HEALS Act would slash student loan repayment options

Posted: 29 July 2020 5:42 pm

Borrowers would get fewer repayment options than most private lenders offer starting in October.

Americans who are about to start repayments on federal student loans would have their choice of student loan repayment options cut from nine to two under the stimulus package proposal Senate Republicans unveiled Monday.

The Heath, Economic Assistance, Liability Protection and Schools (HEALS) Act would reduce student loan repayment options to a standard repayment plan or an income-driven repayment plan. Both plans are currently available on most federal student loans.

If the HEALS Act passes, you won’t be able to sign up for graduated repayment plans, which increase over time. All but one of the income-driven repayment plans would be eliminated. And extended repayment plans, which offer terms as long as 25 years, would no longer be available.

This gives you fewer options than you’d get with most private student loan providers, which typically offer the option of 10-, 15- and 20-year terms — at a minimum.

When would these changes happen?

The new repayment plans would take effect after federal student loan repayments resume in October.

As part of the previous stimulus bill, the Department of Education has placed all federal loans into automatic forbearance until September 30th at a 0% interest rate.

This change would also only apply to borrowers who are about to start repayments or want to switch plans. Those who are already repaying federal loans on a different plan that they like can keep their current plan.

How does the standard repayment plan work?

The standard plan would require borrowers to make fixed repayments over a 10-year term. While it has the lowest total loan cost out of any federal student loan repayment plan, it has the highest monthly repayment.

Who qualifies?

All borrowers can qualify for this repayment plan. In fact, it’s the only option for Parent PLUS borrowers, who are ineligible for income-driven repayments.

How much will it cost?

That depends on your loan amount and interest rate. The average student debt load hovers around $34,000. For 2019–2020, undergraduate student loans came with an interest rate of 4.53%.

On a 10-year repayment plan, that works out to a monthly repayment of around $353 and $8,344 in total interest.

But if you have a higher-than-average student loan — say $60,000 — your monthly repayment on this plan would work out to around $623 per month and $14,724 in interest.

You can use a student loan calculator to see how much this plan might cost you each month and in total interest.

How does the income-driven repayment plan work?

Currently the federal government offers five types of income-driven repayment plans. This would reduce it to one option, where borrowers pay 10% of their discretionary income — similar to the REPAYE plan.

Borrowers with undergraduate debt would have their loans forgiven after 20 years of income-driven repayments. And borrowers with graduate debt would have their loans forgiven in 25 years.

Most importantly, this plan means that you won’t have to make any repayments while you’re unemployed.

Who qualifies?

Like most income-driven repayment plans, this is not available for Parent PLUS loans or federal Direct Consolidation Loans that were used to pay off a federal PLUS loan.

Under the current repayment plan options, Parent PLUS borrowers could sign up for income-driven repayment after consolidating their loans under the Income-Contingent Repayment plan.

It’s also not available to borrowers who can’t verify their income. For example, if you’re working overseas or get paid in cash, you might not be able to qualify for this plan.

How much will it cost?

Discretionary income is all income that is 150% above the poverty line — which is currently $19,140 for an individual. Say your income is around $33,000 — the median personal income in the US in 2019, according to the St. Louis Federal Reserve.

In this case, your discretionary income would be $13,860, or $1,155 per month. That gives you a monthly repayment of around $116 per month.

How does this affect married borrowers?

Under this plan if you’re married and file taxes jointly, the government will count your household income rather than your individual income. This means that you might want to consider a joint tax return if it’s just you and your partner.

But make sure it’s worth it. The poverty line is based on your household size — the more people in your family, the higher it is.

What if I make six figures?

There are some protections for high-earning borrowers. If your adjusted gross income is 800% over the poverty line or higher — that’s $102,080 for an individual — your discretionary income under this plan will decrease by 5% for each percentage point over 800%.

So if your income was 801% over the poverty line — or $102,208 — your discretionary income would be $83,068 before the reduction and $78,915 after. This is a difference between a monthly payment of $692 and $656.

How does this affect eligibility for PSLF?

Under the HEALS Act, repayments under either plan will count toward the 120 repayments required for Public Service Loan Forgiveness. Currently, you must be enrolled in income-driven repayment to be eligible for the popular public service program.

This would fix a problem behind a large percentage of PSLF rejections. Most were unaware that they had to be enrolled in income-driven repayments.

Don’t like either option? Here’s what you can do if the HEALS Act passes

Reducing federal repayment plan options from nine to two might leave a lot of borrowers out. Here are some steps you can take if this bill is signed into law and you don’t like either option.

Sign up for repayments before October

Even if your grace period extends past October 1st, consider signing up for a repayment plan now. You can get started by signing into the federal student aid website and looking up your servicer. Reach out and ask how you can sign up for a repayment plan right now.

Regardless of which repayment plan you enroll in, your student loan repayments shouldn’t start until October 1st — they’re all in automatic forbearance.

Switch repayment plans now

If you’re unhappy with your current plan, make the switch now. Most servicers allow you to do this by filling out an online form. But others might require you to fill out a paper form and mail it in. Both should be available on your servicer’s website.

Refinance with a private lender

Most private student loan providers don’t offer income-driven repayment. But most offer terms as long as 20 years. If your income is too high to benefit from income-driven repayment but you want a longer loan term, this could be a better choice for you. Especially since interest rates are currently at record lows.

But before you apply, read up on the federal benefits you stand to lose — like extensive deferment and forbearance options. If your job security isn’t air-tight, you might want to hold off on refinancing.

How else would the HEALS Act affect financial aid?

The HEALS Act mainly affects student loan repayments. But here are a few additional changes you might see if it’s passed:

  • Emergency Education Freedom Grants. The HEALS Act would give states funding to put toward scholarship programs. But states aren’t obligated to take the funds, so additional funding might not be available everywhere.
  • Extended emergency work-study. The HEALS Act would expand what types of jobs qualify for the federal matching program and extend federal work-study funds until the end of the coronavirus outbreak.
  • Extended Federal Supplemental Education Opportunity Grant (FSEOG). Current FSEOG recipients would continue to receive funds through the academic year that the coronavirus outbreak ends.
  • Financial aid based on current income. The Free Application for Federal Student Aid (FAFSA) application would allow you to provide information about income lost during the coronavirus while calculating your financial aid. And financial aid administrators could consider your current income rather than last year’s taxed income.

The HEALS Act has faced opposition from both Republicans and Democrats. Even if it does get signed into law, it’s unlikely that will happen without significant changes. And it’s possible some or all of these student loan proposals will change.

Photo: Getty Images

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