Bi-Partisan Legislation Proposes Employer Withholding And Automatic IBR For Loan Repayment

Karen McCarthy, NASFAA Policy Staff & Federal Relations Staff 

Republican Senator Marco Rubio (R-FL) and Democratic Senator Mark Warner (D-VA) introduced the Dynamic Student Loan Repayment Act last week. The bill would replace current loans, subsidies, deferments, forbearances, and repayment options with a single loan called the Income Dependent Education Assistance (IDEA) Loan, and would be repaid through income-based repayment and employer withholding. Under this restructuring, all federal loans made to student borrowers would eventually move to the IDEA Program (with limited grandfathering of current Direct Loan borrowers). Federal Direct PLUS loans would continue to be made to parent borrowers, through Parent PLUS, under the current Direct Loan Program.

IDEA borrowers (other than certain military students) would not receive interest subsidies while in school or in the grace period. The bill would establish a repayment system for all borrowers that utilizes withholdings from earnings. Borrowers could opt out of the automatic withholding and make payments directly to the Department of Education (ED). Borrowers not subject to wage withholding who make quarterly estimated tax payments, such as the self-employed, would make loan payments monthly based on estimated income or an amortization schedule chosen by the borrower if that results in a higher monthly payment. Prepayment would be allowed as it is now, without penalty. While the withholding approach to repayment would automatically be sensitive to changes in a borrower’s income, ED could also grant forbearance in cases of extreme economic hardship.

A reconciliation process would occur at the end of the year based on actual earnings reported on the tax return for the year just concluded. If the actual repayment obligation for that year is higher than total payments (withholdings plus additional direct payments), the borrower would have to make an additional payment within 30 days, and an underpayment penalty might apply, depending on circumstances. The bill also permits special payment arrangements between ED and the borrower, as determined by ED. Failure to pay within 30 days would incur interest penalties, and failure to pay within 270 days would result in default.

If withholdings exceed the actual payment due for the year, the borrower could request a refund, or use the overage as a prepayment.

The Dynamic Student Loan Repayment Act is very similar in concept to the Earnings Contingent Education Loans (ExCEL) Act introduced by Rep. Petri (R-WI) several times in recent years. The major differences between the two bills from the borrower’s perspective are:

Provision Dynamic Student Loan Repayment Act ExCEL Act
Forgiveness
  • Occurs after 20 years of repayment, if original outstanding balance was less than $57,500
  • Occurs after 30 years of repayment, if original outstanding balance was $57,500 or more
  • Eligible for public service loan forgiveness
  • No time-based forgiveness
  • Not eligible for public service loan forgiveness
IBR formula 10 percent of income above $10,000 15 percent of income above 150 percent of the poverty line for the borrower's household size
Treatment of joint tax filers Payment obligation is individual for wage income, other income on 1040 is apportioned equally between spouses If both filers are borrowers, 1/2 of the total income on 1040 is apportioned to each spouse
Treatment of self-employed Make monthly payments based on estimated income or selected amortization schedule (if payment would be higher) Make quarterly payments based on quarterly tax returns

NASFAA advocated for similar changes to the loan programs in a Reimagining Aid Design and Delivery (RADD) project through the Gates Foundation, in conjunction with four other policy organizations.

 

Publication Date: 7/21/2014


Karen M | 7/25/2014 2:22:42 PM

John, you and I have already spoken, but for the benefit of others, this bill makes no changes to the current annual and lifetime limits. Although the overarching name of the program would be IDEA loans, for grad students there would be a portion that corresponds to current unsub eligibility and then a portion that corresponds to current grad PLUS eligibility.

Karen M | 7/25/2014 2:21:04 PM

Judith, if a FFEL borrower wishes to borrow again, the FFEL loans would have to be consolidated into an IDEA consolidation loan. If the FFEL borrower doesn't wish to borrow, consolidation into an IDEA consolidation loan would be optional.

Judith A | 7/21/2014 9:25:53 AM

"Under this restructuring, all federal loans made to student borrowers would eventually move to the IDEA Program (with limited grandfathering of current Direct Loan borrowers)."
No explanation of what happens with older FFELP loans.

John G | 7/21/2014 9:0:49 AM

The annual and lifetime limits language is confusing so I hope NASFAA can digest it for some of us.

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