The current federal student loan program is too complex, its terms are too arbitrary, and its benefits can be better targeted. Much of the complexity of this system is a holdover from when banks received subsidies to make loans that were guaranteed by the government. Now that these loans are made directly and more cost-effectively by the Department of Education, the entire student loan system, from disbursement to repayment, can and should be streamlined and improved.

Simplify federal student loans and better target subsidies

We recommend streamlining and improving federal student loans to better support access and success while containing costs and risks for both students and taxpayers. In place of the two types of Stafford Loans available to undergraduates today, there should be a single undergraduate student loan with a fixed interest rate and no fees. To support and encourage students to stay enrolled and complete, the loan would have a low interest rate while the student is in school, based on the government’s cost of borrowing. When the loan enters repayment, the interest rate would rise by a set margin, but the total rate could never exceed a designated cap. The interest rates would be set based on the cost of running the loan program, rather than based on how much net revenue they are expected to generate for the government.

To help borrowers who go to school when interest rates are unusually high, the loan would have a built-in form of insurance that would keep their rates from ever being too much higher than the rate on loans being offered to current students. Additionally, to provide a targeted safety net for borrowers from low-income families, Pell Grant recipients would be eligible for interest-free deferments during periods of unemployment and economic hardship.

Streamline, improve, and promote awareness of federal loan repayment options

With a record high 8.9 million federal student loan borrowers currently in default, and more than  one million borrowers defaulting every year, more needs to be done to improve student loan servicing, simplify and increase borrower awareness of repayment options, and help borrowers enroll and remain in affordable plans that help them avoid default.

Since July 2009, federal student loan borrowers have had additional repayment options that cap monthly payments as a share of their income and forgive any debt remaining after 20 or 25 years in repayment. These plans help to ensure that monthly payments are affordable, but the fact that nearly one in four (23 percent) federal student loan borrowers are either 30 days delinquent or in default makes clear that many more borrowers could be benefiting from them. The Education Department has taken steps to promote awareness of income-driven plans and make it easier to enroll, but much more needs to be done. We strongly support bipartisan legislation (H.R. 3554) introduced in 2017 that would automatically enroll severely delinquent borrowers in an income-driven plan to help prevent defaults, and automate the annual income recertification process required for borrowers to continue making income-driven payments. We also  recommend replacing the multiple income-driven plans with a single, streamlined plan that lets all borrowers choose the assurance of manageable payments and forgiveness after 20 years. Monthly payments would be capped at 10% of a borrower’s discretionary income and remaining balances would be forgiven, tax free, after 20 year of payments. Additionally, we recommend targeting the benefits to borrowers who need help the most by phasing out the income exclusion for borrowers with high incomes, and eliminating the 10-year standard payment cap on monthly payment amounts. We strongly support legislation introduced in the Senate (S. 1948) in 2015 that reflects these recommendations.

While the Department rescinded its July 2016 policy direction on the servicing of all federal student loans to create a more transparent and accountable system that provides high-quality servicing and promotes continuous improvement, it has signaled its intent to implement long-outstanding Government Accountability Office (GAO) recommendations to improve borrowers’ experience with loan servicers through its NextGen Servicing redesign initiative. It is imperative that in this redesign, the Department of Education adopt consistent, enforceable standards for all student loans that offer students high-quality information and excellent service, as was jointly recommended by the Consumer Financial Protection Bureau (CFPB) and Departments of Education and Treasury in 2015.