Senator Suggests Taking Student Loan Payments Directly from Paychecks

Inside Subprime: Feb 11, 2019

By Lindsay Frankel

In a speech highlighting potential student loan reform, Tennessee Senator Lamar Alexander proposed withholding student loan payments from a borrower’s paycheck, similar to how federal payroll taxes are collected.

Alexander, who is also the chair of the Senate’s Committee on Health, Education Labor and Pensions, wants Congress to reauthorize the Higher Education Act before 2020, and views an overhaul of the student loan repayment system as a priority. The Federal Student Aid office currently offers nine repayment plans, and Alexander believes this new option would be more efficient, ensuring borrowers “would never have to pay more than 10% of their income that is not needed for necessities.”

“If a borrower loses their job or does not make enough, they would not pay anything and it would not hurt their credit score,” he added. “The monthly payment would be automatically withheld from borrowers’ paychecks, just like federal taxes.

Proponents of the solution argue that it would help borrowers avoid default, even during times of financial hardship. Under the plan, borrowers could choose a term of 10 years with payments withdrawn from their paychecks or put 10% of their discretionary income towards student loan debt.

“This new option should end the nightmare that many students have of never being able to afford their student-loan payments,” Alexander said.

While student loan borrowers can already choose to make payments as a portion of their income, the overwhelming number of options, along with deceptive advice from consultants, can make selecting the appropriate repayment plan an arduous task. Supporters say the plan will ease the burden on borrowers, but consumer advocates argue that the idea prevents borrowers from making their own financial decisions.

Persis Yu, the director of the Student Loan Borrower Assistance Project at the National Consumer Law Center, said that even if a portion of the borrower’s income was protected for necessities, inconsistent income or financial emergencies could cause borrowers to struggle to cover their expenses with their student loan payments automatically withheld. Alexander’s proposal also doesn’t take into account the higher cost of living in certain regions. Borrowers should have the choice to prioritize food and shelter over their student loan payments, consumer advocates say.

Withholding income could lead to significant challenges for borrowers, as indicated by complaints from disabled borrowers to the Consumer Financial Protection Bureau. Those who had student loan payments withheld from their Social Security benefits struggled to cover their basic needs. But there’s also evidence that the proposed system could help borrowers avoid default – in Australia, which uses a similar system, borrowers rarely fail to pay back their loans. But Australia also has price maximums on public colleges and provides more affordable healthcare. Consumer advocates warn that such a repayment system may not translate well to the United States.

Seth Frotman, the former student loan ombudsman at the CFPB, also noted that Alexander’s proposal brings up additional concerns. Borrowers wouldn’t be able to discharge student loan debt in bankruptcy filings, for example. And Alexander’s plan doesn’t address that many borrowers have too much student loan debt to reasonably be able to manage with limited wealth.

“While forcing people to make their student-loan payment above all of the other financial challenges they have in their life might make the student-debt crisis look a little better on paper, it does nothing to solve the larger problem,” said Frotman.

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