Senators Marco Rubio, R-Fla.,and Mark Warner. D-Va., have introduced the Dynamic Repayment Act of 2014. The proposal would establish an income-contingent based repayment system that would require every borrower of a federal student loan to pay 10 percent of his monthly income upon graduation, and would garner those payments through paycheck withholding.
Student debt is a serious issue. Approximately 60 percent of students who earned a bachelor’s degree during the 2011-12 academic year left school more than $26,000 in debt. Total cumulative student loan debt now exceeds $1 trillion, which, as is often noted, is more than cumulative credit card debt.
But the Dynamic Repayment proposal would fail to drive down college costs over time, instead inviting inflation of tuition and fees. Universities would be able to continue increasing costs, and borrowers would be more likely to consider the payments a 10 percent tax on earnings upon graduation. And because borrowers wouldn’t be cutting the checks for their loan repayments themselves, they would be unlikely to internalize the cost of borrowing. The withholding provision also enshrines the federal role in lending. Moreover, individuals not filing a tax return would have an income-based repayment of zero, potentially disincentivizing work after graduation. Other potential unintended consequences of a 10 percent withholding might include an individual choosing not to take a promotion if it means higher pay, and hence, an increase in the amount they pay per month.
Rather than trying to figure out ways the federal government can manipulate debt repayment, policymakers should be pursuing policies that don’t lead to increasing college costs and don’t encourage even more borrowing.
One way they can do that is to limit the open spigot of federal student aid and pursue the types of structural reforms to the accreditation system that would allow innovation to flourish. Federal policymakers should end government sanctioning of accrediting agencies and allow any institution to accredit courses, decouple accreditation and federal funding, as proposals by Sen. Mike Lee and Rep. Ron DeSantis would do. Their proposals would allow states to establish flexible accreditation models that would infuse a level of customization in higher education that is currently impossible under the existing accreditation system. The Higher Education Reform and Opportunity Act—or HERO Act—would empower states to allow any entity to credential courses and pave the way for a more flexible college experience for students and make possible a dramatic reduction in college costs.