Will Borrowers PROSPER Under the New Proposal in the House?

by Repayable | Jan 8, 2018 | #Millenniallife, Advocacy, Loan Forgiveness

Today’s post provides insight on a few key pieces of the PROSPER Act introduced in the House in late 2017. Estimated read time ~5 min.

The PROSPER Act, short for Promoting Real Opportunity, Success and Prosperity through Education Reform, was introduced by Rep. Virginia Foxx (R-NC), chairwoman of the House Committee on Education and the Workforce, and Rep. Brett Guthrie (R-KY), chairman of the Higher Education and Workforce Development subcommittee late in 2017.

PROSPER is designed as a reform to the current system of higher education funding. Currently the law of the land is the Higher Education Act which has been in place since 1965. It’s fair to say that the landscape of higher education has changed significantly since then.

The Best of PROSPER:

Meaningful information for borrowers to make financially driven decisions about college.

No one wants to end up with a degree that assassinates their financial future. Completion rate, average debt of borrowers, and the average salary of graduates at 5 and 10 years for every college will give borrowers objective data to compare across different degrees and different universities. Ideally there would be salary information for graduates 1 year after graduation and job placement rates in the chosen field so borrowers could also assess how quickly they would get a job after graduation and if there are enough jobs to go around.

Simplified loan options.

There are six different types of federal loans under the current system. I definitely see the need to simplify them. PROSPER proposes a common sense split of one loan for undergraduates, one for graduate students, and one for parents. They call it ONE Loan although there are in fact three loans.

The Worst of PROSPER:

Elimination of a time-based loan forgiveness option.

Essentially PROSPER would protect borrowers from negative amortization (an increase in the principal balance of a loan caused by making payments that fail to cover the interest due) by limiting borrowers to paying no more than they would have under a 10 year standard repayment plan. The problem? You still have to pay off the entire principal of the loan. So if your education cost more than the income it provided you after college you’re stuck paying that loan pretty much indefinitely.

Why is this so problematic? With other types of debt, such as credit card debt, if you get in over your head that debt can be discharged through Chapter 7 bankruptcy. Student loan debt, not so much. A borrower has to die or become permanently disabled for federal loans to be discharged. So if a borrower gets in over their head with student loans under PROSPER… your debt will follow you around for-ev-er.

Graduate student loan changes.

PROSPER would set a cap on the loan amount available to graduate students without taking into account the cost of attendance. In addition PROSPER eliminates graduate students eligibility to participate in work study. Coupled together, these changes could limit the ability of an individual graduate student to financially support their graduate education.

The Things PROSPER Could Do Better:

Offer a time-based forgiveness option.

Even with responsible borrowing there is not enough readily accessible data for a student to accurately decide how much their degree is worth. Want to know the average debt of a graduate in your chosen field of study at your institute? Good luck finding that. Want to know job placement rate? You can probably find that. Want to know the average starting salary of graduates from your particular program? That information isn’t there. Add that to repeated tuition hikes and a system designed to keep students spending and it’s amazing anyone gets out without torching their future finances.

In addition to the majority of responsible borrowers the fact still remains that federal student loans give 18 year old borrowers access to tens of thousands of dollars a year so they can choose a career for the rest of their lives… give me a break! The pre-frontal cortex is the part of the brain responsible for planning and complex decision-making like anticipating long-term consequences. This part of the brain isn’t even fully developed until around age 25. So a borrower at age 18 is supposed to choose something they want to do forever and borrow responsibly. We shouldn’t be holding this decision making over someone’s head for a never-ending period of time.

Loan forgiveness is not a get-out-of-jail free card, it’s the responsible thing to do in a system of higher education that’s becoming increasingly treacherous to navigate.

Offer stronger incentives for colleges to control costs and demonstrate outcomes.

PROSPER could directly tie a college’s access to federal funding based on borrower outcomes. If specific institutions and programs of study fail to demonstrate appropriate debt-to-income ratios, the government could lower funding to those institutions.

Why am I proposing taking money away? Because this prevents predatory programs from racking up debt for borrowers without keeping the promise of higher income through higher education. This steers borrowers away from these types of programs because they won’t be able to access funding. Right now college tuition is on an indefinite upward trend. At some point all degrees will be priced out of affordability. Tying federal funding to something like a debt-income-ratio motivates colleges to lower costs to reduce the debt portion of the ratio. Right now there is no motivation for colleges to lower costs.

A Controversial Stance on Public Service Loan Forgiveness (PSLF):

I’m not opposed to the elimination of PSLF in the long term.

A large percentage of borrowers attracted to this program are not who PSLF was intended for. PSLF has attracted many high income high debt borrowers with the means to repay their loans regardless of a loan forgiveness option. Borrowers like myself, a pharmacist, can save tens of thousands through PSLF but can afford, albeit with modest additional financial pressure, to repay the full balance of our loans without loan forgiveness. Loan forgiveness options encourage existing professional colleges (Pharmacy, Law, Medicine, etc) to continue to increase tuition. The lucrative tuition encourages for-profit institutions to open up which floods the job market with new graduates and drives down wages despite increasing the price tag of education.

I do think PSLF is the right choice for a specific subset of borrowers whose public sector work has mediocre pay yet requires extensive education. To meet the needs of those individuals while preventing wasteful spending, PSLF needs stricter criteria so it can be applied only to borrowers who could not afford to work in the public sector without PSLF.  Without limiting criteria I’m in favor of it’s elimination for the creation of a forgiveness program that reaches borrowers in true financial need.

I do think existing borrowers should be grandfathered in if they have made a reasonable number of qualifying payments on their loans. If we fail to grandfather those borrowers in they will get slapped with additional interest that has been accruing on their income-driven repayment plan because they made a decision based on the promise of loan forgiveness that wasn’t kept.

What else is in PROSPER?

There are a lot of updates in PROSPER that weren’t the focus of this post. If you want to learn more about what’s in PROSPER check out this post on US News and the PROSPER Act summary put together by the House.

What do you think?

I would love to hear your thoughts on this topic share them in the comments below or on the Repayable Facebook Page.