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New Attempt to Streamline Financial Aid

At a time when two-thirds of college graduates leave school with student-loan debt averaging $26,600 and a discouraging job market, policymakers and scholars are eager to find ways to improve the financial aid system.

The latest attempt comes in the form of a bill sponsored by U.S. Rep. Tom Petri, R-Wisc. The Earnings Contingent Education Loans Act (ExCEL) aims to streamline the federal student loan program by allowing borrowers to repay loans based on their income. It was introduced Wednesday, after first being introduced in December.

To make it easier for students to meet their obligation, the legislation would authorize payments through payroll withholding, just as employers withhold payments along with federal and state taxes. "If you lose your job, your payments stop automatically because the withholding stops, giving you a chance to get back on your feet," said Petri in a press release.

The proposed change would limit a borrower's obligation to 15 percent of his or her income, above an exemption amount for living expenses, and the rate would be progressive.

The current system has income-contigent repayment options, but the congressman contends it is too complicated and that his approach is simpler.

Under the ExCEL bill provisions, interest during repayment would not compound. The interest rate could be set based on the market at the time of the loan and fixed for the life of the loan. It caps the total amount of interest anyone can ever accrue on a loan at 50 percent of the loan amount.

Similar income-contigent repayment programs have been successful in the United Kingdom, Australia and New Zealand, according to Petri.

In other efforts, Rep. Karen Bass, D-Calif., introduced The Student Loan Fairness Act of 2013 last month. Her proposal would require borrowers to make 10 years of payments at 10 percent of their discretionary income, after which, their remaining debt would be forgiven. Today Rep. Bass will join student advocacy groups at an event on Capitol Hill to highlight legislative solutions to rein in student loan debt, which, one year ago, crossed $1 trillion dollars in the United States

Last fall, researchers from Education Sector released a report, Affordable at Last: A New Student Loan System that suggested the government abandon the current rigid and punitive system in favor of one that is more flexible and forgiving and allows students to pay back loans on terms they can actually afford.

In its new budget, the Obama administration is proposing switching student loan interest rates from the current predictable, fixed-rate system to a market-based rate at the time of the loan.

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