Student-loan debt collection targeted for overhaul in bill

, Bloomberg

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Sby John Hechinger

Congress will consider overhauling debt collection in the $100 billion-a-year U.S. student loan program, replacing it with automatic withdrawals from borrowers' paychecks tied to their income — a system used in the U.K.

Legislation that Wisconsin Republican Representative Tom Petri plans to introduce as soon as this week would require employers to withhold payments from wages in the same way they do taxes. Payments would be capped at 15 percent of borrowers' income after basic living expenses.

The bill follows growing concern about the burden of $1 trillion in outstanding student loans, which now exceed credit- card debt. Under the new system, the government would no longer need to hire private debt-collection companies and charge fees that add as much as 25 percent to borrowers' loan balances, leaving defaulted former students even deeper in the hole.

"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 an e-mail. "It does mean providing much stronger protections against the kind of financial ruin that is all too prevalent in our current system."

The plan would resemble those in the U.K., Australia and New Zealand. Since the money would be withdrawn automatically and tied to income, borrowers would no longer have to negotiate with collectors and loan-servicing companies, which often offer a confusing array of deferral and forbearance options after a job loss or illness. The Education Department would manage the withdrawals, with help from the Internal Revenue Service.

Election Issue

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.

In the election campaign, President Barack Obama touted the income-based program as a way to make it easier for students to pay back their loans, while unsuccessful challenger Mitt Romney said it encourages students to take on more debt.

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.

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