Defaulting on a student loan can be a hellish experience, even if the loan is guaranteed by or directly from the federal government. The government hires private collection companies to collect on its defaulted loans, which according to Bloomberg allows them to gain up to $1 billion in collection fees. Private collection companies are not known for their compassion, and they routinely neglect to tell debtors that they might be eligible for the government’s Income-Based Repayment (IBR) program, which would probably solve their debt problems. Switching to IBR also deprives the debt collector of any fees. Legislators in Congress, seeing these commissions, want to cut out the middle-men. One representative from Wisconsin, Tom Petri, has proposed a bill that just might do that. Here are a few things it would do if enacted into law.
- The primary change in the proposed bill is that instead of debtors sending checks or setting up direct deposits with the loan servicers, their debt payments would be withheld from their paychecks by their employers, much like how Social Security works.
- However, the government would not be able to wipe out debtors’ paychecks if they’d borrowed too much. The government would cap its withholding at 15 percent of debtors’ discretionary incomes.
- The bill would also eliminate IBR prospectively, including Income-Contingent Repayment, which cancels loans after ten years for borrowers who work in public service occupations and assesses no income tax on the forgiven portion. Without IBR no loans would be canceled, even after 20 years. This provision might hamper the bill in Congress.
- Even though debtors would pay 15 percent of their discretionary incomes, the bill limits the amount of unpaid interest that can accrue to one-half of the principal at the time the loan entered repayment.
- As the Bloomberg article implies, all parties can save significant money if the bill is passed. In 2011, five million borrowers had loans in default (no payments in the previous 270 days), which amounted to $67 billion. Presumably, if these borrowers were on IBR or the proposed withholding system, they would have avoided default, and the government would not have spent $1 billion in fees to collectors trying to recover them.
Student loan debt, whether government-backed or from private lenders, is a growing problem for Americans. If you have high amounts in student loans, talking to a Las Vegas bankruptcy lawyer can still help. Filing a Chapter 7 bankruptcy can free up income for other expenses and nondischargeable student loans.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney for a free initial consultation. Call us at 1-702-880-5554 to set up your free consultation.