Representative Tom Petri from Wisconsin has proposed legislation to make income based repayment the default payment program for student loans. His proposal, made back in April, is gaining momentum and has potential to help cash-strapped borrowers. With student loan default rates nearing 13% once borrowers reach three years post-graduation, HR 1716 would make it easier for borrowers to avoid default from the get-go. Here’s what you need to know about this crucial piece of legislation:
HR 1716 The Earnings Contingent Education (ExCEL) Loans Act
Here are the highlights of the proposed legislation:
• Replace all of the complicated options with a simplified income based repayment option.
• Interest would not compound during repayment and would cap at 50% of initial balance.
• Repayment would be made via payroll withholding.
• If when you file your tax return, it’s determined that your withholdings exceeded your obligation, you can get a refund of any excess paid in.
• Interest rate would be the 10 year Treasury note yield plus 3% for undergrad and 4% for graduate level.
• The IBR would be based on a sliding scale with less income paid out for lower earners (see chart below).
Research and Results from Other Countries
Petri’s summary of the plan cites that similar programs in Great Britain, Australia and New Zealand have been very successful in helping improve delinquency and making loan payments more affordable for student loan borrowers. A recent study presented by The Hamilton Project titled Loans for Educational Opportunity: Making Borrowing Work for Today’s Students supports the proposal that all loan repayment should be income based.
They also suggest repayment via payroll deduction. For those that take the road less traveled and are self-employed, payments would be made through quarterly deposits as is done with income taxes. The study authors write, “The key principle of our proposal is that the repayment of loans will be automatic and simple.” One downside of the Hamilton Project’s approach is that they propose to eliminate the federal tax deduction for student loan interest to offset the administrative costs of their proposed program.
Downsides to the Proposed Legislation
No doubt this legislation, if passed, would be a big win for the government because it would greatly increase their intake of student loan payments because of the use of payroll withholding. For borrowers, this could be a big minus. The proposal also takes out one giant positive feature of the current IBR program – forgiveness. Petri’s proposed legislation eliminates the 25 year forgiveness option, which means your student loans could drag on forever.
If Congress would simultaneously reform bankruptcy codes to allow student loans to be eliminated in bankruptcy for those that truly cannot afford their debt and have tried in good faith to pay their loans, the loss of forgiveness and the income tax deduction could be an equitable exchange. Otherwise, this plan is too lopsided in favor of the government and doesn’t offer enough upside for student loan debtors.
If you have student loans and want to see if you’re eligible for Income Based Repayment, check out our Student Loan Help Center for How To guides on enrolling in IBR. Also sign up for our free student loan management tool to optimize your debt and stay tuned to our blog for news and tips on repaying your debt!