We’ve been seeing some movement recently in terms of reforming the federal student loan system. The Obama administration created the new Pay As You Earn repayment plan, an income-sensitive plan with low payments and faster forgiveness than the existing income-sensitive options. We also saw the introduction of the Student Loan Forgiveness Act of 2012 and The Student Loan Fairness Act of 2013 in Congress, two powerful student loan reform bills that would go a long way to fixing a lot of what’s wrong with the federal student loan system.
There is another, less-known student loan reform bill in the works, and people are starting to talk about it. It’s a bill authored by Rep. Tom Petri (R-WI) called the Earnings Contingent Education Loan (ExCel) Act.
The main thrust of the bill is that it would move the entire federal student loan repayment system, which currently has over half-a-dozen different repayment plans (each with its own procedures and requirements) onto a single, mandatory income-based program (similar toIncome Based Repayment). Thus *everyone* would have to be on a single repayment plan, where you pay 15% of your discretionary income, regardless of your income level.
Another core aspect of the plan is that rather than having to re-apply for the plan annually and submit proof of income (as is the case now for all of the federal income-sensitive repayment plans), you would make your payments via automatic payroll deductions. In other words, your student loan bill would be automatically deducted from your paycheck (like taxes and health insurance premiums), so there would be no need to make a payment each month, no need to send in proof of income each year to have the Department of Education calculate a payment for you, and little need to regularly communicate with your loan servicer. Your employer would handle this for you, automatically.
I think this is a fascinating idea. I really do love the current income-sensitive plans (particularly Income Based Repayment and Pay As You Earn), but as many of you know, the annual income re-certification process to remain on these plans is horrendous, and I have first-hand experiencewith that. Rep. Petri argues that his bill is a good solution not only because it eliminates a lot of the red tape; it would also save taxpayers money by making the whole federal student loan servicing system leaner and more efficient.
There’s another major aspect of this bill that I’m much less excited about: student loan forgiveness would be eliminated. Right now under Income-Based Repayment, after you make payments for the maximum repayment term of 25 years, whatever balance remains is forgiven (the repayment term is 20 years for Pay As You Earn). Under the ExCel Act, you would have to make payments until the loan is paid off. Rep. Petri’s thinking is that this would dissuade borrowers from over-borrowing. Furthermore, he claims to mitigate the consequences of eliminating loan forgiveness by capping total interest accrual at 50% of the loan balance upon graduation. This would prevent runaway balance increases, and interest would not be compounded, either.
I’m not convinced that this aspect of the bill is a good idea. Given the astronomical (and ever-increasing) costs of higher education, I don’t necessarily think that the elimination of loan forgiveness would deter so-called “over-borrowing.” I think that even with modest borrowing, many borrowers would wind up making payments on their student loans for literally the rest of their lives. That is not a situation that we want; it is not good for students or for the country to have a generation saddled with life-long debt.
Despite my concerns and criticisms, I think this bill is worthy of discussion. More importantly, I am pleased to see that members of both parties are beginning to take the student loan debt crisis seriously, and we’re starting to see a variety of creative solutions to reforming the system. We need to keep the conversation going, and I’m hopeful that we WILL see student loan reform in the future.
To read more about the bill, click here.