Proposed Changes to Student Loan Programs
Changes to student loan programs are one part of budget proposals aiming to cut $330 billion to fund the extension of 2018's tax cuts. The proposal includes changes to both available loans and repayment programs. While none of this is final, it is part of House Republicans' plan for reconciliation, a legislative process that allows a bill to be passed with a simple majority, making it filibuster-proof.
The proposal would go into effect for students enrolling in college on or after July 1, 2026. That means that students enrolling this year would be able to access currently-available programs for the duration of their college enrollment.
The proposal would make significant changes to student loan programs, including:
Eliminating subsidized loans for undergraduates. Subsidized loans are awarded on the basis of need; the primary benefit to them is that interest doesn't accrue on the loans while the student is in college and for six months following graduation. Using this year's student loan interest rate of 6.53%, a student with subsidized loans would accrue $3,779 less interest over four years than with unsubsidized loan, assuming they borrow the maximum direct student loan every year. The subsidized loan would have a $50 lower monthly payment which would save the borrower about $6,000 over a 10 year repayment term.
Changing the limit for direct loans for undergraduates from the current $27,000 over four years to a maximum of $50,000 over four years, depending on the "amount of the median cost of college of the program of study in which the student is enrolled" reduced by any Pell grant amount received.
Eliminating Grad PLUS and Parent PLUS loans which allow graduate students and parents to borrow up to the full cost of attendance.
Raising the cap on direct loans for graduate students to a total $100,000 for graduate students and $150,000 for students in professional programs. Currently the cap is $20,500 per year; graduate students needing to borrow more can do so through the Grad PLUS loan program which is less favorable.
In addition, the proposal aims to reduce options for loan forgiveness and income-based repayment. On the one hand, the proposal would eliminate negative amortization, where unpaid interest accrues on the loan and increases the loan balance over time despite the borrower making ongoing payments; on the other hand, it would extend the repayment term to 30 years, from the current 20 or 25, for loan forgiveness. In addition, in an effort to hold colleges accountable for student debt, the proposal would require colleges to reimburse the government for a portion of forgiven loans.
The proposal also includes some changes to Pell grants, on the one hand opening the Pell grant to shorter term programs such as apprenticeships and workforce development programs and on the other hand, eliminating Pell grants for students enrolled in less than six credit hours. This provision would primarily impact independent students attending community college, for whom work and other responsibilities prevent them from enrolling half-time or more.
There's a lot to unpack here, as the saying goes. And harkening back to Schoolhouse Rock days, this isn't even just a bill yet; its final form could be quite different. Our educational system is a mess and costs are out of control in many areas-- driven in part by easy access to loans and loan forgiveness, but also in part by the willingness of large segments of our society to pay exorbitant costs for access to exclusive colleges. Parent PLUS loans are a key driver of delinquencies, and a growing share of retirees have their Social Security benefits garnished to collect student loan debt.
Unfortunately, none of the elements of this proposal deal with the cost side of the equation. Ultimately that means that the people who will pay the biggest price for these changes are the ones least able to afford it: lower-income, first generation and independent students and the colleges that enroll large numbers of them: community colleges, HBCUs and larger state university systems.
It's also interesting that middle- and lower-income students and their families are so often where the federal government goes to fund its initiatives. For example, the Obama administration created the federal direct student loan program to supersede the previous private lending/government backstop partly as a means to pay for the Affordable Care Act. This time around, a new generation of college students is being asked to help foot the bill for tax cuts that predominantly benefit wealthier households.
Again, students who begin their college educations prior to June 30, 2026, will be eligible for programs currently in place for the duration of their college years. Families of students who are not currently high school seniors should be on the lookout to see what shape these programs ultimately take.
