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December 06, 2012 4:15 PM New Law Proposed Would Automatically Withdraw Student Loan Payments

By Daniel Luzer

Apparently Congress may attempt to tackle student loans or, more specifically, how America collects payments on its student loans. According to an article by John Hechinger at Bloomberg:

Congress will consider overhauling debt collection in the $100 billion-a-year U.S. student loan program, replacing it with automatic withdrawals from borrowers’ paychecks tied to their income — a system used in the U.K.
Legislation that Wisconsin Republican Representative Tom Petri plans to introduce as soon as this week would require employers to withhold payments from wages in the same way they do taxes. Payments would be capped at 15 percent of borrowers’ income after basic living expenses.

This could, as Hechinger explains, ultimately save money because under the direct withdrawal plan the U.S. Department of Education would no longer need to hire collection agencies to generate the money from former students. The current deb collection system is, as Stephen Burd explained in the magazine’s September/October issue, complicated and inefficient:

The debt-collecting companies can be downright scary. The federal government contracts with twenty-three such firms to collect on loans in default, paying the industry hundreds of millions of dollars annually in fees and commissions. Well-documented horror stories abound about how these collection agencies routinely fail to inform borrowers about repayment options to which they are entitled, demand excessive payments, refuse to provide documentation to back up their claims, call at all hours, harass borrowers’ friends, family members, and neighbors, and generally lash out in abusive and threatening ways.

Under Petri’s plan student loan payments (up to 15 percent of income) would be withdrawn automatically from borrowers’ paychecks. The Education Department would manage the automatic payments with the Internal Revenue Service.

The Petri law would create a system similar to that now used in the United Kingdom, Australia, and New Zealand, which began the automatic withdrawal plans when they forced students to pay tuition beginning in the 1980s

Hechinger explains that the Petri law would cap interest at 50 percent of the loan’s value at graduation. Other provisions of the law, however, would allow loans to accrue interest while the borrower is still studying (under current policy interest starts only at graduation) and end policies that forgive federal student loans entirely after 20 or 25 years or for people employed in some public service jobs.

The Petri plan would apply only to new student loans issued.

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer

Comments

  • electedface on December 07, 2012 2:32 PM:

    Student debt is stunting the growth of the economy. Student loans have increased by 275% over past decade. As the next generation graduates from college, they are plagued by insurmountable debt that places demands on their income, limiting their ability to spend their earnings in ways that stimulate the economy.