A soon-to-be-proposed bill would drastically change the way federal student loan payments are made, automatically deducting from paychecks rather than leaving it to borrowers to make payments. The bill would also limit the amount of interest a loan can accrue.
Deducted payments would be capped at 15% of discretionary income — what’s leftover after the estimated cost of basic expenses, similarly to the new Income-Based Repayment plan (IBR). Now, people have to apply to be enrolled in IBR, and many who would be eligible for and could benefit greatly from the reduced monthly payments it allows, don’t know that it’s available to them.
The automatic deductions would fix that problem, and ensure that nobody is stuck paying more each month than they have to. A similar system has worked quite well in the U.K., with only 2% of people unable to make their monthly payments, Bloomberg reported. With U.S. default rates rising steadily and raising fears of a new financial bubble, this insurance is definitely appealing.
Automatic deductions would also eliminate the need for middlemen collection agencies, the cost of which is reflected in fees that can account for up to 25% of a borrower’s balance.
Perhaps the best thing about the bill is that it would cap the total interest at 50% of a loan’s original value. Interest can be the most stressful thing about any kind of debt, and is the biggest reason for borrowers to make bigger payments than they can afford and end up struggling financially. With interest reigned in and limited, borrowers can pay only what they can afford each month and not worry if it takes them a long time to chip away at the balance of their debt.
The interest cap would mean that even if someone doesn’t make very much money at all they’d be able to pay off their loans eventually, and not watch them balloon out of control.
Now for the downsides: in order to offset the cost of capping interest, the bill would eliminate IBR programs that forgive remaining loan balances after 20 years, public service programs that forgive balances after 10 years, and the subsidies that prevent interest from accruing while a student is still enrolled in school.
There are some serious upsides to this bill: the interest cap would be a godsend and elimination of costly middlemen is always a good idea. It will be impossible to really weigh those against the elimination of the subsidies and forgiveness programs, which will likely face Democratic opposition, until the bill is introduced and all of the details and caveats laid out.
Wisconsin Republican Representative Tom Petri plans to introduce the bill as soon as this week, according to Bloomberg.