A lot is needed to fix and reimagine the complex and inefficient federal student loan program. From mounting student loan debt to confusing and inefficient repayment options available to borrowers, there is no shortage of issues for lawmakers and Department of Education (ED) officials to address.
Seeking to provide a roadmap to a better student loan system, public policy-focused think tank Third Way recently published a memo offering several recommendations for creating a “stronger, fairer, more generous repayment process for both current and future borrowers.”
The six recommendations outlined in the memo focus on simplifying the entire repayment process for borrowers and providing more targeted debt relief for those most in need. With borrowers having a prolonged period of time without making payments on their federal student loans due to the coronavirus pandemic, the authors note this is a critical moment for ED and Congress to address the significant flaws in the federal student loan system and restructure the process.
First and foremost, the memo outlines ways to fix income-driven repayment (IDR) plans to provide borrowers with a more effective safety net. As currently constituted, IDR plans are not reaching enough borrowers.
The authors call for streamlining the number of IDR plans available to borrowers and making IDR the default option. Further, borrowers would benefit from IDR plans with more generous terms and a shorter timeline for forgiveness.
When it comes to the current loan forgiveness programs available to borrowers, the memo argues the options “are widely regarded as ineffective and unnecessarily complicated to navigate.”
To fix these, the memo says making the Public Service Loan Forgiveness (PSLF) program clearer, more generous, and easier to access is a necessity. The authors note that Congress has the authority to expand the number of loan payment plans that qualify towards PSLF, simplify the employer certification process, and increase oversight of the program’s administration to ensure effectiveness and accountability.
The memo also suggests expanding the types of employers that qualify under PSLF, streamlining existing teacher loan forgiveness options such as the Teacher Loan Forgiveness Program and TEACH Grants, and changing the structure of PSLF from a back-end program to a front-end program by forgiving a fixed percentage of debt for every one or two years of public service to provide borrowers with more immediate relief.
Another major critique of the repayment process is the fact that borrowers too often spend more time paying down interest that has accumulated on their student loans due to high rates as opposed to paying down their principal balance.
Third Way suggests policymakers could institute a cap on student loan interest accrual so that it does not exceed the annual amount required to cover the government’s cost of servicing the loan, implement a fee that is charged upfront instead, or scrap interest accrual altogether.
“This would address the frustration of borrowers, particularly those in IDR, who continue to make timely payments as required under their plan, only to see their balance continue to grow year after year,” according to the memo.
Additionally, the memo suggests extending the repayment grace period available to borrowers after they leave school, from six months to one year, and adding a grace period for interest accrual, which would give borrowers leaving school an added cushion to settle into employment and repayment and possibly even pay down principal before interest accrual sets in.
To reimagine the entire federal student loan repayment system, the role played by student loan servicers also needs to be addressed. The memo asserts that with borrowers set to resume payments in the coming months, the time is now for Congress to reform collection and servicing practices.
The memo calls for an end to wage and benefit garnishment for borrowers in default on their student loans, and allowing for more flexibility throughout the repayment process, for example giving parents the ability to transfer Parent PLUS loans to the student with the consent of the parent, student, and lender.
Further, the memo asserts that the incentive structure and performance assessment for servicers needs to be reassessed to better align the interests of servicers, students, and taxpayers.
Institutions of higher education bear some of the blame for the current landscape, the memo notes, arguing that schools should have “skin in the game” to ensure students using taxpayer-funded financial aid leave school with a degree or credential they can use in the workforce and in turn earn enough to repay their loans.
Lastly, targeted debt forgiveness for borrowers who demonstrate the most need “is a necessary intervention to ensure that borrowers in dire circumstances, or whose institutions committed misconduct, can get a fresh start,” the memo states, noting that borrowers in public assistance programs and those who were defrauded by predatory colleges should see their debts forgiven.
Taken together, the memo underscores the need for comprehensive reform of the student loan repayment system so it can serve its purpose of helping borrowers achieve their educational goals by being able to pay to attend college.
Publication Date: 8/23/2021