What’s In House Republicans’ Student Loan Overhaul

House Republicans have introduced a comprehensive student loan overhaul as part of the broader budget reconciliation process. Known as the “Student Success and Taxpayer Savings Plan,” the package of reforms aims to save hundreds of billions of dollars through new student loan limits, changes to the repayment system, and policies to hold colleges accountable for their outcomes. If enacted, the proposals would also prevent negative amortization and discourage colleges from loading students up with excessive debt.

Because Republicans will attach these reforms to a budget reconciliation bill that also advances other Republican priorities like extending the 2017 tax cuts, the package has a good chance of passing the House of Representatives. But the House still needs to work out a compromise with the Senate, where lawmakers have proposed their own set of student loan reforms that differ on some points.

However, the policies in the House package stand a better chance of becoming law than any major higher education reform proposal we’ve seen in a long time. The student loan changes fall into three categories: loan limits, repayment plan changes, and accountability for colleges. Let’s look at each in turn.

Loan limits

• The aggregate loan limit for undergraduate borrowers will be $50,000, which is higher than the current $31,000 limit for dependent students but lower than the $57,500 limit for independent students. The in-school interest subsidy for some undergraduate loans is eliminated.
• Loans to parents of undergraduates will also have an aggregate limit of $50,000; these loans are currently unlimited. Students must exhaust their own loan eligibility before parents can borrow on their behalf.
• Graduate borrowers have an aggregate loan limit of $100,000; students in professional programs like medicine have a limit of $150,000. These loans are currently unlimited.
• Annual loan limits are equal to the median cost of attendance for similar programs nationally, minus any federal grant aid. Colleges may set lower loan limits if they so choose.

The caps on graduate and parent borrowing are long overdue. Study after study has shown that colleges exploit these unlimited loans to hike tuition. Universities have used graduate loans as a cash cow to finance expensive master’s degree programs of dubious value, while many schools have foisted tens of thousands of dollars in parent loans on low-income families. The new aggregate loan limits will help rein in these predatory practices, though they remain rather high.

The proposal also gives dependent undergraduate students more room to borrow. Higher undergraduate loan limits may increase aggregate borrowing, and could affect tuition prices, though the proposed accountability policies should mitigate this (more on that below). While lower loan limits might have been preferable, the proposed maximums are a good start.

Changes to repayment plans

• For new borrowers, there will be two repayment plan options: a standard plan with level payments over 10 to 25 years, and a new income-driven plan, the Repayment Assistance Plan (RAP).
• RAP sets monthly payments as a percentage of borrowers’ income on a sliding scale from 1 to 10 percent, with a minimum payment of $10. The plan waives unpaid interest and provides a credit to principal to ensure borrowers who keep up with their payments pay down their balances over time.
• Current borrowers may opt into RAP, or choose the existing Income-Based Repayment (IBR) plan. Repayment plans created by executive action, including the Biden administration’s SAVE plan, are repealed for all borrowers. The Education Department is prohibited from creating new repayment plans going forward.

The new repayment plan is earthshaking. For borrowers who make on-time payments, RAP ends the phenomenon of rising balances because payments are insufficient to cover interest. Such negative amortization has been the Achilles heel of current income-driven repayment plans, wherein three-quarters of borrowers see their balances rise over time, according to the Congressional Budget Office.

RAP guarantees that borrowers will pay down principal—by at least $50 per month if they keep up with payments—and most borrowers will retire their loans faster than they would under current plans. We shouldn’t underrate the psychological benefits of a fast payoff. Borrowers who see their balances consistently drop, month after month, will be more willing to remain engaged with their loans.

The simplification of repayment options is also welcome, as is the move to block the Education Department from creating new plans. Borrowers ought to have certainty going forward. The government should lay out repayment options and stick with them. Moreover, taxpayers will save money in the long run if the executive branch can’t create generous new repayment plans to win favor with borrowers.

Accountability for colleges

• Colleges will share responsibility with taxpayers for covering the costs of waiving unpaid interest and the principal credit. Colleges are also responsible for a share of late or missed payments. The proportion that schools must cover is greater for institutions that charge higher prices relative to their graduates’ earnings.
• These “risk-sharing” payments from colleges are set aside and redistributed as direct grants to other institutions based on performance. The PROMISE Grant program, as it is known, benefits schools which enroll high numbers of Pell Grant students, charge reasonable prices, and maintain strong completion rates and earnings outcomes.

While RAP protects students whose earnings aren’t sufficient to pay down their debts, the House proposal also rightly asks colleges to share some of the financial burden. Such “risk-sharing” will help offset some of the costs of RAP. More consequentially, it will discourage schools from loading students up with debt they can’t afford. The higher the debt, the higher the interest, and the likelier it is that the student will require an interest waiver that the college must help pay for.

This is the keystone of the proposal in my view. Changes to loan origination and repayment will have limited impact if colleges themselves don’t have incentives to hold debt to reasonable levels. Risk-sharing payments are unlikely to be ruinous for most colleges—the amounts we’re talking about are relatively low—but they’re nonetheless direct financial encouragement for colleges to make necessary changes. There’s no excuse not to reduce debt: the bill gives colleges the power to set lower loan limits if they so choose.

The PROMISE Grant is also welcome as a carrot to accompany the risk-sharing stick. My analysis of a similar proposal from last year shows that community colleges with a technical or vocational focus are most likely to benefit. The new grants could be an extra inducement for these schools to offer new programs in high-demand fields, as well as give schools the financial capacity to expand.

A new way forward for student loans

The House proposal is a three-front attack on the student loan monster. Loan limits aim to ensure debt levels are reasonable. The new repayment plan will prevent rising balances. Accountability for colleges will ensure the debts they compel students to take on are justified based on outcomes. If passed, the result of this policy mix will be a saner and more sustainable student loan system.