Student-Loan Collections Could Be Subject to Drastic Overhaul
Bloomberg reports that 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 similar to those sued in the U.K., New Zealand and Australia. The bill, proposed by Wisconsin Republican Representative Tom Petri, would require employers to withhold payments from wages in the same way they do taxes, capping payments at 15 percent of borrowers’ income after basic living expenses. The bill follows growing concern about the burden of $1 trillion in outstanding student loans, which now exceed credit- card debt. Under the new system, the government would no longer need to hire thugs to collect, and I personally have found these student loan debt collectors to be quite formidable indeed. Never mind that the debt collectors fees can add up to 25 percent to borrowers’ loan balances, leaving defaulted former students even deeper in the hole. This new process would streamline the confusing process of getting on a reduced payment plan if a borrower is un or under-employed, but would still provide for repayment of the student debt.
This new law would also cap interest owed at 50 percent of a loan’s face value at the time of graduation, giving a break to lower-income borrowers who take longer than the standard 10 years to repay loans. For a student who took out $27,000 in loans, about the national average for a graduate of a four-year program who borrowed, the interest couldn’t exceed $13,500. But here’s the rub. To offset the cost of capping interest, the bill would eliminate some student-loan subsidies that help low-income families and borrowers. Actually, some of those subsidies are being eliminated no matter what a topic I blogged about last year.
But these additional proposed subsidy reductions are much more far reaching. For example, for new loans, low-income borrowers would no longer be excused from accruing interest when they are in college, which worries me. The bill would also eliminate income-based programs that forgive loans entirely after 20 or 25 years -- and, after 10 years, for those who enter public-service careers, such as teaching or law enforcement. This seems like it might put lower income people further behind the 8-ball that they are already. Thoughts?