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New Student Loan Repayment Plan Proposed by Federal Government

  • Published: 2013-01-06 : The Golden Law Group.
  • Synopsis: U.S. government considering change to student loan repayment system hoping the move will reduce default rates while improving fairness in the system

Main Document

The U.S. is considering a change to the student loan repayment system that would make automatic withdrawals from borrowers' paychecks.

These days, it is nearly impossible to leave college without having taken out some student loans. Unfortunately, given the job market, finding a job to pay back those loans can seem like an equally daunting task.

The federal government is considering a change to the student loan repayment system, hoping that the move could reduce default rates while improving fairness in the system. The proposal, which is modeled after the loan repayment system in the United Kingdom, would make automatic withdrawals from borrowers' paychecks. Loan payments would be tied to borrowers' income levels, and would max out at 15 percent of income once basic living expenses are deducted.

The program would be administered by the U.S. Department of Education, meaning that private debt collectors could eventually be phased out of the student loan system altogether. The Education Department does have experience collecting on student loans - currently, the department is responsible for garnishing wages and government payments to repay defaulted federal student loans.

The change is intended to help former students deal with what can sometimes be staggering debt loads. Americans own more than $1 trillion in student loan debt. There is now more student debt than credit card debt in the United States.

An increasing number of borrowers are falling behind on their debt obligations. Loan defaults are more than twice as large now as they were in 2003. In 2011, approximately 5 million student loan borrowers in the United States were in default on their loans. Proponents of the new plan argue that approximately 98 percent of borrowers would be able to keep up with their payments if they could participate in an income-based automatic repayment program.

Repaying student loans

Unlike most debts, student loans are not dischargeable in bankruptcy. Therefore, it is important the borrowers be careful about taking out more loans than they can afford and making an effort to repay them once they are out of school.

If you have recently finished school, keeping the following tips in mind can help you stay on top of your loan payments:

  • Sign up for automatic payments. This way, you will not accidentally fall behind and risk late fees and credit score damage.
  • Avoid choosing the extended repayment plan. Although your monthly payments will be lower, you will end up paying a lot more in interest.
  • If you have more than one loan, focus on the one with the highest interest rate. You will end up paying less in the long term.

If you end up in financial trouble, do not wait to take action.

There are a number of options available for struggling debtors, including deferrals and income-based repayment. If you are also having problems other forms of debt, you may find it helpful to talk with a bankruptcy attorney who can help you explore debt relief options.

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Related Information:

  1. Discharging Student Loans and Bankruptcy - If a person filing for bankruptcy can prove undue hardship then student loans may be discharged by a bankruptcy court - (Published 2011-07-29).
  2. Student Loan Consolidation Program - Information on student loan consolidation programs including FFEL and Direct Loan consolidation as well as loan discharge for disability - (Published 2010-10-09).
  3. Student Loan Repayment Calculator and Information - Information on cancellation consolidation deferment and discharge of student loans including repayment calculator and income based repayment chart - (Published 2011-10-27).

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