Democratic Senators Announce Ambitious Student Debt Agenda

Some of the plans include boosting grant aid and providing bankruptcy relief for student loans.

Sen. Dick Durbin, D-Ill., speaks during a news conference Thursday, Dec. 12, 2013, on Capitol Hill in Washington, D.C.
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A group of Democratic senators Thursday announced a package of bills aimed at lowering student loan debt, including measures that would pump more money into grant aid, restore bankruptcy relief to student loans and require colleges and universities to be held accountable for defaulted student loans.

[READ: Student Loan Default Rates Rise for Sixth Year]

Last week, the same group of lawmakers – Sens. Dick Durbin, D-Ill., Jack Reed, D-R.I., and Elizabeth Warren, D-Mass. – along with Sen. Barbara Boxer, D-Calif., introduced the Student Loan Borrower Bill of Rights. That legislation aims to ensure struggling borrowers are better informed and treated fairly by loan servicers and colleges, and that they understand all available repayment options.

"Inequality in this country is growing, and if we don't fix our higher education system, opportunities will shrink for all but the most privileged," Warren said in a call with reporters Thursday. "Education is our best chance to level the playing field; otherwise the divide between the wealthy and everyone else will just widen."

Building off that legislation, the Senate group announced plans Thursday to introduce three more bills that respectively would create a $1 billion state-federal partnership to increase grant aid, require colleges and universities with high default rates to repay a percentage of those defaulted loans and give the most struggling borrowers the option to discharge their debt through bankruptcy.

"None of us has to explain how badly broken the current system is," Warren said. "Our kids are getting crushed by student loan debt. So the price has gone up, the kids take on more debt and everyone is in trouble following this. We have to do better."

Ethan Senack, higher education associate for the U.S. Public Interest Research Group -- an organization with student members at 75 college campuses -- said in a statement that more lawmakers need to make a "real commitment to higher education."

"Right now, young people are trapped between needing a college degree and burying themselves in debt to earn it," Senack said. "As we look forward into 2014, there is tremendous potential to make a difference for students and families that are struggling to afford college."

Reed described his proposal to expand grant aid as a "Race to the Top for higher education." But unlike the Race to the Top federal program aimed at K-12 education, all states would be eligible under the proposal.

"Particularly low-income students, if they have grants, they don't have to go into the much more expensive borrowing, where we run into these problems," Reed said. 

[REPORT: Student Loan Companies Profit From Borrower Confusion]

The group's more ambitious Protect Student Borrowers Act would hold colleges and universities accountable for student loan default by requiring schools to repay some percentage of defaulted loans.

"They will have to have skin in the game," Reed said. "They will have to make financial judgments based upon how well-informed and how reliable their graduates are in terms of paying back their student loans. It provides incentives for institutions to take proactive steps to ease student loan debt."

Under that proposal, institutions with more than 25 percent of students taking out loans would be subject to scrutiny. If those institutions have a default rate of below 15 percent, no risk-sharing would be required. But once they cross that threshold, they would be required to contribute funding toward the total amount of defaulted loans.

If the institution's default rate is between 15 percent and 20 percent, Reed said, the college would be required to pay 5 percent of all the defaulted loans.

Not putting colleges completely on the hook for repaying defaulted loans protects them from instances in which students might not be actively looking for employment. But at the same time, holding institutions at least partially accountable helps protect borrowers, says Mike Cagney, co-founder and CEO of the student loan refinancing company Social Finance, Inc.