A House bill, the Earnings Contingent Education Loans (ExCEL) Act of 2012, attempts to reduce complexity, improve default rates, and increase the effectiveness of federal student loan subsidies—and would dramatically alter the way federal student loans are paid back. On Dec. 17, Rep. Tom Petri (R-Wis.) introduced the bill, which would provide unsubsidized loans and require income-contingent repayment for all borrowers through a payroll withholdings system. This would shift subsidy benefits from the front end (by eliminating all interest subsidies) to the back end (by providing relief to borrowers who need it based on their actual circumstances during the repayment phase of the loan).
The bill was introduced at the end of the 112th Congress with the knowledge that it would have to be reintroduced in the 113th Congress. “We wanted to get it out there so that people who have responsibilities in the higher education finance industry could take a look at it … and give it a thorough airing,” Petri says.
Petri’s proposed overhaul of federal student loans encompasses a number of concepts and concerns that have gained growing attention recently as political rhetoric surrounding student loan reform heats up. Critics of the existing loan programs cite increasing complexity, unpredictability, and fiscal instability in the programs as they are currently structured.
According to Petri, there is a “real crisis” surrounding federal student loans and “a lot of current programs have features that are ticking time bombs.” The proposed changes would cut out paperwork and hassle for students looking to take advantage of different repayment options.
Petri’s proposal mirrors successful programs in Great Britain, Australia, and New Zealand. The U.S. default rate is around 9 percent, and according to Petri is expected to continue to rise to “unacceptable” levels. In contrast, Great Britain’s default rate is around 2 percent and countries with similar repayment programs have default rates in the same ballpark, Petri notes, adding, “We think based on that track record this solves a large part of the problem.”
The proposal would replace the existing Federal Direct Stafford Loan Program with an Income Dependent Education Assistance Loan (IDEA) Program. IDEA loans would not receive interest subsidies while borrowers are in school or in periods of deferment and would require income-contingent repayment for all borrowers through a system of withholdings from earnings by the Internal Revenue Service, similar to federal tax withholdings. Borrowers who pay their tax obligation quarterly rather than through withholdings would follow that procedure for loan repayment. A borrower could also make additional payments directly to the Department of Education, and prepayment would be allowed as it is now, without penalty.
The repayment obligation would generally be 15 percent of the amount of the borrower’s income. A cap would be placed on the amount of interest that could accrue over the life of the loan, but no cap would be placed on the number of years of repayment (that is, no forgiveness of loan balances after a specified number of years in repayment).
Federal Direct loans would continue to be made for a limited period of time to students who have already borrowed under that program, although only unsubsidized Direct loans would be available. Parent PLUS loans would stay under the Federal Direct Loan Program. Grad PLUS loans would be folded into the new program, while retaining their credit and origination fee requirements.
According to Petri’s summary of the bill, an underlying concept is to keep payments affordable, so that “borrowers pay more when they’re doing well and are protected during periods of unemployment or low earnings. … If you lose your job, your payments stop automatically because the withholding stops.”
Repayment amounts would be sensitive to borrower circumstances, so most deferments and forbearances (other than administrative) would be unnecessary, and therefore eliminated. Borrowers would also be able to pay more than 15 percent of their discretionary income.
Financial aid administrators largely support the concepts outlined in the measure. “This bill takes a giant step forward in providing long-term solutions to several student loan indebtedness issues,” says NASFAA President Justin Draeger, adding that it “would nearly eliminate student loan default, and the terrible consequences that result from it, by integrating loan repayment with employer withholdings and our tax system.”
“This measure also provides a long-term solution to federal student loan interest rates that have been out of step with market rates in recent years,” Draeger adds. The bill caps the total amount of interest that could accrue on a federal student loan and “would ensure that student loan repayment remains affordable for all students by automatically enrolling them in income contingent repayment.”
Chuck Knepfle, director of student financial aid at Clemson University (S.C.) and chair of NASFAA’s Task Force on Student Loan Indebtedness, says the bill as proposed addresses many important issues. It “brings stability to the interest rates over the long term,” he says. “It removes the multitude of back-end servicers that we currently have. It brings simplicity to repayment.”
Impact on HEA
Petri’s bill may also have an impact on the debate surrounding the reauthorization of the Higher Education Act (HEA). “It is my hope that the bill will help start the conversation regarding reauthorization,” says Brent Tener, associate director of student financial aid and director of undergraduate scholarships at Vanderbilt University (Tenn.) and a member of NASFAA’s HEA Reauthorization Task Force, “It is refreshing to consider legislation that has been crafted over time and not under the cover of darkness.”
According to Tener, the discussion surrounding reauthorization and student loans “must address the issues of simplification and protection for the borrower and protection for the taxpayer. The Petri bill attempts to balance these issues and provides an excellent starting point for student loan reform.”
Knepfle says the fact that Petri, a Republican, introduced the bill bodes well for the legislation and reauthorization. Petri “has worked well with Democrats for years, and the odds of it being accepted as a nonpartisan proposal are good.”
However, addressing certain student loan issues separately creates other challenges surrounding HEA reauthorization.
If the Petri bill passes after reintroduction, “there may be a sense that no further action is needed to reform the federal student and parent loan programs,” Tener says. “In other words, the sentiment may be that ‘we have fixed the loan programs, let’s move on to something else.’”
He adds that while he likes some elements of the Petri bill, other issues that have come up during NASFAA’s Reauthorization Task Force meetings need to be addressed, including, he says, “giving schools more flexibility in determining loan amounts, addressing the needs of graduate and professional students, determining whether we should continue with a fixed interest rate or move to either a variable or a fixed-variable rate.”