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Republican Policy Committee: Democrats Play Politics with Student Loans Again

June 10, 2014



June 10, 2014

Democrats Play Politics with Student Loans Again

Next up on the Democrats' cynical election-year agenda is student loans. Never mind that Congress addressed this issue just last year with bipartisan support. Now Democrats are rallying behind S.2432, the Bank on Students Emergency Loan Refinancing Act. This legislation would allow borrowers to refinance any type of student loan (private or federal) to market rates set in 2013.

In coordination with the Democrats' bill in the Senate, yesterday President Obama signed a memorandum to change regulations to the "Pay As You Earn" program to allow an additional five million borrowers with federal student loans to cap their monthly payments at 10 percent of their income. Any remaining debt will be forgiven after 10 years for government workers and those in certain nonprofit jobs, and after 20 years for others. The expanded program is expected to be available to borrowers by December 2015.

Washington already holds more than $1 trillion in student loan debt

Recent Bipartisan Reform

Last year Congress enacted the Bipartisan Student Loan Certainty Act of 2013, which passed the Senate on a bipartisan vote of 81 to 18. The legislation tied federal student loans to a market-based interest rate. It provided certainty for students and parents by setting the rate borrowers pay at the time they take out their loan for the life of that loan.

A market-based annual rate allows students to benefit from low rates and also protects taxpayers. The caps established in the legislation were high enough that taxpayers will not unnecessarily subsidize lower rates in the future.

Specifically, the bill required that, for each academic year, all newly issued student loans be set to the U.S. Treasury 10-year borrowing rate plus an add-on to offset costs associated with defaults, collections, deferments, forgiveness, and delinquency. The details varied by the type of loan:

. Undergraduate loans: 10-year Treasury note plus 2.05 percent. The resulting interest rates for loans taken out after July 1, 2013, would be 3.86 percent for subsidized and unsubsidized loans for undergraduate students. The interest rate resets to 4.66 percent for loans taken out after July 1, 2014.

. Graduate loans: 10-year Treasury note plus 3.6 percent. The resulting interest rates for loans taken out after July 1, 2013, would be 5.41 percent on unsubsidized loans for graduate students. The interest rate resets to 6.21 percent for loans taken out after July 1, 2014.

. PLUS loans (for graduate students and parents of undergraduate students): 10-year Treasury plus 4.6 percent. The resulting interest rates for loans taken out after July 1, 2013, would be 6.41 percent on PLUS loans for parents and graduate students. The interest rate resets to 7.21 percent for loans taken out after July 1, 2014.

The law also protected borrowers against unforeseen circumstances by imposing a cap of 8.25 percent for undergraduate students, 9.5 percent for graduate students, and 10.5 percent for PLUS borrowers. Unsatisfied with this reform of new loans, and needing a political issue for the November elections, Democrats now propose to allow people who borrowed in the past to refinance using taxpayer subsidies.

Existing Repayment Options

There are already a variety of options subsidized by taxpayers to help students repay their federal student loans, including programs that forgive loan balances. These plans to help students repay their debt have been very popular. So much so, the Administration is trying to rein in these programs "amid rising concerns over the plans' costs and the possibility they could encourage colleges to push tuition even higher." Enrollment in income-based repayment plans has increased by 40 percent in six months, now covering approximately 1.3 million Americans who owe $72 billion.

Amid concerns of rising costs, the president's fiscal year 2015 budget proposed a cap on debt eligible for forgiveness at $57,500 per student. Projected enrollment for IBR and PAYE has expanded massively in the budget. Last year, the administration estimated approximately $17 billion in loans issued in 2013 would be repaid through IBR. Now, the administration estimates that enrollment for loans taken out that year will be $27 billion. While the dollar amounts are rising, the estimated number of loans repaid has been revised lower from last year's estimate.

