We’ve reported before on efforts by the Obama Administration and members of Congress to reduce student loan payments and reform the various student loan programs. In particular, Senator Elizabeth Warren of Massachusetts has made this one of her more popular causes. Efforts to deal with the current $1.2 Trillion in student debt have been for the most part a Democratic concern with little notice from the Republican Party. This has changed recently and a new, bipartisan bill has now began working its way through the legislative process.
Marco and Mark – Working Together
Co-sponsored by Senators Marco Rubio (R-FL) and Mark Warner (D-VA), the Dynamic Student Loan Repayment Act is an attempt to further reduce monthly student loan payments. Although previous legislation has lowered interest rates, graduates are still paying a higher rate than the average from 2009 to 2013. Their primary solution to providing immediate relief would be to adjust every outstanding student loan over $10,000. This would be an income based adjustment that, while it does apply to every loan, is geared specifically to helping those borrowers who are just now entering the workforce and are looking at a monthly repayment that hamstrings their ability to do anything other than go to work and pay off their student loans.
After introducing their bill on July 16th, Rubio and Warner released a joint statement detailing their problems with the income based repayment structure. “Our current loan repayment system often turns what should be reasonable debts into crippling payments. Some graduates are forced to work multiple jobs, often in fields they didn’t train for, simply to keep from defaulting.”
Ten Percent Versus Fifteen Percent
Their suggested repayment plan would see their monthly payment topped out at 10 percent of their income. Additionally, borrowers can exempt $10,000 of their annual income from the amount calculated to determine their monthly repayment. Current income based repayment plans can tap as much as fifteen percent of a graduate’s monthly income. There is no exemption of any income amount currently allowed under the various federal student loan programs. Borrowers must still prove at least partial financial hardship in order to qualify for the new Rubio/Warner Plan.
Faster Loan Forgiveness
Right now, borrowers who seek to have their student loan forgiven must have made 25 years worth of qualified monthly payments, unless they qualify for public service loan forgiveness which is 120 months. The only exception now are those borrowers using Pay As You Earn; they may qualify for loan forgiveness after 20 years. Under both options, the remaining amount will be discharged, although the amount may still be considered taxable income for that year. Under Rubio/Warner, outstanding loan amounts less than $57,000 would be forgiven after only 20 years of qualified payments. Outstanding loan amounts exceeding that would be forgiven after 30 years of payments.
Decreasing Defaults by Increasing Income
Both ideas make a lot of financial sense. By tying repayment directly to income amounts and not an arbitrary set of years, students will be able to make a living without having to choose between going into default and starting a family or even starting a business. As these graduates progress into higher pay jobs or even move into management positions, their monthly payment is adjusted upward to reflect that. Changing loan forgiveness with this plan allows people who made their money early or chose to pay over that minimum to have their remaining amount discharged at a time when they are looking to put their own children through college and prepare them for life afterward.
A Good Beginning
Please note that the Dynamic Student Loan Repayment Act reduces payments and the loan forgiveness period for many graduates and their parents. It does not reduce the $1.2 Trillion in debt. In order to do that, the government needs to dig into the tuition and fee increases that have outpaced inflation for the last two decades. This new bipartisan Rubio/Warner bill is certainly a step in the right direction though. If the Congress can get current student loan holders out from under their debt, then perhaps they can pursue lowering fees and tuition in 2015 to break this cycle for future graduates.