Petri Preparing Plan to Overhaul Federal Student Loan System

Posted October 3, 2012 at 12:00am

Rep. Tom Petri, the second-most senior Republican on the Education and the Workforce Committee, is floating the first serious proposal to overhaul the federal student loan repayment system as Congress prepares to take up reauthorization of the Higher Education Act next year.

Petri of Wisconsin roughly modeled his plan on Australia’s system of federal lending for higher education, in which students receive one single loan instead of several split into subsidized and unsubsidized portions. This would help simplify borrowers’ understanding of what they owe, according to Kevin James, Petri’s legislative assistant on education policy.

James unveiled the outlines of the plan Wednesday at a panel discussion at the New America Foundation, a nonpartisan think tank. He said the still-unfinished proposal will likely change before it is introduced, perhaps as soon as the lame duck session.

The current student loan system is “dizzyingly complex,” James said. “It’s very difficult to navigate.”

Under Petri’s plan, the multiple choices currently available for loan repayment, such as deferment or forbearance options, would be eliminated and replaced with an income-contingent based plan in which borrowers’ yearly repayment would be equivalent to 15 percent of their annual income.

In addition, Petri would end the ability to forgive loans after 20 years for borrowers who currently qualify for an income-based repayment plan.

“This shifts the discussion away from forgiveness,” James said. “We don’t think it’s feasible for borrowers to take out loans knowing they can put it all on the taxpayers.”

In exchange for eliminating loan forgiveness, the proposal includes a new policy that would prevent interest from capitalizing and cap the amount of interest accrued.

James also said Petri’s plan revolves around an interest rate that is variable at the time a student signs for the loan, but then becomes fixed for the life of that loan.

The chairmen of the House and Senate education committees have signaled their intent to reauthorize the Higher Education Act (PL 110-315) next year and, in doing so, they may look at returning federal student loans to a market-driven variable interest rate. The law expires at the end of 2013.

“We see this as a way to accomplish the goals of the current system, but target subsidies more effectively,” James said.

The federal student loan program operated with a variable interest rate — capped at 9 percent at one time and 8.25 percent at another — from 1992 to 2005. Then in 2006, Congress cleared legislation (PL 109-171) that set a fixed 6.8 percent interest rate.

In 2007, Democrats fulfilled a pledge in their “Six for ’06” campaign agenda by pushing through a law (PL 110-84) that halved the fixed rate gradually over four years to 3.4 percent. Congress in June passed a bill (PL 112-141) extending the 3.4 percent rate for one year, after a three-month partisan fight over how to pay for the extension.

James said the government spends an enormous amount of federal dollars in the form of subsidies on the front end for things like lower interest rates when it’s not clear that is the best way to promote college access and keep costs low. Instead, he said, the government could be focusing those subsidies on the back-end for borrowers who are having a hard time keeping up with their payments.