Congress, to overhaul the system of debt collection for the outstanding $1 trillion debt on student loans. Initial studies indicate that they are to replace the current system with automatic withdrawals from the borrower’s paycheck once the loan hits maturity. Through this, the economy should no longer be as much bugged down by the loans as it is now.
The suggestion was initially made by Wisconsin Representative Tom Petri who plans to submit legislation requiring employers to withhold student loan payments in a manner similar to taxes. Petri has come to the decision of drafting this bill after millions of American express their concern for the growing student loans. At present, student loans exceed credit card debt, which makes it even more alarming.
Based on the new collection system that Petri proposed, the government would have to do away with debt collection agencies who have reportedly made harassing phone calls to borrowers. It would also lower the charges and interest rate to 15 percent. Remember that the current system adds as much as 25 percent to the borrowers’ loan balances. This makes defaulted university graduates fall even deeper into the debt hole.
How does the New System Work?
According to the bill passed, the new collection system would work just like bad credit loans wherein the payment will be automatically taken from the borrower’s paycheck. This has been closely mimicked form the student debt collection system currently implemented in New Zealand, Australia and the UK.
Under this new system, borrowers will no longer need to negotiate with collectors. The task of collection will be given to the Education Department with the assistance coming from the Internal Revenue Service.
Why did the Old Collection System Fail?
In the current system of student loans, borrowers need to be enrolled in repayment programs that are income-based. However, most of the borrowers do not know of this fact because they lack the proper education. Collection agencies do not inform them because if more borrowers would default, that would mean better business.
As a result of this lack of information drive, about 5 million borrowers are said to be in default. This means that they have not paid their debts for at least 270 days and that would account for $8billion lost in loan payments alone.
But with the new system currently in review, the government aims to cut the default rate by as much as 98 percent. This is because using the automatic payroll withholding, there will be an expected 98 percent improvement in collections. The Education Department, which will be given this responsibility, already has the power to seize a part of wages, Social Security payments and tax refunds from borrowers in order to collect on student loans. This power can be exercised even without a court order.