It’s true that the Student Loan Sunshine and Student Aid Repayment (STAR) acts, if passed, could have long-term effects on the types of student loans available and benefits offered. But regardless of how a loan is originated, the end result for the consumer borrower is the same—it’s a debt that must be repaid and fit into a monthly budget. And for some borrowers entering the workforce today, facing an average education debt of $20,000, there’s a growing concern about the disparity between income levels and monthly payment amounts.

As a nonprofit with a mission of helping students and families manage higher education debt, American Student Assistance® is closely monitoring two pieces of proposed legislation that would directly impact current borrowers’ ability to repay their student loans: the Student Debt Relief Act, introduced by Senator Kennedy (D-MA), Chairman of the Senate Health, Education, Labor and Pension Committee, and the Student Borrower Bill of Rights, introduced by Senator Clinton (D-NY). The repayment components of these bills may not be getting the same publicity as the Sunshine and STAR acts, but they have just as much potential to make a difference in borrowers’ lives.

Student Debt Relief

While various repayment options exist in the federal loan programs, their effectiveness is limited, especially with the increasing debt burden experienced by students. Most options are based exclusively on the borrower’s debt level rather than their ability to pay. This leaves borrowers with high debt and low family income repayment options that lead to negative amortization and increased debt.

As part of the Student Debt Relief Act of 2007 (S. 359), a Fair Payment Assurance program would be created for borrowers with high debt relative to income. This program would defer student loan payments for borrowers earning less than 150 percent of the poverty level for their family size. Borrowers with income above that level would have the option of having federal student loan payments capped at 15 percent of their monthly discretionary income. The government would take care of any unpaid interest that resulted from the lower payments on all subsidized Stafford and Perkins Loans.

Fair Payment Assurance would also forgive student loans after 25 years of steady payment on Stafford, Grad PLUS and Perkins Loans. Parent PLUS Loans could not be forgiven.

Fair Payment Assurance would also address the inequities of the current payment plans in regards to borrowers’ family circumstances and available income. Today, a single borrower with no dependents is treated the same as a single borrower with multiple dependents, despite the fact that their monetary obligations are significantly different. Under the proposed new program, family size would be taken into consideration when a borrower’s monthly payment amount is determined. According to an analysis of the Student Debt Relief Act by the Project on Student Debt, a nonprofit that works to increase public understanding of student debt’s impact on society, a parent with two children would have a significantly lower monthly payment than a single borrower shouldering the same debt level at the same income.

Other initiatives under the Student Debt Relief Act include loan forgiveness for public sector work; the much-talked about interest rate cut on subsidized Stafford Loans; and a $1,500 tax credit for interest on student loans.
Many of these ideas for student loan payment reform were actually originally included in the Project on Student Debt’s Plan for Fair Loan Payments. In 2006, the Project submitted a formal petition to the Department of Education to make student loan payments more manageable for low-income borrowers. ASA was one of a few FFELP guarantors to join student groups, parent associations and college access providers in signing the petition. ED denied the petition, then agreed to make repayment reform part of Negotiated Rulemaking, but ultimately dropped the topic in the Rulemaking sessions. Now it remains to be seen if the reforms will eventually become reality through passage of the Student Debt Relief Act.

Student Borrower Bill of Rights

Another piece of legislation with the potential to directly impact borrowers’ repayment efforts is the Student Borrower Bill of Rights (S. 511). After first presenting the bill last year, Sen. Clinton recently reintroduced this legislation that seeks to, in the Senator’s words, "provide student borrowers with basic rights to ensure that loan payments are affordable, allow students to shop for loans in a free marketplace, and give students timely information about their loans."

To make payments more affordable, the bill would set limits on the maximum amount of a monthly student loan payment based on a formula involving the borrower’s Adjusted Gross Income (AGI) and the poverty line of the previous year. Additionally, the bill would allow loan forgiveness for borrowers who are terminally or seriously ill (unable to work for 60 months or more). Borrowers who have declared bankruptcy could also discharge their student loans. The Bill of Rights would also prevent student loan interest rates from being "unreasonable and exploitative," as well as reduce the additional fees associated with student loan default.

The Bill of Rights would mandate that student loan lenders report not just delinquent, but also timely payments to credit bureaus. It would also allow FFELP loans to be consolidated multiple times. The original version of the bill included the repeal of the Single Holder Rule for Consolidation Loans, which was already passed last year through the Emergency Supplemental Appropriations Act for Defense 2006.

The bill would also require lenders to report important information to borrowers in a timely manner during every payment period. Among other things, the statement would have to include the original principal amount borrowed, current balance, interest rate, total amount paid so far, monthly payment amount and due date, and lender contact information. Such statements and additional information on their rights and responsibilities would have to be sent to borrowers when they leave school, become delinquent, defaulted, or apply for loan consolidation.

Lastly, the bill would require certain higher education institutions to disclose a number of facts to their student loan borrowers, including the percentage of students who graduated within 150 percent of their expected dates; the percentage of graduates who found employment after six months; the median annual earnings of graduates; and the percentage of students who defaulted on student loans. Under the bill, any college administrator who received incentives to push students into loans would be liable for repaying the loans.
Regardless of whether any or all of these suggestions for repayment reform ever become reality, we can all be glad that the topic of student debt has risen to the forefront of our society’s collective conscience.