Yesterday, Senator Jeff Merkley (D-OR), together with Senators Stabenow (D-MI), Gillibrand (D-NY), Baldwin (D-WI), Blumenthal (D-CT), Schatz (D-HI), Cardin (D-MD), and Cortez Masto (D-NV) introduced the Affordable Loans for Any Student Act. At a time when one in four federal student loan borrowers are delinquent or in default on their student loans, this bill makes common-sense and urgently-needed changes to simplify and improve repayment options. If enacted, these ideas will ultimately help reduce default.
The new bill incorporates longstanding TICAS recommendations to streamline today’s multiple income-driven repayment (IDR) plans into a single, improved plan that works better for students and taxpayers. At the same time, it preserves borrowers’ ability to repay their loans through fixed monthly payments over a fixed period of time, if that is what they prefer. While IDR is not the right repayment plan for everyone, it provides more manageable monthly payments for many borrowers because payments are tied to income and family size. Data show that borrowers in IDR are less likely to be delinquent or in default than borrowers in other repayment plans.
The specifics of an IDR plan directly impact its ability to serve the critical role of a safeguard for borrowers struggling with unaffordable debt. The single IDR plan created in the Affordable Loans for Any Student Act takes important steps to help borrowers manage their student debt, and targets the plan’s benefits to those who need them the most. The proposed streamlined IDR plan includes the following key features:
- Monthly payments are capped at 10 percent of income. A borrower’s monthly payments are equal to 10 percent of his or her adjusted gross income – as is currently the case in three of the five existing IDR plans. This helps ensure that student loan payments are a manageable share of a borrower’s income.
- The monthly payment formula protects very low earnings, while targeting benefits to borrowers who need help the most. All of today’s IDR plans recognize that borrowers must cover basic necessities like housing, food, and transportation before making payments toward student loans. The single IDR plan created in this bill expands this “income exclusion” threshold from 150 percent to 250 percent of the federal poverty level, so that a single borrower earning less than $30,000 a year would not be required to make student loan payments (the calculated payment would be $0). This income exclusion is gradually phased out for higher-income borrowers.
- All borrowers in IDR make payments based on income. In some of the existing IDR plans, monthly payments are capped at the amount required under a fixed 10-year plan. This allows high-income borrowers to pay a smaller share of their income than lower-income borrowers. Like the REPAYE plan, the IDR plan created in this bill requires all borrowers to make payments based on their income. This increases the plan’s fairness, and would prevent borrowers with high incomes and high debt from receiving substantial loan forgiveness when they could have afforded to pay more.
- Any remaining balance after 20 years of payments is forgiven. All borrowers in the PAYE and 2014 IBR plans, as well as borrowers with only undergraduate debt in the REPAYE plan, receive forgiveness after 20 years of payments. This represents a critical light at the end of the tunnel for borrowers whose incomes remain very low, relative to their debt, for decades. Maintaining this protection is important, because extending the repayment period for any subset of borrowers in IDR disproportionately harms the lowest income students, who take longer to repay their loans than higher-income borrowers.
- Automates annual processes so borrowers can more easily continue making payments based on income. The latest Education Department data show that more than half (57 %) of borrowers enrolled in IDR plans miss their annual deadline to update their income information, which can lead to unaffordable spikes in monthly payment amounts and interest capitalization that adds significant cost to a loan. To eliminate this unnecessary burden on both students and loan servicers, this bill automates the annual process by allowing borrowers to give permission for the Department of Education to automatically access their required tax information, with the ability to revoke that permission at any time. The bipartisan SIMPLE Act and the White House’s latest budget request to Congress both propose this same change.
- Automatically enrolls distressed borrowers in IDR. The bill notifies delinquent borrowers of IDR eligibility, and automatically enrolls borrowers who are severely delinquent (those who have not made any payments for 120 days) as well as borrowers who defaulted and completed rehabilitation into IDR. Borrowers would always have the opportunity to opt out of this process.
Beyond making these critical improvements and simplifications to IDR, the Affordable Loans for Any Student Act makes additional changes that will lower the cost and reduce the burden of student debt. For example, the bill eliminates interest capitalization and origination fees, limits income seizure for loan payments from borrowers in default, and consolidates existing deferment and forbearance options into a single, easy-to-understand “pause payment” process. The bill also requires school certification of private loans, which ensures that students are advised of their federal loan options prior to taking out private loans. Over half of undergraduate private student loan borrowers have remaining eligibility for federal loans, which are less risky and come with important consumer protections, such as IDR.
There is broad bipartisan recognition of the need to simplify the current array of IDR plans and improve the processes by which students repay their debt, and the Affordable Loans for Any Student Act stands out as the reform borrowers urgently need—reducing the costs and burden of student debt, simplifying and improving repayment options, and lowering the risk of default.
We applaud Senator Merkley for his continuing leadership on strengthening IDR to better serve struggling borrowers, and urge Congress to act quickly on this much-needed legislation.