Decoding the Reducing Educational Debt (RED) Act

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Updated on Monday, February 8, 2016

Decoding the Reducing Educational Debt (RED) Act

We have a massive problem in our country: student loan debt. Clocking in at over $1.2 trillion, it has been assessed as the next market bubble, and a massive detriment to the personal finances of the millennial generation.

Some policymakers have recognized the issue, and taken initiative to fight against it. On January 21, 2016, a coalition of Senate Democrats announced their newest proposal: the Reducing Educational Debt Act, or RED Act. The act contains versions of a series of bills that have previously been proposed, but not enacted.

America’s College Promise Act

When President Obama called for educational reform via tuition-free community college during his 2015 State of the Union address, Senator Tammy Baldwin of Wisconsin took action. She proposed America’s College Promise Act, which is now included as a part of the three-pronged RED Act.

This version of the legislation would provide federal funding to states that made free community college a priority. For every $1 the state set aside for community college tuition waivers, the Federal government would contribute $3. This money would only go to eligible students, and would be applied before any other aid.

Currently, those who qualify for the maximum award level of the Pell Grant are largely able to go to community college without paying for tuition out of pocket. Oftentimes, though not always, the maximum award is sufficient to not only cover tuition and fees, but also books, and a marginal amount of living expenses.

This portion of the RED Act would also provide funding to Historically Black Colleges and Universities, along with other Minority Serving Institutions, to ensure that low-income students have enough funding to cover their first two years of attendance.

Bank on Students Emergency Loan Refinancing Act

In June of 2014, Senator Elizabeth Warren’s Bank on Students Emergency Loan Refinancing Act was turned down in the Senate. Not one to give up on the issue, the Massachusetts senator’s legislation is featured prominently in the RED Act.

This portion of the proposed act would allow those with student loans to refinance through the Federal government. It would allow eligible individuals carrying FFELP and Direct student loans initiated prior to 2010 to refinance at the 2013-2014 school year rate: 3.86%. Those who borrowed through the Federal government between the years of 2006-2009 were subject to rates between 6.0%-6.8%.

Those with private student loans would also be able to refinance through the Federal government. They would be able to do so at whatever current rates were at the time of refinance. For the 2016-17 school year, that rate is 4.29%.

Currently, you are able to refinance through financial institutions in the private sector, but not through the Federal government. Those in good standing with a high credit score may be able to get rates as low as 3.50% in this way today, though they have to be discriminating when making this decision.

Refinancing Federal student loans in the private sector may put them at risk of losing the benefits of certain federal programs, like deferment and PAYE.

Pell Grant Legislation

In 2015, Senator Mazie Hirono of Hawaii proposed a series of bills that would protect and strengthen the Pell Grant both immediately and long term. Aspects of some of those bills have been integrated into the RED Act.

Currently, Pell Grants are funded largely through discretionary spending, with a small portion of the funding coming from a mandatory add-on. In general, Republicans have a history of trying to cut Pell Grant funding, while Democrats have a history of trying to stabilize and raise it. The Health Care and Education Reconciliation Act expanded funding short-term, adjusting the maximum Pell Grant award to inflation for the years 2013-2017.

Sen. Hirono’s bill aims to extend the adjustment for inflation, making it a built-in part of the mandatory add-on, rather than leaving it up to debate as a part of discretionary spending. It also aims to protect the inflationary adjustment so it cannot be deliberated every time Congress sits down to evaluate the Pell Grant.

Keep Up On the RED Act

Want to follow this act as it makes its way through the legislative process? Follow #IntheRED on social media to get the latest news and opinions.

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