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Likely Student Aid Changes in 2015

The Higher Education Act of 1965 (HEA), the legislation that controls most federal student aid programs, is due for reauthorization in 2015. Major changes to federal student aid programs often occur during reauthorization. As the new chair of the Senate Health, Education, Labor and Pensions committee, Senator Lamar Alexander (R-TN) will control the process. Senator Alexander is a former U.S. Secretary of Education and a former college president. The Higher Education Act will be reauthorized later in the year, after reauthorization of the Elementary and Secondary Education Act (ESEA). Possible themes for the HEA reauthorization will include simplification and streamlining of student aid as well as improved consumer disclosures. A big increase in funding for student aid programs is unlikely.

Senator Alexander has already introduced the Financial Aid Simplification and Transparency Act of 2015 (FAST Act), which will simplify the FAFSA, establish one grant and one loan program for federal student aid, and restore year-round Pell Grants. This legislation has bipartisan support and is co-sponsored by Senator Michael Bennet (D-CO).

The President’s proposal for free community college tuition will remain a proposal, as Congress is unlikely to appropriate new funding or to shift funding from the Federal Pell Grant program and the American Opportunity Tax Credit.

Litigation concerning the U.S. Department of Education’s new gainful employment regulations may end with a court ruling that overturns part of the new regulations on the grounds that they are arbitrary, capricious and vague. The U.S. Department of Education made changes in the new regulations that require graduates of for-profit colleges to have 50 percent greater income than the 2011 version of the regulations. Nevertheless, federal and state agencies will continue to enforce the existing regulations. Some for-profit colleges will transition to non-profit status, following the pattern established by Remington College, Stevens-Henager College, Keiser University, Grand Canyon University and ECMC’s acquisition of Corinthian Colleges.

President Obama’s proposal to expand eligibility for the Pay-As-You-Earn Repayment (PAYE) plan will be implemented by December, but may have be scaled back. The President does not have the power of the purse, so any increase in the cost of PAYE must be covered by savings elsewhere in the student loan program. Given that potential savings are limited, the expansion of eligibility will have to be limited. Accordingly, eligibility for PAYE is unlikely to be extended to all borrowers. The proposal to expand PAYE may be moot, however, if HEA reauthorization replaces all of the repayment plans based on income with a single new income-dependent repayment plan, perhaps in conjunction with mandatory repayment through the payroll withholding system. There will then be only two repayment plans for new borrowers, an income-dependent repayment plan and standard 10-year repayment.

Senator King (Ind-ME), with support from Senator Alexander, has introduced the Repay Act of 2015, to propose a simplified income-driven repayment plan. This will base the monthly loan payment on 10% of discretionary income up to a “bend point” and 15% thereafter for new borrowers. The bend point is initially $25,000 and will be adjusted annual for inflation (CPI-U). The remaining debt will be cancelled after 20 years for borrowers whose initial balance was less than $57,500 (the cumulative Direct Unsubsidized Loan limit for independent undergraduate students) and after 25 years for borrowers with more debt. The loan forgiveness will occur after 10 years for new borrowers as of July 1, 2015 who work full-time in a public service job for the 10-year period, similar to the current public service loan forgiveness program. All three types of loan forgiveness will be tax-free. New borrowers will be limited to a choice between this repayment plan and standard 10-year repayment.

President Obama’s proposal for a new college ratings system will likely be delayed, as the timing is too tight for it to be implemented prior to the July 1, 2015 start of the 2015-2016 academic year. Ultimately, the proposal will be a failure, devolving into a set of minimal performance requirements for colleges to retain institutional eligibility for Title IV federal student aid. Colleges may respond to these new requirements by becoming more selective in their admissions policies, yielding a reduction in the number of college graduates even as graduation rates improve. Implementing an effective college ratings or ranking system is incredibly difficult, as has been demonstrated by commercial rankings such as the ones published by U.S. News & World Report. There is no evidence that the federal government will be able to design a college ratings system that is better than the efforts of commercial entities. The President’s ratings system will be met with opposition from postsecondary institutions and policymakers, and will be ineffective at influencing consumer behavior.

The Consumer Financial Protection Bureau (CFPB) is likely to issue new rules concerning the collection of time-barred debt (i.e., debt for which the statute of limitations has expired). The CFPB and state attorneys general will continue to pursue businesses that charge advance fees to consolidate federal student loans and to obtain other financial relief (something borrowers can do on their own for free).

In response to consumer complaints and criticism by public policy advocacy organizations, the U.S. Department of Education will issue new rules concerning the use of debit cards for disbursing federal student aid funds.

An improving economy and more lenders offering private consolidation loans are likely to reduce the pressure on borrowers and lenders. If the capital markets start thawing, non-bank financial institutions may re-enter the private student loan market. The job market for recent college grads will continue to improve.

Total new federal student loan volume will decrease slightly from 2014, mostly because of a decline in demand due to the improving economy and a decline in total college enrollment. Nevertheless, the students who borrow will continue to borrow more than before. Private student loan volume will grow slightly, since demand exceeds the supply and federal loan limits remain stagnant. Even if the Perkins Loan program ends, it will not have much of an impact, as it represents less than 1% of new loan volume.

Interest rates on new federal student loans are likely to increase by 80 to 120 basis points on July 1, 2015. Although current 10-year Treasury rates are down about 50 basis points compared with last May, the Federal Reserve Board is likely to increase the Federal FUNDS rate in 2015, given unemployment rates remain below 6.0%. The market is likely to anticipate the increase. Also, when the Fed breaks the ice with an increase, the market will assume that it is the beginning of a series of interest rate increases.