may qualify for a Pell Grant as well as a disclaimer that the counseling only provides information relevant to the student to the best of the institution’s knowledge.
For federal loans, the institution would have to provide in the annual counseling the current interest rates and estimated monthly repayment amounts for each repayment option authorized under the bill (i.e., each of the fixed repayment brackets that the student could opt for, based on total loan debt, and the IBR plan, based on a hypothetical income and family size of 1). The institution would have to specify that this monthly amount does not include any amounts that the student may be required to repay for private or institutional loans.
During the annual counseling, the institution would need to tell the student the percentage of the total aggregate borrowing limit that the student has reached for subsidized and unsubsidized Stafford Loans, and a statement that such aggregate borrowing limit may change based on the borrower’s undergraduate or graduate status or if there is a change in the borrower’s dependency status. The institution could include any information and financial planning resources that it determines is appropriate.
The proposed income-based repayment plan would set a repayment amount of 10 percent of the amount by which the borrower’s (and spouse’s) adjusted gross income exceeds the applicable poverty line. This IBR plan would not require any financial hardship, would be available regardless of income level, would not have a maximum cap for the repayment amount (in the current IBR program, the IBR repayment amount may not exceed the amount the student would have paid under the standard 10-year plan), and would never capitalize accrued interest. There would be a cap on interest accrual of 50 percent of the original loan principal. Forgiveness of remaining balances would occur after 20 years rather than the current plan’s 25.
The fixed repayment plan would allow repayment over:
10 years if the borrower’s total Federal loan debt is up to $10,000;
15 years if the borrower’s total Federal loan debt is over $10,000, up to $20,000;
20 years if the borrower’s total Federal loan debt is over $20,000, up to $30,000;
25 years if the borrower’s total Federal loan debt is $30,000 or more.
A borrower could elect one of the shorter time periods than his or her debt otherwise falls into.
Borrowers participating in one of the older repayment plans could switch to either of these new plans, but then could not switch back. Borrowers could change their election between the two new plans once per calendar year.
Publication Date: 8/6/2015