Dr. Wayne Johnson, who previously served as Chief Operating Officer of Federal Student Aid at the U.S. Department of Education, has issued several student loan proposals in response to the coronavirus pandemic.
Dr. Johnson ran the federal student loans program during his tenure at the U.S. Department of Education, but left the federal agency to run for the U.S. Senate. Dr. Johnson is a Republican.
He is urging Congress to reform the federal student loan system because “he witnessed first-hand the devastating life impact that unchecked student loan debt is having on the very fabric of America.”
Bankruptcy Discharge of Student Loans
Dr. Johnson recommends that Congress amend the U.S. Bankruptcy Code to allow federal and private student loans to be dischargeable in bankruptcy after 10 years without requiring the borrower to demonstrate undue hardship.
In 1976, student loans could be discharged in bankruptcy five years after the loans entered repayment. Student loans could be discharged earlier if the borrower demonstrated that the loans imposed an undue hardship on the borrower and the borrower’s dependents.
This waiting period was increased to seven years in 1990 and repealed entirely in 1998.
Alan Collinge, a student loan activist and founder of StudentLoanJustice.org, has been calling for student loan bankruptcy reform for more than a decade. He says, “There is no good reason for student loans to be treated any differently in bankruptcy than all other loans. Nonetheless, returning this right to student loans with a 10-year waiting period would be a great leap forward in providing long needed relief to borrowers, and reining in this predatory lending system.”
Extend the Student Loan Payment Pause and Interest Waiver
Dr. Johnson is calling on Congress to suspend the requirement to make payments on federal student loans through December 31, 2021. Interest would not accrue on federal student loans during this payment pause. Collection activity on defaulted student loans, including wage garnishment and the offset of income tax refunds and Social Security benefit payments, would also be suspended. The paused payments would still count toward Public Service Loan Forgiveness.
The payment pause and interest waiver adopted by the CARES Act is set to expire on September 30, 2020.
The proposal for a 15-month extension is longer than any other proposal. The Heroes Act, which was passed on May 15, 2020 in the U.S. House of Representatives, calls for a 12-month extension. President Trump issued an executive memorandum on August 8, 2020, ordering a 3-month extension.
Cancel Federal Student Loans to Replace Loans with Grants
Dr. Johnson proposes that the federal government get out of the student loan business, by replacing federal student loans with $50,000 in job-skills and college grants to each high school graduate. As part of this proposal, Congress would forgive up to $1 trillion in federal student loan debt, up to $50,000 per borrower. Any remaining federal student loans would have their interest rate set to 0%.
The Opportunity Plus Scholarship Grant Program would supplement other forms of federal student aid, such as the Federal Pell Grant program, and not replace them. It would replace only federal student loans.
The Opportunity Plus Scholarship Grant Program will require recipients to participate in annual online financial awareness training and to perform 10 hours of community service or public service for every $1,000 received.
Borrowers whose loans are forgiven would be required to perform 10 hours of community service or public service for every $1,000 of cancelled debt.
Tax credits of up to $50,000 would be available to taxpayers who are ineligible for the loan forgiveness because they already repaid federal student loans borrowed since 2000 or never borrowed federal student loans to pay for their education.
Dr. Johnson also proposes the creation of a new STEEM (Science, Technology, Education, Engineering and Math) grant program.
He would pay for the program by adding a 1% tax on the top-line revenue on all U.S. corporations, including non-profit corporations such as colleges and their endowments. He estimates that this would provide more than $225 billion in tax revenue, enough to cover the cost of the loan forgiveness and the new Opportunity Plus Scholarship Grant Program.
See also: 7 Ways to Get Student Loans Discharged
Remove Student Loan Information from Credit Reports
Dr. Johnson argues that the unique circumstances of federal and private student loans lead to “inaccurate and unfair credit bureau reporting.” He says that removing student loan information from credit reports would improve access to low-cost credit and jobs by student loan borrowers. He feels that it is absurd that participation in an income-driven repayment plan is reported as negative information on the borrower’s credit history due to the impact on debt-to-income ratios.
Dr. Johnson’s proposal does not mention whether student loan delinquency and default would continue to be reported to credit bureaus.
This proposal is a two-edged sword, however. Reporting of student loan information to credit bureaus helps recent college graduates who repay their student loans on time to build a good credit history.