Congressman Tom Petri introduced the Earnings Contingent Education Loans (ExCEL) Act of 2012 Monday which he said would both simplify and improve student loans for borrowers while saving significant taxpayer dollars.
Instead of having a mortgage-like repayment schedule which never varies, under the ExCEL Act a borrower would pay a percentage of his or her income until the loan is repaid.
"If you are earning a higher income after leaving school, you would repay your loan more quickly, although with no more than 15 percent of your income beyond an allowance for basic living expenses. If you lose your job, get sick, or can't find a good job, your loan payments would automatically be kept at affordable levels," he said.
In addition, interest on student loans would not compound during repayment and would be capped at 50 percent of the loan's balance upon graduation. "Students would have to repay what they borrow, but they wouldn't face interest spiraling out of control just because of a temporary bout of unemployment," Petri said.
"This approach protects borrowers from the financial ruin that comes with student loan default. And it protects the taxpayers who currently have to spend a lot to collect defaulted loans," Petri said.
Because borrowers pay a percentage of their income, employers would simply withhold payments along with federal and state taxes. This is easier for borrowers and makes the payment amount automatically respond to a borrower's circumstances. "If you lose your job, your payments stop automatically because the withholding stops, giving you a chance to get back on your feet," Petri said.
Student borrowers in the United Kingdom have a similar income-contingent repayment arrangement, with 98 percent meeting their loan obligations. Similar programs have also been successful in Australia and New Zealand.
The current federal student loan program has income-contingent options, but Petri considers them administratively difficult for borrowers to navigate. Additionally, he added, "they are layered on an already dizzyingly complex student loan system. What I am proposing would be simple to understand and very consumer-friendly."
The ExCEL Act would also save money by eliminating loan subsidies made obsolete by the bill's reforms. "We've provided strong protections to borrowers struggling in repayment, an approach advocated by many experts who have looked at our system," Petri said. "By better targeting these protections, we free up money for other priorities such as deficit reduction and Pell Grants."