I’ve been wanting to write a column for a while on federal college loans, but developments in this niche have been so frequent that I thought I’d wait until things died down.
Well, that hasn’t happened, and since it’s unlikely that calm will descend upon the student loan world anytime soon, I decided it’s best to share what’s been happening lately and add a couple of suggestions for your clients with federal loans.
Here are five things that your clients should know if they are repaying federal loans or will be taking on debt to pay for an undergraduate, graduate or professional degree.
1. The most desirable federal income-driven loan repayment program, with the best terms for the vast majority of borrowers, is essentially dead. Attorney generals for numerous GOP states filed suit against the federal government for its Saving on a Valuable Education loan repayment plan (SAVE) that President Biden’s administration rolled out in early 2023.
The 8th Circuit Court of Appeals issued a stay last year and, earlier this year, issued a ruling enjoining the program. A lower court needs to issue a permanent injunction against SAVE and it will. The reason SAVE is dead is that only the Trump administration would have standing to challenge the ruling before the U.S. Supreme Court and the administration won’t because it wanted to kill SAVE.
As if acknowledging the inevitable, the Department of Education’s online menu of repayment options no longer lists the SAVE plan as an option.
2. Right now the roughly eight million SAVE borrowers are stuck in limbo. Their loans were placed into interest-free forbearance, which is expected to last until at least this fall.
Eventually, SAVE borrowers will have to pick a different plan. For borrowers interested in the income-driven repayment plans, there are three other ones, but two – PAYE and ICR – have also been legally challenged and the Trump administration in April announced it will be exploring changes to PAYE and ICR. The only income-driven plan that is on solid legal ground, due to it being created by a vote of Congress, is the Income-Based Repayment (IBR) plan.
The Department of Education offers a resource tool, called the Loan Simulator, to determine the best repayment option for borrowers. On the calculator website, however, the government acknowledges that the results might not be accurate. Another calculator that could be more helpful at this time is Student Loan Planner’s Income-based Repayment Calculator.
Picking the right plan is critical since it could ultimately save a borrower thousands, if not tens of thousands of dollars or more. It might not be possible at this time, however, to make the right decision unless borrowers want to choose IBR.
3. In another potential change, the Parent PLUS and Grad PLUS Loan programs might be reduced or eliminated by the GOP-led Congress through the budget reconciliation process. The GOP has criticized these loans in the past because of the ability to assume a tremendous amount of debt with very little credit underwriting. In some cases, parents have been able to take on extremely high levels of debt with no evidence of being able to pay it off.
With the Parent PLUS, a parent can borrow up to the full cost of attendance of their child’s undergraduate education after grants, scholarships and the federal Direct Loan for students is subtracted. Proponents argue that these loans encourage colleges to charge high prices because the price won’t necessarily dissuade people due to the ability to borrow what’s needed. PLUS proponents, however, say the PLUS allows students who otherwise wouldn’t be able to afford college to obtain degrees.
Until now, Barack Obama was the last president to attempt to put limits on the Parent PLUS program and it generated a great deal of blowback, especially from historically black colleges, civil rights groups and low-income parents who needed to borrow a tremendous amount for college. Under Obama, the credit standards were tightened for borrowing, but later in his administration, some of the restrictions were rolled back due to the criticism.
4. The Trump administration issued a formal notice early in April that it wants to explore changing the PAYE and ICR plans, and also the Public Service Loan Forgiveness program. The PSLF allows borrowers who go into occupations in government or nonprofits to have their debt forgiven after 10 years of payments while working for qualified employers. It appears that the Trump administration wants to narrow the definition of who qualifies for PSLF.
5. The Trump administration would like to shut down the federal Department of Education. This might have been an off-the-cuff remark, but Trump said he would like student loan programs to be transferred over to the U.S. Small Business Administration. Moving the loan function of the Department of Education to the SBA or possibly the U.S. Treasury would no doubt cause a great deal of confusion.
6. No one knows how any of these proposed or anticipated actions will pan out. What is important is that borrowers have copies of all their loan documents including all their payments. And they need to make sure that their loan servicer has their correct email and street address and phone number.