Program

Monthly Payment

Terms

Standard Repayment Plan

Minimum $50

Predictable monthly payment for a period of up to 10 years

Consolidation

Varies

Allows borrowers to consolidate federal student loans into a single loan, with a fixed interest rate at the weighted average of interest rates being consolidated; provides opportunity to reduce monthly payment by extending period of repayment

Graduated Repayment

Variable; lower at start increasing over time

Smaller monthly payments at first which gradually increase over 10-year repayment period as borrower's income typically increases

Extended Repayment Plan

Minimum $50

Allows lower monthly payments for an extended repayment period for new borrowers after October 1998 with outstanding loan balance over $30,000; up to 25 years

Income -based repayment programs

Current Income-Based Repayment Plan

As low as $0; no more than 15% of discretionary income

Available for loans made prior to June 30, 2014; any balance on loans after 25 years forgiven

New Income-Based Repayment Plan (IBR)

As low as $0; no more than 10% of discretionary income

Available for borrowers of Direct Loan program loans made after July 1, 2014; any balance on loans after 20 years forgiven

Income-Contingent Repayment Plan

As low as $0

Payment amounts for Federal Direct Loan borrowers are the lesser of monthly loan payments over a modified 12-year repayment plan or 20% of adjusted gross income above the appropriate poverty level; maximum repayment period is 25 years with remaining unpaid balance forgiven

Pay As You Earn Repayment Plan (PAYE)

*Program targeted for expansion by President Obama

As low as $0

Plan made available December 2012 for Direct Loans made after October 1, 2007; limits monthly payments to 10% of adjusted gross income above appropriate poverty level for borrowers with partial financial hardship; after 20 years of repayment balance is forgiven

Income-Sensitive Repayment Plan

Minimum $50

Payment amount adjusted annually for borrowers of Family Federal Education Loan program loans over 10-year repayment period; allows for administrative forbearance of up to 5 years

Alternative Repayment Plans

$5

Four alternative repayment plans exists that give the Secretary of Education the discretion to enter into an alternative repayment plan with Direct Loan borrowers; repayment period not to exceed 30 years

Deferment

n/a

Temporary pause of borrower's obligation to repay loan principal and interest during periods of unemployment, economic hardship, military services and enrollment in higher education

Forbearance

n/a

Borrowers may reduce or stop payments or extend the repayment period; forbearance usually granted in 12-month intervals for demonstrated need with no adverse credit impact; interest to accrue on loan during forbearance

Democrats' Bill Misses the Mark

The Democrats' bill would permit student loans made prior to July 2013 to be refinanced into the government's Direct Loan program at a rate determined based on the market in 2013. Nearly all federal loans would be eligible to be refinanced, including existing federal student loans and student loans financed by private lenders.

"If we wanted to be quote, political, about this, we would have paid for it with the 'Buffett Rule.'" - Senator Schumer, April 26, 2012

The bill does nothing about quality of education, and nothing to increase access to higher education. Democrats pay for this election year ploy with a $72.5 billion tax increase in the form of the "Buffett Rule" tax. Originally proposed in 2011, this tax hike has failed (https://www.senate.gov/legislative/LIS/rollcalllists/rollcallvotecfm.c fm'congress=112&session=2&vote=00065) twice (https://www.senate.gov/legislative/LIS/rollcalllists/rollcallvotecfm.c fm'congress=113&session=1&vote=00027) in the Senate. Other attempts to impose a "millionaire surtax" have been voted (http://www.senate.gov/legislative/LIS/rollcalllists/rollcallvotecfm.cf m'congress=112&session=1&vote=00160) down (http://www.senate.gov/legislative/LIS/rollcalllists/rollcallvotecfm.cf m'congress=112&session=1&vote=00177) in the (http://www.senate.gov/legislative/LIS/rollcalllists/rollcallvotecfm.cf m'congress=112&session=1&vote=00195) Senate (http://www.senate.gov/legislative/LIS/rollcalllists/rollcallvotecfm.cf m'congress=112&session=1&vote=00219) an additional six (http://www.senate.gov/legislative/LIS/rollcalllists/rollcallvotecfm.cf m'congress=112&session=1&vote=00224) times (http://www.senate.gov/legislative/LIS/rollcalllists/rollcallvotecfm.cf m'congress=113&session=1&vote=00183). By proposing an offset sure to fail, Democrats have made clear they are not serious about enacting their bill into law - this is merely an election year stunt.


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Source: Congressional Documents & Publications


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