Obama’s 2015 Proposed Budget: Impact on Public Service Loan Forgiveness (PSLF)

UPDATE (April 5, 2014): See our new post “The U.S. Department of Education (ED) Official Statements on Obama’s 2015 Proposed Budget: Impact on Public Service Loan Forgiveness (PSLF)”: http://www.holdfasttodreams.org/?p=494

Obama’s 2015 Proposed Budget includes new limits on how much debt that individual borrowers could have forgiven. The amount forgiven for Public Service Loan Forgiveness would be capped at $57,500. Borrowers with student debt above $57,500 would make payments for 25 years.

Background

The proposal was announced on March 4, 2014 in Obama’s 2015 Proposed Budget. See sources for the 2015 Proposed Budget:

Indirect reference page 72: http://www.whitehouse.gov/sites/default/files/omb/budget/fy2015/assets/budget.pdf

(“Ensures that Student Debt Remains Affordable. The Administration is helping stu­dent borrowers with existing debt manage their obligations through income-driven repayment plans such as Pay-As-You-Earn (PAYE) that cap student loan payments at 10 percent of discre­tionary income. ED has contacted struggling borrowers to make sure they are aware of these new options, and ensure that they have the in­formation they need to choose the best plan for them. The Budget proposes to extend PAYE to all student borrowers and reform the PAYE terms to ensure that the program is well-targeted and provides a safeguard against rising tuition at high-cost institutions.”)

Direct reference page S-13:

http://www2.ed.gov/about/overview/budget/budget15/justifications/s-loansoverview.pdf

(“Capping Public Sector Loan Forgiveness (PSLF) at the aggregate loan limit for independent undergraduate students to protect against institutional practices that may further increasestudent indebtedness, while ensuring the program provides sufficient relief for students committed to public service;

Establishing a 25-year forgiveness period for borrowers with balances above the aggregate loan limit for independent undergraduate students”)

Direct reference:

http://www.whitehouse.gov/sites/default/files/omb/budget/fy2015/assets/edu.html

(“The 2015 Budget proposes to: expand PAYE to all qualified student borrowers regardless of when they took out loans: eliminate the current standard payment cap in PAYE; calculate payments for married borrowers filing separately on the combined household Adjusted Gross Income; cap Public Sector Loan Forgivenness (PSLF) at $57,500 (the independent undergraduate student Direct Loan limit); establish a 25-year forgiveness period for borrowers with a debt above $57,500; prevent payments made under non-income-driven repayment plans from counting toward PSLF terms; and cap the amount of interest that can accrue at 50 percent when a borrower’s monthly payment is insufficient to cover the interest.”)

Origins

The proposal was spearheaded by the New America Foundation (http://www.edcentral.org/obama-administration-announces-major-reforms-income-based-repayment/):

“Over the last few years we’ve sounded the alarm that changes the Obama administration made to Income-Based Repayment overwhelmingly benefit graduate students and allow borrowers earning high incomes to qualify for loan forgiveness. The changes also exacerbated a loophole in the student loan program where schools combine the unlimited benefits of Public Service Loan Forgiveness with unlimited borrowing under the Grad PLUS program to capture windfall taxpayer subsidies for themselves and their graduate and professional students.” This is known as the “Georgetown Law Loophole” (http://www.washingtonpost.com/blogs/wonkblog/wp/2013/08/09/how-georgetown-law-gets-uncle-sam-to-pay-its-students-bills/).

Does the cap to PSLF apply to new borrowers after July 1 2015? Or all current borrowers?

It’s unclear whether the PSLF caps will apply to all current borrowers or just borrowers with PAYE/ new borrowers after July 1, 2015.

Obviously, the cap is on the table (at least for new borrowers) and that should be of concern to current and future borrowers.

Most experts expect the cap to apply only to new borrowers after July 1, 2015 (assuming it passed this year), saying current borrowers will “probably” be grandfathered in.

One of the strongest arguments for existing borrowers to feel confident in their access to Public Service Loan Forgiveness in its current form is the incorporation of PSLF into the Master Promissory Note which details the contractual terms of federal student loans. The MPN explicitly incorporates the Higher Education Act and its amendments (http://www.direct.ed.gov/pubs/dlmpn.pdf):

“A public service loan forgiveness program is also available. Under this program, the remaining balance due on your eligible Direct Loan Program loans may be cancelled after you have made 120 payments on those loans (after October 1, 2007) under certain repayment plans while you are employed in certain public service jobs.”

Take Action!

You can petition the Obama Administration to “Retain the Public Interest Loan Forgiveness Program in its Current Form” here:

https://petitions.whitehouse.gov/petition/retain-public-interest-loan-forgiveness-program-its-current-form-forgiving-all-qualifying-student/wkqnqBCH