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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 borrowingno doubt
an important issuea 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

- 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.1

- 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.

- 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.

- 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.

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:

o Repaid through a simplified and improved income-based repaymentpayment
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
borrowers circumstances, our current complex array of repayment
options, deferments and forbearances isn't necessary.2
Payments would be made through withholding by default, making
repayment simple and automatically responsive to the borrower's
current circumstances.3
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
o The interest rates in this bill are the same as they are in current law.

o New borrowers would be eligible only for these new terms.
o Borrowers with active Stafford or Grad PLUS loans could continue to borrow
under existing terms.
o 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
o 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.
o Parent PLUS and Perkins loans would still available.

Borrowers do retain a forbearance option for extreme economic hardship.
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 recommended4
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 reports5 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 doesnt create an additional option 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 borrowers 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

Doesnt 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.

The Dynamic Repayment Act also encourages and makes it easy for borrowers to make higher-
than-scheduled payments, if they can, so they accrue less interest. Borrowers can even request
to pay according to a certain schedule to ensure their loan is repaid within a certain number of
years. There is also no penalty for prepayment, and lenders or servicers are encouraged to
communicate to borrowers the potential benefits of prepayment.

This proposal does not reduce college costs.

College costs are an extremely important issue but theyre not the only issue: Many students
are in default or delinquent on payments because our repayment system is inflexible and
bureaucratic. A streamlined and dynamic repayment system could solve many of these issues.

Manageable payments should be part of a broader conversation of how to make post-

secondary education more affordable and must not relieve pressure on colleges, states, or the
federal government to keep prices down.

Does everyone pay the same percentage regardless of income?

A borrower's obligation is 10 percent of his or her income above the exemption amount.
However, because the exemption is a larger share of a low-income individual's income, the
effective rate that borrowers pay is below 10 percent and is progressive. The table below shows
the effective rate paid by an individual at different income levels:

Annual Wages/Salary Annual Obligation Effective rate Paid

$10,000/yr. $0/yr. 0% of gross income
$20,000/yr. $1,000/yr. 5% of gross income
$35,000/yr. $2,500/yr. 7.1% of gross income
$45,000/yr. $3,500/yr. 7.7% of gross income

How is my annual repayment obligation determined?

Your repayment obligation is 10 percent of your income above the exemption amount. The
Department of Education would calculate your obligation as follows:

1. Add together the following sources of income on your tax return:

a. Your salary or wage income.

b. Your non-salary/wage income (self-employment income, interest, dividend income,

capital gains, etc.) above $3,000.

c. Subtract the exemption amount.

d. Multiply by 10%.

What is the repayment process?

Its important to note that the income-based repayment plan in this bill is based on current
income, not past income. The current income-based option requires borrowers to document
their income and then sets monthly payments based on that documentation. That process is
burdensome and the payments and amounts can quickly become out of date.

In the Dynamic Repayment Act, a borrowers obligation for the year is based on his or her
income for that year, much like taxes. The bill then uses a simple paycheck deduction process
so that borrowers pay the required percentage of income as they earn each dollar, eliminating
the paperwork in the current process and ensuring payment amounts always reflect current

The following steps outline the annual process of repayment:

1. The borrower makes payments through paycheck deduction. (The only exception is for
borrowers who opt-out of the withholding process or borrowers who have large
amounts of non-wage income).

2. The borrower should file his or her tax return with the IRS.

a. Note: Borrowers who are exempt from filing a return per IRS exemptions need
not filetheir obligation will automatically be zero.

3. The borrowers servicer will send the borrower an annual statement showing whether
he or she met their obligation for the year, or whether he or she owes money or is
entitled to a refund. Most borrowers paying through paycheck deduction should meet
their obligation (in the same way that almost everybody meets their obligation for
payroll taxes at the end of the year).

What is the IRS's role in the repayment process?

The borrower should file his or her tax return with the IRS (unless not required to do so per
current IRS exemptions). The IRS plays no role in the paycheck deduction process.

Does this affect private student loans?

No. These reforms are only for federal student loans.