Dynamic Repayment Act
Senator Warner and Senator Rubio
Legislative Summary
Default is expensive for the government and often financially ruinous for the borrower. Yet on average, almost 15 percent of borrowers will default within three years of entering repayment. While much of the media attention has focused on the levels of student borrowing
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no doubt an important issue
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a majority of defaults are by borrowers with a manageable level of debt. Our current system turns these manageable debt levels into payment burdens that can be crippling for borrowers just getting started in their working life. Federal student loan programs include numerous protections for borrowers to avoid default, but most students don't utilize them because the system is so complicated. Borrowers must submit paperwork with evidence of income changes to change payment amounts, which is very burdensome, especially during times of unemployment. The Dynamic Repayment Act does four things:
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Simplifies and consolidates.
Replaces our complicated array of loans, subsidies, deferments, forbearances, and repayment options with a single loan repaid through simplified and improved income-based repayment.
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Automatically keeps payments affordable
. A borrower would pay an affordable percentage of his or her income until the loan is repaid or the time limit is reached. Borrowers pay more when they're doing well and are protected during periods of unemployment or low earnings.
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Makes income-based repayment more fiscally responsible
. Tiers loan forgiveness so that it provides a safety net for responsible borrowers who unexpectedly find their loan balances permanently unaffordable, while minimizing incentives for individuals to engage in unnecessarily risky borrowing.
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Strong borrower protections.
Interest would not compound during repayment, allowing the borrower to make progress on the principal. Because obligation is a percentage of a borrower's income, a borrower's payments are automatically adjusted based on their current ability to pay.
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The bill does include a forbearance option for cases of extreme economic hardship.
Proposal: Combine several federal student loan options (subsidized and unsubsidized Stafford loans, Grad PLUS loans) into a single loan repaid through a simplified and improved income-based repayment.
This new loan would be similar to Stafford loans except for the following
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Simplicity
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Repaid through a simplified and improved income-based repayment
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payment obligation is an affordable percentage of the borrower's income above the $10,000 exemption each year until the loan is repaid or the time limit is reached.
Because income-based repayment automatically responds to a
borrower’s circumstances, our current complex array of repayment
options, deferments and forbearances isn't necessary.
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Payments would be made through withholding by default, making repayment simple and automatically responsive to the borrower's current circumstances.
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Borrowers can prepay at any time without penalty, including according to a schedule that would allow them to repay in a specific number of years.
Interest Rates
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The interest rates in this bill are the same as they are in current law.
Transition
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New borrowers would be eligible only for these new terms.
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Borrowers with active Stafford or Grad PLUS loans could continue to borrow under existing terms.
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The terms of loans that have already been made would remain the same. However, borrowers with existing loans could consolidate into the new loans created under this bill.
Loan Limits
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This proposal would not change loan limits. If you would have been eligible to borrow an additional amount under the Grad PLUS program, you can borrow up to that amount under this bill, subject to the same credit check and fee requirements that are part of the current Grad PLUS program.
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Parent PLUS and Perkins loans would still available.
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Borrowers do retain a forbearance option for extreme economic hardship.
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The withholding process is not required. Borrowers can opt to use a monthly payments process instead.
Your proposal would eliminate the distinction between subsidized and unsubsidized Stafford loans. Won't this hurt access to higher education for low-income individuals?
Several recent reports compiled by a variety of experts on federal financial aid have advocated targeting the protections within the student loan system to borrowers who are struggling in repayment in lieu of subsidies during school that are based on the student's circumstances before enrollment. In their report, the Rethinking Student Aid Study Group recommended
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eliminating the distinction between subsidized and unsubsidized Stafford Loans, noting that:
"consistent with the principle that the focus of the subsidy on student loans should be on diminishing the burden of repayment, generous repayment protection will replace the in-school subsidy. There is no evidence that eliminating in-school interest is critical to enrollment decisions."
Other reports
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have also advocated focusing protections within the loan system on borrowers struggling in repayment, freeing up taxpayer dollars for other priorities.
There are a number of income-driven plans already in existence. Why is it necessary to create another?
Current income-driven repayment plans are underutilized because the system is so complicated. Borrowers must submit paperwork with evidence of income changes to alter payment amounts, which is very burdensome, especially during times of unemployment. The Dynamic Repayment Act
doesn’t create an additional opti
on on top of the existing plans. Instead, it streamlines the current repayment options into a simple, user-friendly, income-
based repayment plan that automatically adjusts to changes in a borrower’s income with none
of the paperwork required in the current system. It also reforms the protections available to borrowers to make them more fiscally sustainable and fair while removing the taxability of forgiveness.
Doesn’t tying payments to income
make the loan more expensive?
The Dynamic Repayment Act would ensure that, by default, all borrowers have affordable payments. In contrast, the current system automatically puts borrowers in a fixed payment plan that leads many into default or forbearance, an outcome that is often far more costly for them and offers none of the protections of income-driven repayment.
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