Analyzing the College Affordability Act: Changes to the Direct Loan Program

By Jill Desjean, NASFAA Policy & Federal Relations Staff

Updated Nov. 6, 2019: A markup of this bill took place over three days from Oct. 29-31, 2019 — after the article below was written. An amendment in the nature of a substitute replaced the original bill text, and multiple amendments were adopted during the markup process. The substitute amendment and additional amendments made several minor changes, and this article has been updated to reflect those updates.

Editor's Note: This article is the fourth in a series of six that delves into Title IV-related issues contained in the College Affordability Act, the House Democrats' bill to reauthorize the Higher Education Act. This article details the proposed changes to the Direct Loan program. See all of NASFAA's coverage of the College Affordability Act.

The College Affordability Act (CAA) makes significant changes to the Direct Loan program, many of which result in greater simplicity and savings for student borrowers, both upfront and during repayment. Additionally, the cohort default rate is redefined, as are the default rate eligibility thresholds and sanctions. 

Direct Loan (DL) Application Process Changes

Direct Loan origination fees, a relic of the bank-based Federal Family Education Loan Program (FFELP) and a bane to students and financial aid administrators alike, are repealed under the CAA.

The Master Promissory Note (MPN) would be renamed the Student Loan Contract, and the multi-year functionality of the MPN would be eliminated. Students could not sign the Student Loan Contract until after completing loan entrance counseling, and would need to complete the contract for each additional loan, even within the same period of enrollment for which they had received other loans. The Department of Education (ED) would be required to use consumer testing to streamline loan disclosures and incorporate more disclosures into the entrance counseling tool.

Subsidized Loan Eligibility

The CAA would allow graduate and professional students access to the Federal Direct Subsidized Loan Program. Only students at public and non-profit institutions would be eligible to borrow. The interest rate for the loan, in effect once the borrower is no longer enrolled or comes to the end of their grace period, would be the same rate as a graduate borrower’s Federal Direct Unsubsidized loan interest rate. 

Debt Collection

The CAA, in its original text, included text that would place a six-year statute of limitations on the collection of defaulted federal student loans. The amended version striked this language and instead would institute a cap on the collection fees that may be charged to defaulted borrowers.

Cohort Default Rate Changes

The CAA replaces the cohort default rate (CDR) with an adjusted cohort default rate, which multiplies the result of dividing the institution’s number of defaulted loans by its number of loans in repayment by the percentage of students who borrow at the institution. Loans in non-mandatory forbearance for 18 to 36 months would be excluded from the number-in-repayment count; after 36 months those loans would be treated as defaulted.

Institutions would be ineligible to participate in the Title IV student aid programs for two years if their adjusted CDR was greater than:

  • 20% for each of the three most recent fiscal years for which adjusted CDRs were published
  • 15% for each of the six most recent fiscal years for which adjusted CDRs were published and ED determines the institution has not made adequate progress in meeting standards for student achievement established by the relevant accrediting agency or association 
  • 10% for each of the eight most recent fiscal years for which adjusted CDRs were published and ED determines the institution has not made adequate progress in meeting standards for student achievement established by the relevant accrediting agency or association 

The bill states that exceptions for the adjusted CDR thresholds would be permitted for categories of education programs at an ineligible institution if the program’s adjusted CDR was less than 15% for each of the six most recent fiscal years for which adjusted CDRs were published. It is not clear, however, how programmatic eligibility could be retained in a scenario in which institutional eligibility has been lost. 

A transition exception would also be permitted for certain institutions with adjusted CDRs of over 20% for the first fiscal year the adjusted CDR is published. Public institutions, Historically Black Colleges and Universities (HBCUs), and private not-for-profit institutions with at least 45% of total enrolled students classified as low-income would qualify for this exception. Eligible institutions would be permitted to request that their eligibility not be based on the adjusted CDR for any or all of the first three fiscal years for which adjusted CDRs are published. Such institutions would be required to submit a default management plan to ED, which, per the CAA, could not include placing students in forbearance.

Institutions with adjusted CDRs below 5% for each of the three most recent fiscal years would be exempt from the requirement to make multiple disbursements on single-semester Direct Loans; the adjusted CDR would have to be less than 2% for each of the three most recent fiscal years for loans for study abroad to qualify for the exemption.

Repayment Plan Changes

The CAA eliminates all existing repayment plans and replaces them with two new plans: a fixed plan and an income-based repayment (IBR) plan. Borrowers already enrolled in one of the existing repayment plans would be eligible to continue repaying under that plan for the life of the loan, but could only choose from one of the two new plans if they decided to switch repayment plans. Meanwhile, borrowers entering repayment after the new plans became effective would only have the choice between those two. ED would be required to hold negotiated rulemaking on the two new repayment plans prior to enactment of the CAA. 

