Congressman Drew Ferguson has introduced legislation making major changes to student loan repayment plans – including doing away with time-based loan forgiveness for lower-income borrowers.
The “Help Students Repay Act” affects the various income-driven repayment plans, and, if passed, would only apply to new loans.
Ferguson’s legislation, House Resolution 4372, does away with an abundance of student loan repayment options and allows only two: the standard, 10-year repayment plan and a single income-based plan.
Currently, borrowers making loan payments under the five existing income-driven plans make payments for 20 or 25 years – depending on the specific repayment plan. After that time, any remaining loan balance is forgiven.
Ferguson’s plan does away with the time-based loan forgiveness altogether. Instead, borrowers would be responsible for paying the entire loan, but interest would stop accruing after 10 years, according to Ferguson’s staff.
The plan doesn’t affect public service loan forgiveness, or other loan forgiveness options.
“Our current student loan repayment process is too complex, which only makes it more difficult for borrowers to successfully repay their loans,” Ferguson, R-West Point, said in an emailed statement. “We must empower borrowers to make active progress towards repayment. My bill would simplify the repayment process and give borrowers the opportunity to pay down their loans based on their income, reducing their risk of default.”
Ferguson was asked why he wants to do away with the time-based forgivingness.
Forgiveness “does not incentivize student borrowers to make significant progress on their loans, when they know that once they reach an arbitrary cut-off year, all borrowers funds will be forgiven,” he said.
“And time-based forgiveness certainly does nothing to put downward pressure on the very real problem of rising college costs, when institutions know that students can borrow past their means.”
Capping the interest after 10 years “gives borrowers a better likelihood of paying down the principle on their loan, rather than simply paying down interest that continues to accrue until the loan is forgiven.”
According to the congressman’s office, the repayment amount of a loan will be the same whether it’s under the 10-year standard plan or the income-based plan.
The actual language of the bill states that interest will cease accruing “after the borrower has made payments… in an amount equal to” the amount the borrower would have made based on a 10-year repayment plan, plus any capitalized interest.
Members of Ferguson’s staff checked with legislative counsel after being asked whether the bill caps interest after 10 years or only after the original principal and interest have been paid. The staffer said that the legal experts assured her the legislation caps interest after 10 years.
Under the legislation, borrowers on the income-based plan would have payments set at 15 percent of discretionary income. The plan calculates discretionary income as federal adjusted gross income minus 150 percent of the poverty level.
Currently, some income-driven plans set payments at 15 percent of discretionary income while others set the payment at 10 percent.
Before the legislation was introduced, surveys on the issue were sent to everyone on the congressman’s email list. There were approximately 3,000 responses, according to the congressman’s office.