With student loan debt in the U.S. surpassing the $1 trillion mark this summer, a new bill that’s being introduced would streamline the repayment process – but it might not be as good a deal as it sounds. It would require automatic deductions that look and feel too much like garnishments from former students’ paychecks. Referred to as payroll deductions, the fact that consumers would have no say is what has many concerned. They would have to agree to those terms or else, find another way to finance their college educations.
Success in UK
This system is already in place in other countries, including the UK and they say it works well, but can it translate well in the U.S? It’s important to keep in mind the lion’s share of student loan debt is owed to the government, so that could be a determining factor in whether the bill actually becomes law. Wisconsin Representative Tom Petri plans to introduce the idea to Congress as soon as this week, reports Bloomberg.
So why now? For lawmakers, it’s simple. Hiring collection agencies is costly. If the government can bypass that in its entirety and basically become its own debt collector and judge who signs garnishment orders, it doesn’t have to go through those pesky laws like consumers do. One provision in the bill is that a 15% ceiling, after “basic” living expenses have been taken into consideration, would be the threshold. Petri continues,
This doesn’t mean leaving taxpayers on the hook if a student borrows too much – everyone would still pay back what they borrow under this system. It does mean providing much stronger protections against the kind of financial ruin that is all too prevalent in our current system.
On the other hand, the UK has had great success with its efforts; in fact, 98% of student loan dollars are repaid. Proponents insist it would not just save the government billions by collecting the debts directly, it would also remove all the red tape currently involved in applying for existing income-related payment plans or deferral programs.
Not only that, but along with the income-related cap on payments, the bill would also tie the interest rates to Treasury market rates and would cap interest owed at 50% of a loan’s face value at the time of graduation. There’s a certain simplicity to it and would be a great solution for those who graduate college, but are unable to find jobs in their fields and are forced to take part time or lower paying jobs. It would provide a longer pay back period.
One more consideration that could be what kills this bill before it’s off to a running start is the removal of some subsidies designed to help low income students. These borrowers would lose the option of bypassing accruing interest while they’re actually in college. This, and other programs that forgive loans after two decades or sooner, would be removed from the equation. It should also be noted that the bill, if it passes into law, won’t be retroactive, so any current loans won’t be affected.
The bottom line is student loan debt has quickly become a huge financial burden and has long since passed credit card debt. The government acting as a debt collector is a little disturbing for some, though – especially in this context. There’s no denying there are a lot of great reasons why something like this could work; it’s those less than ideal dynamics that have some worried. Even if the government does take over collecting old debt, it won’t likely be as bad as what some college graduates report they go through with abusive debt collectors.
It’s been suggested the Education Department oversee the withdrawals in order to keep in streamlined with less confusion. It would also be easier for borrowers to renegotiate the terms of their loans if the system in its entirety didn’t become overburdened with government agencies. The IRS would be able to kick in assistance too, according to Petri.
Last year, 5 million borrowers were in default on their student loans. This is generally described as those who have no paid for at least 270 days. Those default accounts total more than $67 billion, an increase of two times of what it was in 2007. Since the Education Department already has exclusive rights to seek legal remedies for garnishments, it makes sense the law would simply be another tool for collection efforts.
In the election campaign, President Barack Obama touted the income-based program as a way to make it easier for students to pay back their loans, while unsuccessful challenger Mitt Romney said it encourages students to take on more debt. Where do you stand on this issue? Is it a good idea or are we extending too many liberties to the government?