The fixed repayment plan would be the default plan for borrowers entering repayment after the new plans take effect. Repayment terms under the fixed plan would be established based on the student’s loan balance, as follows:

  • 10 years for balances under $20,000 
  • 15 years for balances $30,000 or less
  • 20 years for balances of $40,000 or less, 
  • 25 years for balances over $40,000 

Borrowers would be permitted to choose shorter repayment terms. 

The IBR plan’s monthly payment amount would be based on joint household income, regardless of the borrower’s tax filing status, unless the borrower was separated or otherwise unable to access their spouse’s income information, Currently, those who file as married filing separately can have only their income considered for income-driven repayment (IDR) plans. 

Monthly IBR payments would be calculated as 10% of the borrower’s adjusted gross income that exceeds 250% of the federal poverty level, with a phase-out described below. All current IDR plans also use 10% of discretionary income to determine monthly payments, with the exception of the Income-Based Repayment plan for borrowers whose first loan was borrowed prior to July 1, 2014, which uses 15% of discretionary income. All current IDR plans use 150% of the poverty level to determine the amount of income to be excluded from the monthly payment calculation as non-discretionary. The CAA, therefore, will lower monthly payments for borrowers using the IBR plan, except for borrowers with higher incomes as detailed below.

The percentage of income above poverty level used would be reduced by 10% for each additional $1,000 of adjusted gross income above $80,000 for single borrowers, and for each additional $2,000 of income above $160,000 for married borrowers. This graduated phase-out would have the effect that, as the borrower’s income increases, less of that income would be protected from consideration as available toward loan repayment. 

Forgiveness for loans repaid under the IBR plan would be granted after 20 years, down from 25 years as in current law. Also unlike the current IDR plans, monthly payments under the new IBR plan could exceed the fixed repayment amount. Borrowers would be permitted to select IBR via written, electronic, or verbal notice, and ED would be granted the authority — and would be required to implement a process within two years after enactment — to obtain income and household size information for automatic re-enrollment in the IBR plan. This would presumably require a corresponding change to Internal Revenue Code (IRC) section 6103, which limits how the Internal Revenue Service can share taxpayer data. The change is not included here because jurisdiction for the IRC is held by the House Ways and Means Committee. 

ED would also be given the authority to obtain income and household size information for borrowers who were more than 60 days delinquent on a payment due, so ED could advise those borrowers of their repayment options and include the borrower’s estimated monthly payment amount under IBR. ED would have the same income and household size verification authority for delinquent loans and loans entering repayment following their ninth rehabilitation payment, and would be permitted to automatically place rehabilitated loans and loans more than120 days delinquent into the IBR plan. Borrowers would retain the right to opt out of all of the above.

Public Service Loan Forgiveness Changes

Public Service Loan Forgiveness (PSLF) eligibility would no longer hinge exclusively on the concept of working for an eligible employer but, rather, on working in an eligible job. Any individual working for a 501(c)(3) organization, regardless of their position there, would continue to be eligible for PSLF as they are now, as would the current categories of employment, including government employees. However, borrowers working for non-501(c)(3) employers but performing qualified jobs, including certain health care workers and farm workers, and individuals working for a veterans or military service organization that does not engage in partisan political campaign activity would now be eligible. These changes address issues that came to the forefront in a 2016 lawsuit in which several borrowers sued ED after being denied forgiveness because their organizations were not 501(c)(3) organizations, despite the fact that their work fell into the category of public service.  

The CAA establishes a number of new requirements for ED in response to data showing that only 1% of PSLF applications have been approved to date. The requirements focus on making the PSLF process simpler and more transparent, so that borrowers are better informed of their progress toward forgiveness.

ED would be required to create and update a database of public service jobs that qualify for PSLF and to create an online portal with up-to-date information on how borrowers can access the database to establish whether their job is qualifying. The portal would also identify which of the borrower’s loans are in the DL program and which loans were not eligible for forgiveness, along with information on which steps the borrower would have to take to make those ineligible loans eligible. The portal would also provide borrowers with their number of qualifying payments made to date and the number of payments required to obtain forgiveness, along with instructions on how to complete PSLF forms.

Finally, the CAA requires ED to begin accepting electronic signatures from borrowers and employers on Employment Certification Forms and PSLF applications. ED would also need to establish a dispute process for denials under the proposed bill.

