Dramatic New Plan For Student Loan Debt Repayment
December 4, 2012

As early as this week, Representative Tom Petri of Wisconsin plans to introduce a bill to radically change the way the federal government collects student loan debt. In the proposed new system, student loan debt repayments would be automatically deducted from borrowers’ paychecks just like taxes. The deducted amounts would be based on the borrower’s income, specifically, 15% of discretionary income, which sounds a lot like the current federal Income-Based Repayment plan. This method of collecting student loan debt repayment, though a drastic change from the current U.S. method, bears a lot of similarity to the collection methods instituted in the UK and Australia.

Elimination of Loan Servicers

One of the biggest complaints about student loan debt repayment is that dealing with loan servicers is nightmarish. Consumers often find it difficult to even speak with a servicer empowered to assist them, let alone get any usable information out of them. Consumers continually find it extremely difficult to figure out refinancing issues and access to repayment plans and they are frequently surprised by their loan going into default when they believed they were making good-faith partial payments. If loan repayments were automatically deducted from borrowers’ paychecks, all of these servicing issues and the accompanying headache would disappear. Also, all borrowers would be automatically placed on a plan with their debt repayments based on income, which would eliminate the borrower awareness issue surrounding Income-Based Repayment.

Elimination of Collection Agencies

Last year the government spent $1.4 billion paying collection agencies and other groups to track down defaulted borrowers and make them pay up. As the number of student loan defaults continues to grow, we can expect the sum spent on recovering the defaulted value to steadily climb in parallel. When borrowers go into default, it destroys their credit and with an 86% recovery rate, they can bet they’ll end up paying the amount owed in its entirety anyways. Furthermore, two to the top reasons that people go into default are: a lack of awareness of how they can avoid it and the troubling servicing problems referenced above. All of this would go away under the new system: it would be much more difficult to default on a loan and that $1.4 billion could be put to better use.

The Downside

While the bill calls for a cap on student loan interest rates, it also calls for the elimination of some student loan subsidies as well as any eventual possibility of loan forgiveness down the road. These are admittedly some pretty serious downsides to the new plan, but this is an important conversation and it’s exciting to see the debate. It would be really helpful to see some more information about the numbers involved in the representative’s bill, perhaps in the form of an infographic; infographs are an invaluable way to communicate complex material in a readable and understandable format. With a well-made infographic it would be easier to put the pros and cons of the bill into perspective.

It’s uplifting to see this kind of change on the horizon. In the meantime, borrowers struggling with debt and facing the loan servicing and/or default issues discussed here today, need to know they aren’t alone; there are student aid organizations ready to help borrowers manage student debt.