House Bill Could Kill Private Student Loan Debt Collection

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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.

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Posted in Collection Laws and Regulations, Department of Education Collections, Featured Post, Government Receivables, Student Loan Collections .

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  • avatar Jeffrey Weinstein says:

    I can understand that this is terrible news for any collection agency owner who has a significant portion of their revenues coming from student loan collections. However, it DOES make sense from the government standpoint.

    Wages taken directly from paychecks do not have as much of a chance to become delinquent in the first place. This should significantly reduce the default rate from the get-go. It will mean significant savings for the taxpayers, and maybe even for borrowers.

    For the existing student loan agencies, there should still be a backlog of uncollected loans to collect on. And, they can shift their focus to other markets. It is not like there is a shortage of bad debt out there.

  • avatar BHA LLC says:

    Why does the government get to take their money on a loan from someones paycheck, without a judgment or due process.

    Why arent all creditors allowed this same right?

    it always amzes me how we give up our rights with out a whimper in this country.
    with all the talk about our freedoms….I for one do not think the government has the right to arbitrarily add automatic dedustions from debtors paychecks without a court ordered judgment.
    call your congressman or woman and demand they wote no

    (and for the record i do nto collect student loans nor am i shilling for someone who does)

  • avatar webninja says:

    Why should the gov’t be able to garnish wages if student loans aren’t dischargeable? If student loans are to be treated as a special category, then stop trying to strong arm collection tactics against underemployed borrowers who have no bankruptcy recourse.

  • avatar erp says:

    Our gov’t at work. No one realizes how long it will take consumers to pay off a 10 ,20, $30,000 loans back at a payment of $15.00 per paycheck. But then again why would the Gov’t care. Just keep giving money away. Let the debtors get goods and services, education and not have to pay it back. Socialism here we come!

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