President Donald Trump issued an executive order extending student loan relief to Dec. 31, 2020. Prior to that, however, on July 21, 2020, Senator Lamar Alexander reviewed his own student loan relief proposal on the Senate floor. At the time, payments on federally held student loans were set to resume in October as the CARES Act’s student loan relief was set to expire on Sept. 30.
Addressing the complexity of the federal system
Alexander’s proposal, the Student Loan Repayment and FAFSA Simplification Act, aimed to address the need for further relief while also addressing the complexity of the federal system:
“What do we say to those 43 million student loan borrowers today? … ”
“Number One: No Income: No monthly payment. In other words, if you have a student loan, your monthly payment is ZERO if you do not have any income, for whatever reason.
Number Two: When you do begin earning income, your monthly payment will never be more than 10 percent of your income AFTER you deduct the necessities of life, such as the cost of housing — such as rent or mortgage — and food.
Number Three: The same generous loan forgiveness that exists today for student loan borrowers will still exist. After 20 years of payments for undergraduate loans and 25 years of payments for graduate loans, if you still have an outstanding loan balance, your loan will be forgiven — and that includes all the months your payment was ZERO because you didn’t have any income.”
This proposal was immediately bashed by advocates because what Senator Alexander proposed already exists and could eliminate some productive repayment options.
Understanding Senator Alexander’s proposals on student loan ‘relief’
In response to Senator Alexander’s first proposal: Any federal student loan borrower can lower their payment to as low as $0 per month on an income-driven repayment plan. Here’s the Student Loan Planner guide on how to lower your payment if your income has dropped or if you’ve lost your income altogether.
And to address the senator’s second proposal, he’s essentially describing the income-driven plans REPAYE and PAYE, which both keep your payment based on 10% of your discretionary income. If you don’t have access to these plans due to having FFEL loans, you can consolidate to give yourself access after reviewing specific considerations.
The senator then goes on to say:
“The remaining good news in this proposal is that the current bewildering system of nine different ways of paying off your student loan would be thrown in the trash heap and replaced by these two straightforward options:
- One, the income-based repayment option; and
- Two, the ten-year mortgage-like option.”
Once again, a 10-year repayment plan already exists, and limiting 43 million borrowers to only two repayment options could be detrimental. I get what he’s after here — simplification — but eliminating existing plans that are still productive for borrowers is counterproductive and actually does not bring any additional relief to borrowers.
Alexander admits that these ideas are not new, confirming these options already exist, and saying he just wants to eliminate the other repayment options to make the repayment decision for a borrower easier.
He says: “There has never been a more important time to end the maddening complexity of student loan repayment and make it simpler for Americans to pay off their student loans.”
Notice, this proposal seems to be fixing the complexity problem of the federal student loan system, not reducing the financial burden of payments to offer more relief for borrowers.
In his example for the income-based repayment option, he explains that the average student loan balance for a four-year college graduate today is about $30,000. Someone with $30,000 in student loan debt making $52,000 each year would be expected to pay 10% of their discretionary income, which is about $274 per month.
That’s precisely what the repayment plans REPAYE or PAYE would generate as a payment for this borrower today.
So what additional relief does Senator Alexander’s proposal offer borrowers?
Short answer: None. And this lack of relief is concerning because he says these ideas have “been recommended by higher education experts numerous times testifying before the Senate education committee during the past six years while we considered reauthorizing the Higher Education Act. The concepts have also been suggested by many senators, both Democrat and Republican, including King, Burr, Rubio, Merkley, Portman, Warner, Wicker, Manchin, Shaheen and Collins.”
He ends his thoughts on his student loan relief options with, “Because of the confusing repayment system we have today, too many borrowers will have ended up in an unaffordable standard 10-year repayment plan with payments so high they will find themselves in default.”
This claim is laughable because one of his mere two options is the 10-year repayment plan, which he’s bashing. He also neglects to mention that paying on 10% of one’s discretionary income is already an option borrowers have access to, along with other income-driven options based on 15% and 20% of income, and amortized options that can extend out as far as 30 years.
Why should we care about these student loan repayment proposals?
It’s clear that Congress is aware of the complexity of the federal student loan system, and even though Senator Alexander’s proposal is just that — a proposal — it’s worth noting that the Republican Senate may be in favor of simplifying the current system.
There are currently several different federal student loan repayment options:
Amortized repayment options
Amortized repayment options — paying off in regular payments that satisfy principal and interest in full throughout the repayment term:
1. 10-Year Standard Repayment options
- Fixed (payment stays the same)
- Graduated (payment increases every two years)
2. 15- to 30-Year Standard Repayment terms available for Direct Consolidation Loans and FFEL Consolidation Loans
3. 25-Year Extended Repayment options:
Income-driven repayment options
Income-driven repayment options — payments based on a percentage of discretionary income:
1. Income-Contingent Repayment (ICR): Pay 20% of your discretionary income and receive forgiveness of any remaining loan balance after 25 years.
