A Not-So-Simple Simplification in the PROSPER Act

Coming on the heels of the announcement of a mobile FAFSA application at the Education Department’s annual Federal Student Aid (FSA) conference, the PROSPER Act calls for the development and implementation of just such an app. Judging by mock-ups available during the FSA conference, it’s clear that the development of this application is already well underway and is slated to be released next summer, likely well before we will see HEA reauthorized. In addition, the PROSPER Act calls for consumer-testing the application, something the Education Department is planning to do.

A mobile application is a great move to promote access to the FAFSA. Many parents and students own only a mobile device, so ensuring an application that is optimized for use on these devices will make it much more accessible for students and families to fill out the FAFSA in a timely manner. With the inclusion of the IRS Data Retrieval tool which populates the FAFSA with a student’s and family’s income data, the time and complexity burden faced by students and families should be reduced.

But while requiring the creation of an application certainly simplifies access to the FAFSA, it doesn’t simplify the FAFSA itself. To do so, there would have to be an actual reduction of questions that students and families see and must answer on the FAFSA. Many advocacy groups have detailed various ways FAFSA could be simplified further, such as the National College Access Network’s proposal to reduce FAFSA to three pathways as determined by information gathered by the application with some students and families seeing as few as 20 questions. The PROSPER Act does, however, call for an increase in the threshold of the simplified needs test from $50,000 to $100,000 meaning those with income below $100,000 would be able to skip more questions in the FAFSA which should promote simplification for more families. And while the PROSPER Act asks that the Secretary continue to examine whether data from the IRS alone could be used to generate an Expected Family Contribution--a move that would vastly simplify the application process--this is a carryover from the last HEA and we have yet to see much progress. There is also no mention of a multi-year FAFSA that would allow students who currently must fill the application out every year they enroll, even when they are enrolled within the same degree program, to have it automatically renewed each year.

Overall, the PROSPER Act makes some movement at improving accessibility of the FAFSA but falls short of making a significant reduction in the burdens faced by students and families when it comes to applying for federal aid.

The PROSPER Act fundamentally changes the loan options available to students and parents of undergraduates, by creating a phase out period for the existing Direct Loan programs, and replacing it with a new loan -- known as the ONE loan. Despite its name, the ONE loan contains separate borrowing limits and loan term for loans made to undergraduates, those for graduate or professional students, and loans made to parents. Relative to the current direct loan system, ONE loan limits are increased for dependent and independent undergraduates, and dramatically curtailed for parents and graduate and professional students. Under current law, both graduate and professional students and parents of undergraduates can borrow up to the cost of attendance each year, while the ONE loan would be limited to $28,500 per year for graduate students (with a higher amount for students in certain medical degree programs) and $12,500 per year for parents, with aggregate caps of $150,000 for graduate students and $56,250 for parents of undergraduates. Interest rates would continue to be fixed for the life of a loan, and would still change annually according to the rate for the 10-year Treasury note, plus a markup. The markup would not change for undergraduate and parent borrowers, and would be set at the current level of graduate Stafford loans.

While the intention behind the move to a new loan program appears to be simplification, creating a new loan program rather than modifying and streamlining existing loans actually adds complexity, particularly in the short term. The move would also create servicing headaches after borrowers enter repayment, as servicers will be required to navigate no fewer than three separate loan programs, each with its own terms and repayment options.

Additionally, while the current system of virtually unlimited loans for graduate students is far from ideal, setting borrowing caps too low risks discouraging enrollment, particularly among low-income students without the resources to self-finance their education, and creates opportunities for private lenders to fill the gaps. These private loans will likely carry much worse terms, particularly for borrowers whose banks view as risky. While this may help steer prospective students away from low-value credentials, it would also disproportionately hurt low-income borrowers and other vulnerable groups.

Likewise, the language introducing limits on loans to parents still fails to address the lack of consideration for a parent’s ability to repay the loans they receive. The proposed aggregate and annual caps are still much higher than one would expect a Pell-eligible family to be able to comfortably repay, especially because parents do not have access to income-based repayment options. And while more affluent families would be able to turn to the private loan market,  low-income parents and those of color will have much more limited alternatives. This means that without an expansion in grant and loan aid to the student, capping parent loans does little to address college access and affordability for low-income students.

