The House Republicans recently introduced the Prosper Act which, in part, modifies existed law dealing with the availability and repayment of student loans. Presently, undergraduates are eligible for Perkins loans which are subsidized and Direct Stafford loans which are subsidized and unsubsidized. Subsidized means that the government pays the interest on the loan while the student is in school and for a grace period after the student leaves school. Unsubsidized means that interest accrues from the time that the loan is drawn down but payments are deferred. When you consider that the current rate of interest on undergrad Stafford loans is 4.29% and the average undergrad is in school for a little over 4 years, eliminating unsubsidized loans translate into a higher monthly payment for students.
The Prosper Act replaces the undergraduate Perkins and Direct loans with what is called a Federal One loan. It also eliminates the 1%+ origination fee for undergraduate loans and the 4.27% origination fee for Parent Plus and Graduate Plus loans. That is a savings. It also increases the aggregate amount that an undergraduate can borrow under the Stafford program from $31,000 to $39,000 for dependent undergrads and from $57,500 to $60,250 for independent undergrads. These amounts are caps. Under the proposed bill, the school does not have to offer the cap amount to all students. For example, it may offer the cap amount to engineering or IT students who have better prospects for a higher paying job upon graduation. And, by the same token, it may offer less to, say, a history or anthropology major.
Currently, Parent Plus and Graduate Plus loans have no cap. The parent or student can borrow the cost of attendance less any other aid offered to the student. The proposed bill limits parents to $56,250. I deal with many parents who have in excess of $100,000 of Parent Plus loans. How are they going to make up the difference? Each case is different, but I would suspect that parents will be forced to take on private loans which traditionally have not been as flexible as federal loans in regard to repayment options.
There are other parts to the proposed legislation which we will address in future blogs.