Today, Congressman Tom Petri (R-WI), a senior member of the Education and Workforce Committee, introduced the Earnings Contingent Education Loans (ExCEL) Act of 2013 with Rep. Jared Polis (D-CO) to simplify and improve student loan repayment for borrowers and save taxpayer dollars. The innovative, bipartisan legislation would improve and expand income-based repayment for borrowers and put in place a long-term fix to the student loan interest rate question.
Currently, federal student loan borrowers are automatically placed in a mortgage-like repayment schedule which never varies throughout repayment. Under the ExCEL Act, borrowers would pay an affordable percentage of their income until the loan is repaid.
"It's pretty simple if you think about it," said Petri. "When students graduate from college, traditionally they will make less. And then as they progress in their professional career they'll earn more. The repayment schedule should follow this trend so that borrowers pay less early on and more as they earn more."
Borrowers currently have the option of enrolling in income-based repayment (IBR) but the paperwork burden makes it cumbersome for borrowers. Under the ExCEL Act, borrowers would be able to have their payments withheld from their paychecks along with payroll taxes. This makes repayment automatically responsive to borrowers' economic situation so they pay off their loan quicker as they earn more but are protected during periods of low-earnings or unemployment.
"If you lose your job, your first thought is probably not 'I need to update my income information with the Department of Education,'" said Petri. "Other countries have implemented universal income-based repayment but they do it in a far simpler way by using the employer withholding system.
"These reforms are proven to work. In Great Britain--one of the major economies that has a similar system--98 percent of borrowers are meeting their obligations, whereas in the U.S. over 13 percent of borrowers default on their student loans within three years of entering repayment."
In addition, this proposal offers better financial protections for borrowers. Under the ExCEL Act, 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," Petri said.
The ExCEL Act would save taxpayer dollars by eliminating loan subsidies made obsolete by the bill's reforms and by consolidating unnecessary programs currently in existence. With respect to interest rates, the ExCEL Act proposes moving to market-based interest rates by tying interest rates to the 10-year Treasury rate. President Obama and Senators Coburn, Alexander, and Burr have called for similar reforms as a long-term solution for interest rates.
"Right now, when students take out loans to invest in their education, they are too often running the risk of financial ruin that comes with failing to pay back student loans," said Polis. "The ExCEL Act streamlines our complicated student loan system and provides protections that help young people to pay back their loans and establish good credit. I am proud to support a system that will keep student loan payments affordable and make it easier for young people to succeed."
Reps. Petri and Polis are both members of the Education and Workforce Committee.