Warner Announces Bills to Provide Student Debt Relief

Sen. Warner Introduces Legislation to Ease Burden of Student Loan Debt

Student loan debt now stands at $1.4 trillion nationwide, average debt for
Va. students tops $29,000 per graduate

Mar 31 2017

WASHINGTON — U.S. Sen. Mark R. Warner (D-VA) has introduced two bipartisan proposals to provide much needed relief to young people struggling with student loan debt. One proposal allows employers to make payments towards their employees’ student loan debt using pre-tax income, and a second would make income-based repayment the default option for federal student loan borrowers. More than 60 percent of Virginia’s college students will graduate with some student loan debt, and the average student loan debt in Virginia tops $29,000 per graduate. Nationwide, Americans now owe more than $1.4 trillion in student loans, outstripping credit cards and auto loans as the country’s leading source of non-housing debt.

“As the first person in my family to graduate from college, I would not have had the chance to be a successful entrepreneur if I had left college with overwhelming student loan debt. And since I graduated, the nature of work has dramatically changed, making the burden of repaying student loans greater than it has ever been,” said Sen. Warner. “Student loan debt has a ripple effect in our economy, preventing people from taking chances that will benefit them, and the economy, in the long-run. We must do more to help younger borrowers, most of them at the beginning of their careers, manage their student loan debts better. And we should allow businesses to consider offering a new employee benefit to help their employees pay-off their student debts. These two bipartisan bills accomplish these goals while providing relief to the growing number of borrowers that are struggling with the crippling effects of student loan debt.”

The Employer Participation in Repayment Act, introduced by Sens. Warner and John Thune (R-SD), would update an existing federal program so that it works better for employees living with the reality of burdensome student loan debt. Currently, the Employer Education Assistance Program allows employers to contribute pre-tax earnings to help employees finance continued education, but does not allow pre -tax contributions for individuals who already have incurred student loan debt in the course of their undergraduate or graduate careers. The Warner-Thune bill would help those with student loan debt by allowing employers to contribute up to $5,250 pre-tax to their employees’ student loans – providing employees with much needed relief and employers with a new tool to recruit and retain quality employees. A summary of this legislation can be found here. To read the full bill, click here.

“Now more than ever, college graduates often find themselves bogged down by massive student loan debt,” said Sen. Thune. “We should be looking for creative opportunities, like the one Sen. Warner and I have proposed, that would help Americans capitalize on their investments in higher education, enter the workforce, and pursue a career. Our bill would give graduates the flexibility they need to work with employers to secure lower interest rates and pay part of their student loans back tax free. This is an obvious win for graduates, but it also helps businesses attract and retain talented employees.”

Similarly, the Dynamic Repayment Act, introduced by Sens. Warner and Marco Rubio (R-FL) would simplify student loan repayment by making income-based repayment the default option for borrowers. By encouraging greater participation in income-based repayment plans, the bill will help borrowers avoid default during periods of low earnings. While current federal student loan programs include numerous protections for borrowers to avoid default, many students don't utilize them because the enrollment process and paperwork can be confusing and burdensome. As a result, the three-year national default rate stands at more than 11 percent, an outcome that is not only expensive for taxpayers but also ruinous for borrowers.

“Our current federal student loan program is outdated and often leaves students and college graduates burdened with a significant amount of debt. This bill will ensure that people with federal student loans have affordable payments and stronger borrowing protections,” said Sen. Rubio. “As someone who once owed more than $100,000 in student loans, this issue is personal to me, and I will continue working to simplify this complex and bureaucratic student loan system.”

