APA Tracks Federal
Student Loan Reform
By Alice P. Jacobsohn, Esq.
APA's Government Relations Task Force is watching closely for student loan reform legislation because of impacts on wage garnishments and associated administrative requirements. This past summer, the APA met with legislative staff from the office of Senator Bob Corker (R-Tenn.) to discuss streamlining the repayment process for federal student loans. A half dozen or more bills regarding federal student loans also are floating around Washington, D.C., which APA is tracking.
Deciding Federal Student Loan Policy
The Higher Education Act of 1965, as amended, is the law governing federal student loans and repayment. The law was set to expire in 2013 and was extended until the end of 2016 while Congress works on reauthorization. The last comprehensive rewrite of the act was in 2008 under President George W. Bush.
At this time, consensus on revisions does not exist in Congress. Some of the proposals are directed at relief through employers helping their employees to pay off their loans, and some are geared directly toward helping employees manage their loans, each with a different management process.
The problem for reform legislation is accommodating the different interests of the Democratic and Republican parties. Senator Lamar Alexander (R-Tenn.), Chair of the Senate Committee on Health, Education, Labor, and Pensions, stated that he wants to scale back federal regulations on colleges and streamline student aid programs. Other Republicans are pushing for reduced federal involvement in financing students with an assumption that the private sector will play a greater role. Conversely, Democrats want the federal government to engage further by forcing colleges to reduce their costs and directly assist students in paying off their loans.
Analysis of Different Approaches
The Student Loan Employment Benefits Act (H.R. 5382), introduced on June 3 by Representative Steve Israel (D-N.Y.), and the Higher Education Loan Payments (HELP) for Students and Parents Act (H.R. 5191), introduced on May 11 by Representative Bob Dold (R-Ill.), are focused on employers. The first bill would offer pretax relief by not adding employer-paid student loan payments to the employee's gross income. The second offers employers incentives if they establish student loan repayment programs or qualified tuition reimbursements. This includes pretax relief for employer payments from gross income and a tax credit for employers based on the amount paid. The pretax benefit and tax credit also apply to employer payments to a college fund for the children of employees.
The Dynamic Repayment Act (S. 2456), introduced on January 20 by Senators Mark Warner (D-Va.) and Marco Rubio (R-Fla.), uses wage withholding as a means of repayment. Bill provisions include consolidating all federal student loans into one loan program called the Income Dependent Education Assistance (IDEA) Loan Program. Any loans not fully paid after 20 or 30 years are forgiven if the borrower consistently makes payments under the IDEA Loan Repayment Program. However, the bill opens full access to the national directory of new hires to the U.S. Department of Education and U.S. Department of Health. This is controversial because the federal Office of Child Support Enforcement would prefer that other agencies not have such access.
Corker's bill, not yet introduced, takes an entirely different approach. Employees owing student loans identify themselves through a revised federal Form W-4. Employers withhold wages based on the total amount of the loan. The percentage of withholding is calculated by imposing 1% for every $10,000 owed, rounded to the nearest 0.5% or $5,000. The bill places the burden to create procedures and instructions on the IRS, which includes withholding requirements, estimated quarterly payments, and an annual reconciliation process. A loan is forgiven after 25 years of payments or when the borrower has paid an amount equal to the total owed multiplied by 1.75.
Bill provisions also include employers paying the withheld student loan payments to the IRS in the same way as they pay income taxes. Over and underpayments are reconciled through an employee's income tax return and not through the employer. The IRS, not the employer, transfers the loan portion to the U.S. Department of Education.
Corker's bill seems like a much easier approach for employers. However, the total amount of the loan offer is only $50,000 for all four years of college and none for graduate school education. This is intended to push financial needs to the private sector. For payroll purposes, if private sector loans increase, so will the potential for wage garnishments from creditors. So, in the long run, Corker's legislation may not be that helpful.
Passage of student loan reform measures is not likely in 2016. Congress still needs to debate the direction of this legislation, which will require further discussion with stakeholders such as the APA.
Alice P. Jacobsohn, Esq., is Senior Manager of Government Relations for the APA.