Rubio Bill Aims to Replace Student Loan Interest With One-Time Fee

By Megan Walter, NASFAA Policy & Federal Relations Staff

Sen. Marco Rubio (R-FL) introduced the Leveraging Opportunities for Americans Now (LOAN) Act last week, which would eliminate interest on federal student loans, replacing it with a financing fee which would be equal to the amount the loan costs to service, paid over the life of the loan. The financing fee would not increase over the life of the loan and the bill would not eliminate the current student loan origination fee.

This change would be implemented for new loans made on or after July 1, 2021. Borrowers who were actively enrolled prior to that date would be able to borrow loans under the current system or could choose to borrow loans under the LOAN Act program.

For borrowers enrolled in an undergraduate course of study, undergraduate preparatory coursework, or a teacher certification program, the financing fee would be equal to 25% of the amount of the loan. For example, a student who borrows a $5,000 loan would have an additional $1,250 added on to the loan amount. For Parent PLUS loan borrowers, and students borrowing loans to be used for a graduate or professional course of study, the financing fee would be equal to 38% of the borrowed amount. The same $5,000 loan would have a financing fee of $1,900 added to the balance.

The LOAN Act provides incentives to borrowers who pay toward the balance of their loan earlier than required under their repayment plan. The bill allows borrowers to be refunded or credited a portion of the financing fee in accordance with the borrower’s income. Borrowers with an income of $45,000 or less would receive a credit of not more than 15% of the amount paid earlier than required, borrowers with incomes between $45,001 and $95,000, would receive a credit of not more than 10%, and borrowers with incomes over $95,000 would receive a credit of not more than 5%. Only borrowers with a gross income above $10,000 would be eligible to receive the financing fee credit.

The LOAN Act would also simplify the repayment plan system, requiring borrowers to enroll either in a 10-year fixed repayment plan, or an income-dependent education assistance (IDEA) repayment plan. Borrowers who enter repayment without choosing a plan would automatically be enrolled in the IDEA plan. Borrowers in the IDEA plan would be required to pay 10% of their gross income above $10,000. Those with gross incomes less than $10,000 annually would not be required to contribute to toward their loan. Working together with the Internal Revenue Service (IRS), the Department of Education (ED) would verify a borrower's income and update the monthly payment amount automatically from year to year, if applicable. Repayment continues until the loan is paid in full, but the bill does require that ED determine “appropriate loan forgiveness options for students.”

Under the LOAN Act, borrowers in repayment who fail to file a tax return—and are required to—would be alerted of their failure to file by ED, and given 90 days to file their return. If the borrower fails to file the return within the 90-day timeframe, the loans would be marked as delinquent and the borrower would need to complete a not-yet-defined appeals process with ED to get their loans back in good standing.

The bill would also require ED to provide an annual statement to each borrower that would include the total number of payments they have made, the amount the borrower has paid that year, the borrower’s outstanding balance, and a description of how the borrower’s repayment amount was calculated.


Publication Date: 5/9/2019

Peter G | 5/13/2019 3:51:37 PM

Trying not to have a knee-jerk response, as I do appreciate the creativity, but this sounds complicated to explain once you factor in the actual mechanics of the "credit" (the rebate is not on the overall fee, but on the overage one pays in any given tax year, it appears) and the delinquency bit.

Perhaps it's just a different type of complexity. But if this is the approach, they should absolutely incorporate elimination of the origination fee as well.

As a small note, I find it interesting that the $10,000 floor is the only part of the equation that seems to be indexed to CPI.

It's also a bit disingenuous in the description, and I'd caution NASFAA against repeating it ("a lie told often enough..."). If the fee is set based on level of study, then very clearly it's not set based on any real estimate of "cost to service." As David said, it's just interest in a different form where grad students will pay more even though they are less likely to default, etc.

Still, as a concept there are aspects of the approach that are intriguing.

David S | 5/9/2019 11:54:36 AM

OK, so what he's proposing is that a borrower repays more than they actually received, with the extra amount calculated as a percentage of the amount borrowed. Uh, pretty much sounds like interest to me, Marco. Yes, technically not interest, but come on.

And if you phrase it as "38 percent of the amount borrowed," those of us in Jersey start comparing it to the terms you'd get by going to, well, this guy I know. Don't ask him his name or phone number, don't bring anybody with you, don't need anything in writing...we'll give you instructions about your, how do you want to call it, income-based repayment plan.

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