Archive for December 10th, 2012

December 10, 2012

Proposed bill would improve student loan debt collection

by Grace

English: Day 3 of the protest Occupy Wall Stre...

Under a proposed bill sponsored by Wisconsin Representative Tom Petri, the federal government would begin to garnish wages of individuals whose student loans are in default.  This move would save about $1 billion in commissions now paid annually to private debt collectors.

… Payments would be capped at 15 percent of borrowers’ income after basic living expenses.

The proposed program is intended to force qualifying debtors to participate in the existing Income-Based Repayment Plan (IBR).

In the U.S., borrowers currently must ask to be enrolled in income-based repayment programs and many don’t because they don’t know about them or collections companies don’t tell them….

Last year, 5 million borrowers were in default — generally meaning they had failed to make payments for at least 270 days — on $67 billion in loans, more than twice the amount in 2003. Through the new system, based on experience in the U.K., 98 percent of borrowers could meet their loan payments through automatic payroll withholding, according to Petri’s office.

The Education Department already has the power, without a court order, to seize a part of wages, tax refunds and Social Security payments to collect on student loans. There is no statute of limitation.

New law would result in lower student loan interest rates under our current economic scenario.

The legislation would tie the interest charged to Treasury market rates. Currently, students in the most popular program pay as much as 6.8 percent.

Problem of ballooning debt balances would be curbed.

In another boon to borrowers, the plan would 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.

Student loans, which can rarely be canceled through bankruptcy, can balloon to several times their original size, after adding interest and collection fees.

Current loan subsidies and loan forgiveness features would be eliminated.

Low-income borrowers would no longer be excused from accruing interest when they are in college. 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. The new system would apply only to new loans.

While taxpayers might save money by not picking up the tab for forgiven loan balances under the provisions of this bill, cutting loan subsidies may cost more money since it’s unclear if subsidized loans are a moneymaker for the federal government.

Political concerns

While Petri’s bill makes sense, the elimination of the low-income subsidies and forgiveness could face opposition from Democrats, said Sandy Baum, a senior fellow at the George Washington University School of Education. Republicans may be concerned that taxpayers won’t be repaid if more borrowers join the income-based program, she said.

Congress is expected to consider the bill early next year.

%d bloggers like this: