PROSPER Act – How Does It Impact Student Loan Borrowers?

One of the most popular student loan forgiveness programs is under attack by house Rep. Virginia Foxx (R N.C.) and Rep. Brett Guthrie (R KY). The two have introduced the Promoting Real Opportunity, Success and Prosperity through Education Reform (PROSPER) Act. The PROSPER Act would immediately put an end to the public service loan forgiveness program which borrowers have finally started to benefit from starting in October of 2017.

What is Public Service Loan Forgiveness (PSLF)?

PSLF is a program that was created by George W. Bush in 2007, which allows for complete loan forgiveness for people who work in the public sector, or for certain non-profit organizations. The program requires ten years of qualifying payments with complete student loan forgiveness at the end of the ten year period. Since the program began in October of 2007, borrowers started receiving their forgiveness only a few short months ago.

Qualifying Jobs for PSLF

PROSPER Would Eliminate PSLF

PROSPER would eliminate the PSLF program for new borrowers starting in 2018.  According to the Department of Education, there were 25,683 applicants for PSLF in 2012, and 669,426 applicants through 2017.  It’s been estimated that over 33 million Americans would be eligible for PSLF, but most are not even aware of the program.  The PSLF program is currently one of the strongest student loan forgiveness programs,  that really helps promote public sector jobs, as well as offering a reasonable way out for borrowers.  Borrowers needed to work in the public sector for ten years and make qualifying payments on their student loans during this time to qualify for loan forgiveness.  The removal of this program is a big step backward into helping solve the student debt crisis in this country.

PROSPER Changes Income Driven Repayments

Not only does PROSPER try to put an end to PSLF, but it also removes other beneficial student loan programs.  Currently, there are six student loan repayment plans, of which four are income driven.  PROSPER would move to consolidate them into only two repayment plans.

• Ten Year Standard Repayment
  • This would put all student loans, regardless of the balance, into a standard ten-year repayment plan which could result in a very high payment.
• Income-Based Repayment
  • This is an existing payment plan that bases the payment on 15% of your discretionary income.  This would mean a very high payment for borrowers with high income.  It would also mean an increased payment for low-income borrowers who can currently take advantage of the PAYE or REPAYE payment plan, of which both offer a payment of 10% of your discretionary income.

This change to the repayment plans really does not help anyone except for the private lenders.  Any normal loan would have a repayment term depending on the size of the loan, but PROSPER doesn’t work this way.  PROSPER forces you into one of two repayment plans with close to no flexibility for the borrower.

PROSPER Helps For-Profit Colleges

Two changes would greatly benefit for-profit colleges if PROSPER becomes law. Currently, there are two strong regulations aimed to protect student loan borrowers which will be done away with is PROSPER passes.

Changes to the 90/10 rules for-profit colleges

Currently, a for-profit college cannot receive more than 90% of its revenues from Title IV funds.  Title IV funds are essentially federal student loans.  The idea is to disallow for-profit colleges from being propped up by federal taxpayer dollars.  The 90/10 rule is an attempt to make for-profit schools competitive and offer educations that make a student want to attend their school despite being able to borrow less money than if attending a non-profit school.  If the education is good, and the possibility of a job is high post graduating, people will make the decision to attend the school.

PROSPER would remove the 90/10 rule for for-profit colleges and effectively completely put the burden on the taxpayer, and allow the for-profit school to compete against non-profit schools despite possibly not having a solid track record for its graduates.

Removal of Gainful Employment Rule For For-Profit Colleges

Currently, for-profit colleges have to meet certain debt-to-income ratio for their graduates to maintain access to federal student loan lending.  This motivates the for-profit colleges to make sure that their graduates not only graduate with a low student loan balance but have high-income post-graduation.  For-profit colleges can easily go out of business if they do not maintain their ratio, as most of their student require federal aid to attend the school.

PROSPER would remove the gainful employment regulation for for-profit college and not hold them to any standards to allow their student to be eligible for federal student aid.

Conclusion

While it doesn’t seem likely that this bill will be passed into law, its something to keep an eye out on.  This bill would significantly reduce borrowers interests through loan forgiveness, flexible repayment plans, and regulations on for-profit colleges aimed at protecting the student loan borrowers that attend those schools.