The PROSPER Act also simplifies repayment for future borrowers, since the ONE Loan comes with only two repayment options: the standard 10-year repayment plan, and a income-driven repayment plan that caps monthly payments at 15% of a borrower’s adjusted gross income in excess of 150% of the federal poverty line. In contrast with the current framework for income-driven repayment programs, the ONE loan includes no forgiveness element—the plan eliminates both public service forgiveness as well as forgiveness under income-driven plans, though any extra interest that accumulates as a result of the extended repayment timeline would be cancelled once a borrower has paid an amount equivalent to principal and interest that would have accrued under the 10-year standard plan. Finally, the plan requires a minimum payment of $25. If the borrower can document extenuating circumstances, that payment drops to $5, but this alternate minimum can only be used for three years.

Again, by creating a new loan program rather than modifying and streamlining repayment terms for existing loans, the PROSPER Act strives for simplicity in a needlessly complex way. Because the bill makes no changes to repayment options for existing Direct Loan and FFEL borrowers, borrowers with more than one type of loan would still have to determine their eligibility for and apply for each of the available plans, and all would be required to provide income documentation to remain eligible.

Change to the terms of repayment are less generous than some of those available to current borrowers, but still protect borrowers from facing unmanageable monthly payments. The elimination of forgiveness will generate savings for taxpayers, and reduces the incentives for borrowers to borrow more than they need. However, with no exceptions for extreme cases, eliminating the forgiveness mechanisms reduces the insurance function of income-driven plans: borrowers with loan balances disproportionate to their lifetime earnings could wind up making loan payments well into retirement. While such a scenario will likely occur only rarely, the move adds risk for borrowers and could reduce higher education participation among debt-averse individuals.

The changes in the PROSPER Act align well with the recommendations made by our coalition for reforming Federal Work Study. The Act authorizes an appropriation for Federal Work-Study that almost doubles the appropriation from about $1 billion in 2016 to $1.7 billion. It also changes both parts of the formula for distributing the money to colleges which historically has been biased towards expensive private nonprofits in the north east.

The formula for improved institutions (which comprises any funds for the program above $700 million) has been reworked to reward colleges that do a good job graduating or improving graduation for Pell students. The bill also phases out the base allocation until 2023 when colleges are eligible for whichever is greater: 20 percent of their 2018 allocation or an allocation based on a combination of the amount of Pell they receive and their demonstrated student need. This is a complicated change in the funding formula but it is also a welcome one that will target Federal Work-Study money to where studies have shown it is most effective: low-income students.

Another change that will allow these limited funds to go to the students they will benefit most is the end of allowing Federal Work-Study dollars to go to grad students. The legislation also makes it easier to be employed off campus, in a job that aligns with what a student wants to do with their career.

The Pell Grant program forms the basis of the federal student aid system, and the PROSPER Act would maintain that foundation. For instance, the bill maintains the year-round Pell Grant, recently passed into law through a funding bill and put into effect for the current award year. And with another provision, the bill would expand on the Pell program, with a Pell Grant Bonus of up to $300 for low-income students who take 30 credits in an award year. That’s a critical change--one included in the Obama Administration’s final budget request to Congress--designed to incent students to take a full courseload that would allow them to graduate on time, while recognizing not all students can handle an extra class each semester. While the dollar amount is small (perhaps too small), it’s a step towards increasing on-time college completion, a challenge that plagues the postsecondary education system. Also noteworthy -- the language is unclear, but seems to be designed to avoid giving students both a bonus and a summer Pell Grant at the same time. The authors of the bill will need to clarify their intent--and their language--in a future version.

The bill also doesn’t do much to answer other problems. It wouldn’t increase the size of the maximum Pell Grant award, despite the fact that the purchasing power of a Pell Grant has hit historic lows. It wouldn’t continue indexing the Pell Grant to inflation to help it keep pace with increases in college tuition, a benefit that expired at the end of the last award year. It wouldn’t expand Pell Grant eligibility to incarcerated individuals, a ban put in place during the 1990s but which, a current experiment at the Department posits, would reduce recidivism. And while it would require the Department to issue more and better information to Pell Grant recipients about their remaining lifetime eligibility, it wouldn’t increase that eligibility beyond the current 12 semesters, which can make it nearly impossible for students who swirled around the higher education system for years, often at for-profit colleges, without earning enough credits toward a degree to finally settle in and finish the program.