Over the past year, U.S. Secretary of Education Betsy DeVos has announced several proposed changes to how student loans will be handled, affecting loan forgiveness, debt relief for defrauded students, and how the federal student loan program is operated.
For her part, DeVos claims the changes will simplify and clarify how loans and payments are handled, making the process fairer as it saves the government a lot of money. Critics, on the other hand, believe the changes are unfair to students and their families sharing the financial burden, making loans and debt relief harder to get.
Then, the national debate on student loans took another turn in March with the COVID-19 pandemic, whose disruptions to the economy impaired the ability of many to keep up with the monthly installments on their federal and private student loans. The Trump administration promised to provide student loan relief to tens of millions of federal student loan borrowers during the emergency.
DeVos announced that all borrowers with federally held student loans would automatically have their interest rates set to 0% until Sept. 30, 2020. They would also be able to suspend their payments for at least two months to allow them “greater flexibility during the national emergency” without worrying about accruing interest.
A New Formula for Debt Relief
One of the biggest issues facing DeVos is dealing with the fallout of 200,000 defrauded student borrowers, dating back to 2015 when the for-profit giant Corinthian Colleges shut down. The government was deluged with thousands of claims based on the fact that borrowers with federal student loans are eligible for loan forgiveness if a college or university has misled them or engaged in other misconduct in violation of certain state laws.
In September 2019, DeVos made it more difficult for borrowers to get debt relief by:
- Adding a three-year time limit to hear claims
- Insisting on hearing each case individually, even if there was evidence of widespread misconduct at a school
- Asking they demonstrate they suffered financial harm from their college’s misconduct
- Showing a college made deceptive statements with “knowledge of its false, misleading, or deceptive nature.”
The government claimed that the changes would save it $10 billion over 10 years.
Three months later, the Education Department released a new methodology for assessing debt relief claims from student borrowers. To decide if someone is entitled to have their loans forgiven, the government would take their median earnings and compare them to the median earnings of graduates from comparable programs.
Said DeVos: “We cannot tolerate fraud in higher education, nor can we tolerate furiously giving away taxpayer money to those who have submitted a false claim or aren’t eligible for relief. This new methodology treats students fairly and ensures that taxpayers who did not go to college or who faithfully paid off their student loans do not shoulder student loan costs for those who didn’t suffer harm.”
Critics countered, however, that the new formula does not live up to the provisions of the 2016 borrower defense rule, allowing students to have their debts discharged if they are victims of fraud or misrepresentation by their schools. The methodology enables the government to “provide students less relief than the law allows,” House Democrats believe.
More Changes Proposed for How Student Loans Are Handled
In February of 2020, the Trump administration released its fiscal 2021 budget proposal, earmarking $66.6 billion for the Department of Education, representing a $5.6 billion, or 7.8%, decrease from the current year.
Some of the key initiatives for student loans repayments include:
Simplifying How Student Loans Are Repaid
The budget plan followed up on the 2016 Trump campaign proposal to combine existing federal student loan repayment plans into a single one, which would supposedly help borrowers to pay off their student loans more quickly.
It proposes an income-based repayment plan that would cap payments at 12.5% of discretionary income (up from 10%) and forgive outstanding balances after 15 years. Current income-driven repayment plans forgive remaining balances after 20 to 25 years.
Eliminating Subsidized Student Loans
By ending subsidized student loans, the government would relieve the financial burden of paying interest costs while student borrowers are enrolled in school.
Limiting Parent and Graduate PLUS Loans
To mitigate risk and reduce the number of defaults, the federal government proposes to limit the amount of Parent PLUS loans and Graduate PLUS loans. Parents and grandparents turn to Parent PLUS loans to fund undergraduate education for dependent kids, while graduate students use PLUS loans for graduate school studies.
PLUS loans have high interest rates, about 7%, and can be difficult to manage, especially for borrowers in or close to retirement. (If people have student loans with high interest rates, they can try to lower the rates through refinancing.)
Ending the Public Service Loan Forgiveness Program
The budget proposes eliminating the Public Service Loan Forgiveness program, created in 2007 by President George W. Bush. It forgives federal student loans for borrowers who are employed full time in an eligible federal, state, or local public service job or a nonprofit job.
To be eligible, they must have made 120 eligible on-time payments over 10 years. The program is intended for public servants, including members of the U.S. Armed Forces, police officers, firefighters, first responders, prosecutors, public defenders, and others.
“The administration feels that incentivizing one type of work and one type of job over another is not called for,” said DeVos. The proposal would affect future borrowers and not ones currently working in public service and paying off student loans.
DeVos and the Department of Education are also facing legal action because of their handling of the Public Service Loan Forgiveness program. California is suing the Department of Education for its alleged failure in implementing the program. Apparently, from May 2018 to May 2019, 99% of applicants under the program were rejected because of a complicated loan system and misinformation from some lenders.
In 2018, Congress earmarked hundreds of millions of dollars to repair the ailing program, with a temporary expansion aimed to deliver forgiveness to borrowers who hadn’t been informed by their lender or didn’t realize they were enrolled in a payment plan that disqualified them. The lawsuit alleges that even so, most people applying for debt forgiveness are denied.
The budget proposals need to be approved by Congress before they come into law.
Changing the Government Student Loan Business
In December of 2019, DeVos unveiled a proposal that, if enacted, would get the Department of Education out of the student loan business. At an annual education conference in Reno, she floated the idea of taking Federal Student Aid (FSA) — the country’s largest provider of financial aid — and making it a standalone entity (no longer part of the Education Department) so that it can be better managed.
Today, FSA is the nation’s largest consumer lender, with over $1.5 trillion in outstanding student loans. Only 1 in 4 loans have principal and interest currently being paid down. Nearly 11 million loans are delinquent, and 43% are considered “in distress.”
Under the proposal, the FSA would become a standalone government corporation “run by a professional, expert and apolitical Board of Governors.” When it comes to student loan repayment, currently there are:
- Eight repayment plans, each with different eligibility requirements
- More than 30 variations of deferment and forbearance options
- 14 forgiveness options
- 11 loan servicers
DeVos argues that Congress never intended the Department of Education to become a bank. However, the FSA separation is just at the idea stage. The Trump administration hasn’t made a formal legislative or policy proposal yet.
Keep Current With Changes to the Student Loan System
With the rising cost of higher education and the increasing difficulty in obtaining debt relief, it becomes more important than ever for students and their families to plan wisely.
CollegeFinance.com offers all the planning, borrowing, and repayment resources needed to make informed decisions about financing a college education.
With our constantly updated information, you will be prepared no matter what changes are made to the student loan and repayment system.