Direct Refinanced Loan Program

One-time refinancing of federal and private student loans would be permitted under the CAA. All FFELP loans would be eligible, as would private and Direct Loans first disbursed prior to July 1, 2021. Interest rates on refinanced federal loans would be fixed and would be equal to the 2019-20 Direct Loan rate for the corresponding loan type being refinanced. Refinanced consolidation loan interest rates would be the lower of the 2019-20 rate or the weighted average of the rates of all underlying loans. 

Borrowers would have to meet qualification requirements to be eligible for refinanced loans. To refinance FFELP or Direct Loans, ED would establish income or debt-to-income ratio requirements. 

For private loan refinancing, borrowers would need to be current on payments for the past six months and be in good standing upon application; could not be in default on any private or federal loans; and would have to meet other qualifications to be developed by ED in conjunction with the Department of Treasury and the Consumer Financial Protection Bureau (CFPB), such as an income or debt-to-income ratio. Qualifications would need to be developed with an eye toward reducing inequities between private and federal loans, precluding windfall profits to private lenders, and ensuring full access to otherwise eligible borrowers.

Previous payments made on a refinanced Direct Loan would be counted toward the 120 qualifying payments toward PSLF. However, for FFELP loans, only those payments made after the refinancing was complete would count toward forgiveness. Refinanced private loans would not be eligible for any service-related forgiveness programs.

Miscellaneous Changes

Interest would no longer capitalize on Direct and FFELP loans after any period of forbearance, as well as after deferments for economic hardship, unemployment, cancer treatment, military active duty, or National Guard deployment. 

Separation of joint consolidation loans would be permitted under the CAA, which also includes a provision for individual applications to separate joint consolidation loans in cases of domestic violence, economic abuse, or if one borrower is unable to reach or access the loan information of the other borrower.

Conditions are added in the CAA under which borrowers can re-consolidate already consolidated loans, including for separation of joint consolidation loans and to obtain Direct Loans for purposes of qualifying for PSLF.

In instances where borrowers apply for total and permanent disability (TPD) loan discharge, the bill adds automatic income monitoring during the initial three-year discharge period to save borrowers the burden of providing the annual income verification required for continued eligibility. An opt-out provision is included. Also added under the CAA is a new provision that Parent PLUS loans borrowed for students who have had a TPD discharge granted may also be discharged 60 months after the student obtains a TPD discharge for loans borrowed in their own names.

Finally, the CAA stipulates that private student loan providers be required to report those loans to ED, the Department of Treasury, and the CFPB.

 

Publication Date: 10/29/2019


Peter G | 11/4/2019 6:0:29 PM

For the record I am 100% on board with eliminating origination fees.

However, considering that by statute DL is subject to the sequester through 2022, I'm a bit curious/concerned how sequester cuts/revenue boosts would be applied to these programs in a fee-free environment?

Brenda T | 10/30/2019 10:53:49 AM

so, they are so concerned about making the FAFSA simpler but expect a student to do loan counseling and an mpn for each loan?

Julia F | 10/30/2019 9:34:29 AM

I like the automatic enrollment with IDR; so many students fell into default when there was excessive administrative processing and documentation that created a backlog of paperwork across the administrative process.. The consumer was left trying to understand what, when or who often fell into an array of confusion and default.

Ben R | 10/29/2019 2:22:25 PM

Automatic enrollment in IDR should eliminate defaults and make all loan repayments "affordable", but I can see the cost getting out of hand since this only covers up over-lending and ability to repay. Already close to half of all borrowers with $60K or more in loans are negatively amortizing on IDR plans (and about 2/3 of those at $200K plus are). While this group (60K plus) only represent 14 percent of all borrowers, they hold 53 percent of all the loans in the federal portfolio. Use of IDR also means that schools where most of the students borrow, borrow much more but do not pay down any principal will be treated the same as schools where few students borrow and/or most borrowers pay down their loans.

Sonya S | 10/29/2019 12:38:23 PM

Requiring a new MPN for every loan sounds burdensome...

Jaime S | 10/29/2019 12:25:55 PM

For the MPN changes, does this mean if a student requests an increase of their Unsub or Grad PLUS and we create a new loan, they need to do a new Loan Contract for the increase? I can see that being an administrative burden. One contract per loan, per year, is enough.

Geoff M | 10/29/2019 11:28:43 AM

It would be great if they would also eliminate the outdated requirement to prorate loans in the final semester of enrollment. So many students lose the opportunity to cover direct costs with federal loans in their final semester. In addition, there must be thousands of hours spent administering this requirement.

Paul L | 10/29/2019 10:21:02 AM

How about we get some relief on interest rates?

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