2. Original Income-Based Repayment (IBR): Pay 15% of your discretionary income for loans issued between July 1, 2009, and July 1, 2014. Monthly amount capped at no more than the amount of the 10-Year Standard plan. Forgiveness of any remaining loan balance after 25 years.
3. Revised Income-Based Repayment: Pay 10% of your discretionary income for loans issued after October 1, 2011. Monthly amount capped at no more than the amount of the 10-Year Standard plan. Forgiveness of any remaining loan balance after 20 years.
4. Pay as You Earn (PAYE): Pay 10% of your discretionary income. Monthly amount capped at no more than the amount of the 10-Year Standard plan. Forgiveness on any remaining loan balance after 20 years.
5. REPAYE (Revised Pay as You Earn) – Pay 10% of your discretionary income. Monthly amount is not capped. If all debt is from undergraduate debt, then any remaining balance forgiven after 20 years. If any debt from graduate debt, then any remaining balance forgiven after 25 years.
Again, the 10-Year Standard plan and an income-driven plan that resembles REPAYE are the options Senator Alexander wants to keep.
Generally accepted guidelines say that if your balance is lower than your annual income, you should pay off your loans sooner than later, and the 10-Year Standard plan or refinancing could be appropriate in that situation.
If your balance is greater than your annual income, however, an income-driven plan can be your best option, including pursuing forgiveness after 20 or 25 years.
What if REPAYE was your only choice?
The proposed income-driven repayment plan in the Student Loan Repayment and FAFSA Simplification Act could still be an appropriate option, depending on the borrower’s circumstances.
Positives of the proposed income-driven plan:
- Paying based on income can help you prioritize other financial obligations. Using the same borrower example from above, someone making $52,000 a year with a $100,000 student loan balance would maintain that same $274 payment versus a monthly payment of $1,110 on the 10-Year Standard plan, which would be more than 26% of this borrower’s gross income. This amount would make it tough to cover basic living expenses, much less save for the future.
- Pursuing forgiveness after 25 years can be — and is, for this borrower — more lucrative than the 10-Year Standard Plan, even when you include the potential tax bill for the forgiven balance. This tends to be the case when someone’s balance is at least 1.25 times the borrower’s income.
- If your spouse has federal student loans too, you could both be on REPAYE and keep your household payment based on your household income. Your respective payments toward each of your loans would be proportionate to your own balance.
Downsides of this plan to consider:
- If your spouse does not have student loans, their income will still be included in your calculation for determining the 10% of discretionary income. This factor might make some people consider postponing marriage or maybe even avoid it altogether. There is no language in the proposal that suggests that you could exclude spousal income by filing separately, a strategy borrowers can use to keep their payment based on their own income on the PAYE, IBR and ICR plans.
- If you have graduate loans, 25 years is your forgiveness timeline versus 20 years if you would have had access to PAYE.
- According to the bill, this income-driven repayment option would not be available to Parent PLUS loans even if consolidated. The double consolidation loophole might still work in this situation based on the language, but that means borrowers of Parent PLUS loans would only have access to the 10-Year Standard repayment plan without the loophole. This circumstance would be a huge problem for many Parent PLUS loan borrowers.
- If your income exceeds eight times the poverty line deduction or more, the poverty line deduction you receive off of your adjusted gross income to calculate your payment is decreased by 5% each percentage point it exceeds this threshold. In plain terms, the more you make, the less of a poverty line deduction you get.
The poverty guideline for a household of one is $12,760. The payment calculation on the income-driven plan would be 150% of this, so you could deduct $19,140 from your AGI to get to your discretionary income amount, which is what the 10% is based off of for your monthly loan payment. If your income exceeded eight times $19,140, however, which would be $153,120, you’d start getting your 150% of the poverty line deduction reduced by 5% increments by every percentage point you are over, thus increasing your payment.
What’s the probability that REPAYE would be the only option available?
The short answer is, it’s very unlikely that repayment options would be reduced to just REPAYE. When this proposal was made, those opposed to it expressed why they thought it was not a good solution:
“Simply put, Senator Alexander’s proposal misses the mark on how we need to support student loan borrowers,” said Kyle Southern, a Democrat candidate for the Tennessee House of Representatives. “Nearly 40 million student loan borrowers are hurtling towards an economic crisis of this administration’s own making, forced to resume loan payments at the worst possible time,” he said.
“Instead of taking the necessary steps to protect borrowers from a looming financial disaster, Senator Alexander is offering platitudes and tired, warmed-over policies that fail to address the magnitude of this crisis,” according to Mike Pierce, policy director for the Student Borrower Protection Center.
Simplifying the system by reducing repayment options does not help borrowers afford their student loan payments. This proposal instead backs borrowers into a corner with only two repayment options that do not make payments more affordable than they already can be under existing repayment plans.