Student Loan Bill
It’s disconcerting that over 15 percent of borrowers default on their federal student loans within three years of entering repayment. This can be financially ruinous for borrowers and extremely expensive for taxpayers.
While many focus on high levels of borrowing and the costs of college—no doubt important issues—what is often overlooked is that a significant number of federal loan defaults occur on manageable amounts of debt. The fact is our federal student loan repayment system has been patched with well-intentioned ideas so many times over the years that it has become unnecessarily complex and the source of many needless defaults. Many borrowers are not even aware of the options available to them.
Fortunately, there is a better way.
Decades ago, conservative economist Milton Friedman and liberal economist James Tobin independently concluded that repaying student loans through fixed payments doesn't make sense because graduates tend to earn less when they first leave school and more over time. Therefore, payment amounts should be an affordable percentage of the borrower’s income with protections for those who struggle with low income after school.
While President Obama has talked about similar ideas through his Pay As You Earn reforms, he has focused on providing generous forgiveness to borrowers while doing little to eliminate the needless bureaucracy that causes so many students to fall through the cracks. These changes move fundamentally in the wrong direction and will only reward overborrowing while leaving taxpayers on the hook.
In contrast, the Earnings Contingent Education Loans (ExCEL) Act, which I introduced with Congressman Jared Polis (D-CO), would do the following:
- Give federal loan borrowers a streamlined and dynamic repayment system that automatically adjusts to their ability to pay over time.
- Protect low-income graduates by eliminating interest compounding and capping interest accrual on the loan at 50 percent of the loan’s balance upon graduation.
- Protect taxpayers by eliminating loan subsidies and unnecessary loan forgiveness programs.
These reforms would protect borrowers from the financial ruin of default but in a way that is fiscally sustainable, fair, and rewards prudent borrowing.
Articles and Reports
Telling Students to Earn Less, Wall Street Journal editorial (April 24, 2014)
A Vision for Reforming Student Loans, by U.S. Senator Marco Rubio and U.S. Representative Tom Petri, CNBC (April 10, 2014)
Our Student Loan System Is Broken, and These New Statistics Prove It, The Atlantic (August 8, 2013)
How to Repair Income-Based Repayment of Student Loans, the Chronicle of Higher Education (June 9, 2013)