Will Congress finally tackle student loan debt?

We have written about the mounting problem of student loan debt on our Atlanta bankruptcy blog on multiple occasions, detailing the many issues that are having serious effects on borrowers in Georgia and throughout the country. In those posts, we have bemoaned the lack of a federal response to the growing student debt load and the inability of borrowers to pay off their debt. However, that may be changing in the near future.

It has been reported that Tom Petri, a U.S. Representative from Wisconsin, plans to introduce a bill which will overhaul the federal government’s system of collecting student loan payments from borrowers. Under Petri’s plan, which is modeled on successful collection processes in the U.K. and Australia, the government would set up automatic withdrawals from borrowers’ paychecks. Those withdrawals would not be permitted to exceed 15 percent of the debtor’s income after accounting for basic living expenses.

Currently, the government uses private debt-collection companies to collect past-due student loan payments, which can add as much as 25 percent to borrowers’ student loan payments in fees and other costs. There is an income-based repayment plan in place, but many borrowers are either unaware of it or are intimidated by the complication application process. Under the new plan, payments would be automatically based on income with no action required from the borrower.

The bill would also limit interest rates and cap the total amounts of interest that borrowers would pay over the lifetime of their loans. If approved, it will only impact new loans.

There is one downside to the bill. In order to fund the capping of interests, the bill would eliminate income-based programs that forgive loans after 20 or 25 years, or after 10 years for those that enter public service professions. It would also eliminate the ability of low-income borrowers to halt the accrual of interest while they are in school. With those negative aspects, it is unknown whether the bill will be successful. However, it is promising that members of Congress are aware of and working on the problem, at the very least.

Source: Bloomberg, “Student-Loan Collection Targeted for Overhaul in Congress,” John Hechinger, Dec. 3, 2012