Rubio-Petri Legislation Would Give Students Access to Innovative College Financing Option

Apr 9, 2014 Issues: Education

Washington, D.C.—U.S. Senator Marco Rubio (R-FL) and U.S. Representative Tom Petri (R-WI) introduced legislation today to expand access to a new and innovative private financing option to help students pay for postsecondary education.

The bill, entitled the Investing in Student Success Act, would create a legal framework where individuals or organizations can provide students with money for school in exchange for the student agreeing to make payments linked to their income for a set period of time after graduation.  Students would have no loan balance to repay, so some students might end up paying less than the amount given to them and others more.  These plans would serve as an alternative to student loans.

“This concept is quite innovative in its approach to financing college,” said Petri, who is a senior member of the House Education and the Workforce Committee.  “Far too many students struggle to obtain enough financing through traditional sources to pay for college, and many others are saddled with unaffordable payments after graduation.  These plans would help all students get the financing they need – including students from disadvantaged backgrounds – but without the anxiety that comes with traditional loans.”

“In the 21st century, higher education is no longer an option for Americans, it has become a necessity. But a complex and confusing student loan system makes it increasingly difficult for millions of people trying to meet the challenges of our economy,” Rubio said. “Allowing private investment groups to invest directly in an individual student is an alternative to student loans that helps make higher education more affordable and more accessible.

These ideas were originally proposed by Milton Friedman and were recently discussed in a report published by the American Enterprise Institute (AEI).  One of the recommendations of the report was for Congress to create a legal framework that would provide investors with clarity regarding tax treatment, consumer disclosures, and other relevant aspects of these contracts.  While there are a few small companies operating in this market, the report argues that the lack of legal clarity has prevented the growth of these financing options on a wide scale.

The AEI report also highlights the potential for these financing tools to help address the issue of college costs.  It argues that investors will likely offer more generous terms to students for higher quality institutions and programs or for fields that are in high demand in the workforce.  “By helping students navigate to programs that will set them up for success, these tools would likely put pressure on institutions to cut costs and improve quality,” Petri said.

“By clarifying the lawfulness of income share agreements, this bill incentivizes the free enterprise system and allows people to access the skills needed to take advantage of the opportunities created by the free market,” added Rubio. “Fostering more choice for students to fund their education guarantees opportunity and equips people with the tools needed to achieve the American Dream.”

Senator Rubio and Representative Petri have both spoken about the need to reform our system of higher education financing.  Senator Rubio discussed these ideas and also proposed expanding income-based repayment for federal student loans in a February speech at Miami-Dade College.  He is also a lead sponsor of Student Right to Know Before You Go Act, legislation to provide students and parents with better information about the performance of graduates from different programs and institutions.

Representative Petri has introduced H.R. 1716, the Earnings Contingent Education Loans (ExCEL) Act, which would streamline the federal loan system by tying repayment to income for all borrowers while eliminating unnecessary and expensive subsidies and loan forgiveness programs that put taxpayers at risk.

Rubio’s “Student Right to Know Before You Go Act” and Petri’s “ExCEL Act” were also recommended in the AEI report.