House Bill Could Kill Private Student Loan Debt Collection

A bill to be introduced possibly this week would require employers to withhold student loan payments from the paychecks of workers. The withholding would be subject to limits based on income. The reporter notes that it may eliminate the need for private debt collection agencies currently used by the Department of Education.

According to a story running on Bloomberg Tuesday, U.S. Representative Tom Petri (R-Wis.) has said that he may introduce the bill as early as this week.

The main provision of the bill would require companies to withhold federal direct student loan payments from their employees’ wages, as is the common practice with income and Social Security taxes. The amount withheld from each paycheck would be capped at 15 percent of income “after basic living expenses.” The Department of Education (ED) and the IRS would manage the system.

The system would be similar to those used in the U.K., Australia, and New Zealand. The withholding scheme is possible now that most student loans are direct government loans, a provision of the healthcare reform package signed into law two years ago.

“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,” Petri said in a statement to Bloomberg. “It does mean providing much stronger protections against the kind of financial ruin that is all too prevalent in our current system.”

Other key provisions of the bill include a new interest rate that would be tied to Treasury rates (which are currently at all-time lows). Additionally, total interest paid over the life of the loan would be limited to 50 percent of the face value of the loan. But those caps would cost ED money.

To compensate for the lost interest revenue, the bill calls for the elimination of certain subsidies that are aimed at helping low-income students and their families.

The bill’s prospects are unknown at this point. Bloomberg noted that Democrats may oppose the ending of low-income subsidies. Petri’s office told the news outlet that it doesn’t expect the bill to be considered before the new Congress convenes next year.

The assertion that the bill may end the ED private student loan debt collection contract might also be premature. There is no indication what the new plan would mean for student loan borrowers that are unemployed with assets or those that receive their wages on a 1099 basis or through a similar manner that does not include tax withholding.

Bloomberg’s piece is also a follow up of sorts on a feature article published earlier in the year that targeted the practices of and commissions paid to private student loan collectors.