New Report Outlines Steps to ‘Fix’ Student Loan System
Related topics in the Ref Desk: Income-Based Repayment Plan; Public Service Loan Forgiveness
By Owen Daugherty, NASFAA Staff Reporter
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
Cindy H | 8/23/2021 5:3:17 PM
There should be one student loan instead of sub and unsub with a very low interest or implement the proposed fee upfront. Also serious consideration should be given to a 'sophomore cap'. many of us are seeing students with extremely low transfer credits and at aggs limits. Students should not be able to transfer from school to school with no final way to achieve a degree with little to low loan borrowing power.
Allison B | 8/23/2021 3:29:30 PM
They need to address the interest - as noted in here. Individuals can never overcome their debt, especially for plus loans in large amounts, if they are paying as much as they can but the interest is still not decreasing their loan. I know many people who have paid month after month, year after year, very large amounts, only to still be upside down years later. They need to address it, and then allow it to help those already negatively effected as well!
David S | 8/23/2021 2:18:50 PM
Income driven repayment should be the standard plan all borrowers are placed into unless they opt out of it. The only way to repay your student loan in the UK, Australia and I think also New Zealand and Ireland is as a portion of your income above a certain threshold (and that threshold is raised over time to keep it realistic), and as a payroll deduction (that of course is another story). Then when you reach a certain age, you stop, no matter how much you've repaid (at least that last part is how it works in the UK).
People in those countries are not, to the best of my knowledge, all worried about students not being able to repay their loans, nor is the ability to pay them back in full seen as an indictment on their college or their field of study. They understand that having more educated people in the workforce is a good thing for the country, and it's worth an investment. Which is also why college is so much less expensive in those countries than it is here in the first place.
David S | 8/23/2021 2:5:00 PM
"...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."
Problem here is that employers don't interview, hire or pay colleges, they interview, hire and pay people. Two classmates with the same degree, one succeeds, one doesn't. The one who does interviews brilliantly. The one who doesn't may not have ever visited the school's Career Services Office. Or alternately, maybe the one who succeeded has a family connection to a well paying job. And maybe the one who doesn't is the victim of the misogyny and racism throughout the workforce that in 2021 still results in white men being paid more than anyone who isn't both of those things.
None of the conditions I just described had anything to do with the degree. So is that a degree that students can use in the workforce, or isn't it?
David S | 8/23/2021 1:56:18 PM
A huge reason why borrowers are in this predicament is because of negative amortization - they're under water, principal keeps growing because all they're doing is paying down interest. Let's start repayment reform by eliminating negative amortization. Student loans are supposed to help needy students. If we're lending needy students $25K that can turn into paying back $75K, then guess what we're not doing. We're not helping them.
Ben R | 8/23/2021 10:6:15 AM
These proposals amount to closing the stable door after the horse has already left the barn. The problem even before the pandemic was not enough borrowers paying down their loans (and the borrowers holding the most debt relying the most on loan forgiveness). That was not a problem because IDR was not generous enough. Making payment plans even more generous with cancellation even easier to attain makes that problem even worse without addressing the root cause. For the skin in the game proposal, how do you define “unaffordable” if we go this route?
Mark M | 8/23/2021 9:49:15 AM
The current PSLF process would work more effective and efficient if modeled after the Perkins loan forgiveness process - 5 year duration with immediate cancellation for each year of eligible service and suspension of monthly payment through deferment during eligible employment. Mark M.
Harold W | 8/23/2021 9:41:51 AM
Regarding PSLF, we just halted payments for students during the pandemic. Those months where students were not making payments, but employed in an eligible PSLF organization, should be counted as on-time payments toward their eligibility for forgiveness. It wasn't their choice, and for some, could delay their ability to benefit from forgiveness.
Michele K | 8/23/2021 8:57:13 AM
Transferring PLUS volume to students is a bad idea. We are having this conversation because students already struggle with the debt they have. If the parents borrow the PLUS, they should keep it in their name. They should have access to the same kind of repayment options, but it should stay in their name. And we already have a fee that is charged up front on federal loans - the origination fee. Since the reason that fee was being used no longer exists - private lenders are no longer originating federal loans, if the fee continues to be charged, put it to use here.
John G | 8/23/2021 8:45:57 AM
I believe these are good recommendations. I would love all federal loans to be subsidized but that's a big ask. However, schools cannot "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". No school can guarantee any future earnings or employment, even if the degree is highly bankable in today's market.
James C | 8/23/2021 8:39:49 AM
All great ideas EXCEPT transferring Parent PLUS loans to students. So many parents borrow the maximum each year because they don't have great credit but it is good enough for the PLUS loan so they are probably using it for other purposes. If PLUS is going to be able to be transferred to students, then it needs to be capped at the amount an independent student can borrow ($4,000/$5,000 per year). Also the standard Direct Stafford amounts need to be increased so students borrow less in private alternative loans.
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