The Warner-Rubio bill would make student loan repayment more manageable by replacing the complicated array of loans, subsidies, deferments, forbearances, and repayment options with a single, streamlined, user-friendly repayment plan that allows a borrower to pay an affordable percentage of his or her income until the loan is repaid. Student loan payments would be capped at 10 percent of a borrower’s income over $10,000. For example, a borrower making an annual salary of $40,000 would pay 10 percent of $30,000 – or $3,000 a year. The bill also tiers forgiveness in order to responsibly steward taxpayer dollars. If after 20 years, a balance still remains on a loan of $57,500 or less, the remaining debt will be forgiven entirely. If the balance is more than $57,500, the loan will be forgiven after 30 years of repayment. A summary of this legislation can be found here. To read the full bill, click here. Both bills were previously introduced in the 114th Congress. Sen. Warner has been an advocate of measures to help students make informed choices when choosing a college or university, and protect college students on campus. He has backed a bill to provide college-bound students powerful new tools for comparing colleges’ and universities’ programs based on cost, likelihood of graduating, and potential earnings, and sponsored legislation to combat the epidemic of sexual assault on college campuses and improve support for survivors.

Full transcript below:

Too many students come out with huge amounts of debt. On average in Virginia its 29,000 dollars. And the challenge is, coming out with that amount of student debt, into a workplace that is very different than the workplace I entered 35 years ago.

Long time ago it used to be you go work for a single job, and potentially stay there your whole career. Virtually nobody is going to work for the same firm for thirty years anymore. Millennials particularly know this. They move from one job to another. And unfortunately, if you have that level of student debt, your ability to move around, take chances or pursue the kind of career you want in this 21st century economy is dramatically reduced.

So, for the long term growth of our economy, from making sure that young people entering the workforce have the flexibility that this workforce demands, and to make sure we can approach this problem in a commonsense, bipartisan way I’ve introduced two pieces of legislation.

One that would make your student debt repayment contingent upon how much money you are making, so in effect, income-based repayment. Commonsense and that ought to be the number one option for every student coming out of college.

And secondly, we have to make sure that employers who want to try to help pay down student debt can pay that student debt down for their employees the same tax-advantaged way that they can pay ongoing tuition costs.

Both of these bills make commonsense and would really meet with the emerging workforce, with these debt levels that they have, with the kind of tools they need to compete and live in a world that is changing and to make sure that they are prepared for the future of work in the 21st century.

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The Employer Participation in Repayment Act

A bill introduced by Senators Warner and Thune to allow employers to provide tax-free student loan assistance for their employees.

What the Bill Does:

As currently constructed, the Employer Education Assistance Program only provides assistance for workers who are seeking additional education, but does not benefit individuals who already have incurred student loan debt in the course of their undergraduate or graduate careers.

Their inclusion in the program would help individuals pay down their loans and serve as a recruitment and retention tool for younger employees who are typically not large consumers of health care, retirement and insurance benefits.

Background:

Young Americans have increasingly turned to student loans to finance their post-secondary education. Of the more than $1.3 trillion in national student loan debt, more than $600 billion has been borrowed by families whose head of household is under 35 years of age. For younger workers, this debt threatens their long-term financial security, including their ability to make asset purchases such as homes and vehicles.

Our current employer tuition assistance program — as outlined in section 127 of the Internal Revenue Code — allows employers to provide up to $5,250 per year in tax-free employer education assistance benefits for undergraduate or graduate courses. Though recipients are not required to be degree-seeking, they are required to be currently enrolled in courses. This provision excludes students who have already accumulated student loan debt, and offers them no relief.

Employer sponsored benefit plans are taken advantage of primarily by older, more experienced workers. Younger workers are typically not large consumers of health care, retirement and insurance benefits, at least not in their early career. Assistance in paying down student loans is an employer sponsored benefit that would attract and assist younger employees.

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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 borrowing — no doubt an important issue — 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:

• 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.

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:

• Simplicity

  • Repaid through a simplified and improved income-based repayment — 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.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

  • The interest rates in this bill are the same as they are in current law.

• Transition

  • New borrowers would be eligible only for these new terms.

  • Borrowers with active Stafford or Grad PLUS loans could continue to borrow under existing terms.

  • 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

  • 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.

  • Parent PLUS and Perkins loans would still available.

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:

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 doesn’t 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 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.

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 they’re 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:

 

What is the repayment process?

It’s 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 borrower’s 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 income.

The following steps outline the annual process of repayment:

 

 

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.