Student Loan News: Pell Grant Cuts and Bankruptcy Rules

Welcome to Student Loan News, a weekly summary of developments and events affecting college debt in the U.S. Join us each Friday for a look at goings-on that could impact your own student loan situation.

Pell Grant funding-cut proposal sparks uproar

A plan floated Monday by the Trump administration to cut about $4 billion from the Pell Grant program is meeting with sharp pushback, according to reports from Politico and others.

Pell Grants are the main form of free financial aid for college students in need. The program currently enjoys a roughly $9 billion surplus, thanks to supplemental funding passed earlier this decade, and the White House has called for tapping into that money. It initially wanted to use $2 billion of the funds, but on Monday, it released a budget amendment to use an additional $1.9 billion. Much of the additional money would be used to fund a NASA moon mission, as President Trump noted in a tweet.

Criticism of the proposal followed, with the American Council on Education (a group representing colleges and universities) saying it would “hurt students and make college more expensive.” Other opponents of the Pell cut ranged from the nonprofit policy research group The Institute for College Access and Success to a retired astronaut and several legislators.

How it affects YOU: While Pell Grant funding might not impact student loan borrowers who have already finished their education, it would help reduce debt for current students. And although there’s a surplus for now, “the funding challenges for the Pell Grant program remain,” likely requiring increases in money for the grant in the years ahead, according to research from the nonprofit think tank New America.

On the other hand, as the Politico report notes, the administration has sought to access the Pell surplus previously but then withdrew the proposals due to lack of support in Congress. So here, too, the White House might change tack.

Lawmakers seek to ease student loan bankruptcy rules

A group of House and Senate legislators, including presidential hopeful Sen. Elizabeth Warren, introduced a bill last Friday to make it much easier for those filing bankruptcy to have their student loans “discharged” (wiped away), though passage of the act is far from certain.

Until 1976, student loans were treated the same as any other consumer debt, but starting that year, Congress began to tighten requirements to receive a discharge of those debts. In 2005, new rules were set forbidding student loan discharge except in a few rare cases of extreme hardship.

CNBC reports the proposal has drawn support from some legal scholars but also received opposition from the banking industry. But the enactment of the plan may face the typical political hurdles — according to a release from Warren’s office, the backers of the bill are almost all Democrats, with just one Republican (Rep. John Katko of New York) supporting it. With politics so sharply partisan — especially on the federal level — the proposal might need to be part of a larger deal to find enough votes for passage.

Then again, there have been signs of bipartisanship when discussing changes to the Higher Education Act, so you never know.

How it affects YOU: Even if these changes become law, using a bankruptcy filing to get rid of student loans would be a risky and expensive move. Given the damage to your credit and the legal fees involved, you’d probably only want to declare bankruptcy if your finances were already in tatters. And those who are truly at the end of their rope — for example, someone who is incapacitated and might never work again — student loans can already be discharged in bankruptcy. As a result, loosening the bankruptcy rules around student loans might affect a relatively small segment of borrowers, though for those impacted it would certainly be a huge relief.

Also in the news …

  • As we’ve reported previously, state governments are stepping in to regulate student loan lenders, and this week, Colorado and Maryland each added new legislation to this effect, Politico reported (See the Politico link in “Pell Grant funding-cut sparks uproar” above.)
  • The director of the Consumer Financial Protection Bureau says her agency is having trouble policing student loan servicers because the Education Department has told the servicers not to comply with requests for information, NPR reported Thursday.
  • The Trump administration has asked a private consulting firm to estimate losses for the federal student loan portfolio, as it considers selling off all or part of the roughly $1.5 trillion in loans to private investors, the Wall Street Journal reported earlier this month.

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