This week, the Student Loan Ranger examines the proposals in President Barack Obama's recently released budget for Fiscal Year 2016 that relate to student loans.
New Rules Proposed for Pay As You Earn, Public Service Loan Forgiveness
According to the 2016 budget, the president wants to "reform and streamline income-driven repayment to ensure that program benefits are targeted to the neediest borrowers and to safeguard the program for the future." Under his proposal, a modified Pay As You Earn plan would be the only income-driven repayment plan for borrowers who originate their first loan on or after July 1, 2016.
Currently, federal student loan borrowers have a number of income-driven repayment options available. Eligibility for each plan depends on the loan's type and age.
Standard income-based repayment caps payment at no more than 15 percent of the borrower's discretionary income and allows any remaining balance to be forgiven after 25 years of payment, or after 10 years for those working in public service.
A more generous form of income-based repayment, known as Pay As You Earn, is only open to newer borrowers -- it's expected to be opened up to more borrowers by the end of this year -- and it caps payments at 10 percent of discretionary income and allows forgiveness after just 20 years. Older student loans are eligible for other income-contingent repayment options.
The president's proposal would make Pay As You Earn the only income-driven plan available for borrowers moving forward, but it would also enforce stricter limits on benefits.
Graduate student loan borrowers with balances of $57,500 and higher would be eligible for forgiveness after 25 years of payment, not 20, and the amount eligible for public service forgiveness would be capped at $57,500. Also, any payments made under non-income-driven plans would not count toward public service loan forgiveness.
Additionally, married borrowers would not be allowed to exclude their spouse's income from the income-based repayment calculation by filing separate taxes. And the new plan would eliminate the standard payment cap.
Under current rules, a borrower in an income-based repayment program will never have payment set higher than it would be under the standard 10-year repayment term. The president's proposal would do away with that cap, so that high-income, high-loan-balance borrowers would pay a more equitable share of their earnings as their income rises.
The president is also recommending capping the amount of interest that can accrue when a borrower's monthly payment is insufficient to cover the interest.
All of these changes would only apply to future borrowers. Students who borrowed their first loans before July 1, 2016 would continue to be able to select among the existing repayment plans. It's also worth nothing that the president's budget contains a re-estimate of costs for the federal student loan program, showing a shortfall of about $21 billion thanks to the expansion and more widespread adoption of income-driven repayment plans. That could make funding for new higher education-related programs a hard sell in Congress.
Unsubsidized Perkins Loans
Federal Perkins loans are need-based loans with lower loan limits and interest rates than Stafford and PLUS loans. Unlike Stafford and PLUS loans, Perkins loans are repaid directly to the higher education institution that issued them.
Under the presidents proposal, the existing Perkins loan program would be ended and replaced with new unsubsidized Perkins loans. These new loans would carry the same interest rate, terms and conditions as the unsubsidized Stafford loan and would be serviced directly by the U.S. Department of Education. Loan limits for both undergraduate and graduate students would remain the same as in the current Perkins program.
The proposal would expand the Perkins program to provide $8.5 billion in new loan volume annually. The Obama administration estimates that the higher interest payments from borrowers on these loans would add up to an additional $6 billion over 10 years, which would be redirected to the Pell Grant program.
Most of the president's budget proposals are just that -- proposals with no weight of law that often require legislative action before they can become reality. In fact, several of the ideas covered above were introduced in previous years' budgets but went nowhere.
At this point, the president's budget is really more of a suggestion. Next steps in the process are congressional budget hearings, a budget bill and then appropriations bills that will dictate the true funding levels for federal programs.
Allesandra Lanza is the director of corporate public relations for American Student Assistance. She has nearly 20 years of experience in the student loan industry, and has answered students' questions about their federal loans; conducted on-campus loan counseling sessions for students as they enter and exit school; and written about loan repayment, debt management, budgeting and more. Lanza received a B.S. in journalism from Boston University.