A new proposal from Sen. Marco Rubio (R., Fla.) would dramatically overhaul the federal student loan system.
The Leveraging Opportunities for Americans Now (LOAN) Act would replace all interest payments on federal student loans with a "financing fee" of a fixed percentage of the loan amount (the percentage being a function of the type of loan). Students could get this initial fee reduced by paying their loans early, but otherwise would be liable for the balance of the fee in addition to the principal of the loan.
Even more importantly, the LOAN Act would give enrolled student loan recipients two options for repaying their loan: a ten-year, fixed repayment plan, or an income-based repayment plan that charges them 10 percent of their annual earnings in excess of $10,000 until the totality of the loan is paid off. Repayment would also be paused in the event of unforeseen financial hardship.
This new model parallels the popular notion of an income sharing agreement, which experts suggest would help actually link a student's debt to the benefit, or lack thereof, of his investment. Similar approaches have been implemented at a number of universities, including Purdue University in Indiana.
If implemented, the LOAN Act would radically overhaul the federal student loan system, which would in turn essentially transform student loans in America: the federal government originates more than 90 percent of new loans under the Direct Loan Program, and currently holds roughly 80 percent of federal student debt on its balance sheet.
In a public statement, Rubio framed the proposal as part of his broader focus on restoring working-class prosperity.
"For years, our nation's outdated federal student loan system has saddled working-class Americans with mountains of debt and accruing interest that they are unable to repay. The LOAN Act will ensure borrowers are not trapped in a cycle of debt," Rubio said. "It's time that our federal student loan system ensures that those pursuing higher education are able to achieve the American dream without burdening them with debt they can never repay."
According to Rubio's office, the proposal has the backing of the United Negro College Fund, which has funded scholarships for African American students since 1944.
"I am excited to support a bill that would not only eliminate interest rates on student loans, but create a process that increases equity in our financial aid system and takes unforeseen financial circumstances that would affect a borrower's ability to repay their loan, regardless of income, into consideration," Dr. Michael Lomax, president and CEO of the UNCF, said.