Legislation & Lobbying

US Lawmaker Is Crafting Plan to Withhold Student Loan Payments from Paychecks, Just Like Income Tax

  • Print.

As overall student loan debt nears the $1 trillion mark and some observers worry that it could be the next debt bubble to burst, at least one lawmaker is suggesting a new system be implemented to ensure that those who can afford to repay do repay.

Instead of leaving it up to individuals to make federal student loan payments along with their other bills, proposed legislation that a ongressman from Wisconsin plans to introduce next week would require employers to withhold the amount due from the debtors’ checks just like income tax, according to Bloomberg.

If the bill is approved, the required student loan payment deductions from individuals’ salaries would only apply to new loans issued after the law takes effect, not existing student loan debt, a spokesman for U.S. Rep. Tom Petri tells the ABA Journal. However, it may be possible for existing student debt holders to voluntarily join the new payment program, which could be more beneficial to some than other options.

Petri’s planned bill would centralize and automate the student loan payments under government oversight and also help those who qualify for reduced payments but aren’t aware of the option or can’t get collection agencies to cooperate, the Bloomberg article explains. His plan is intended both to ensure the correct amount is withheld and eliminate expensive collection costs that are passed along to debtors when private agencies are in charge of pursuing those who don’t pay.

Other benefits to the borrower would include a lifetime 50 percent cap on interest charged. Thus, for an individual who graduated with a $100,000 student loan balance, no more than $50,000 in interest could be charged. A draft information sheet (PDF) provided to the ABA Journal by Petri’s office gives further details.

As the bill is currently envisioned, payments would be determined through an income-based formula that would withhold 15 percent of the borrower’s gross income, with some adjustments. However, current options such as forbearance (loan payments are put on hold during a period of economic hardship for the borrower) and forgiveness of the remaining balance after a borrower who can’t afford to pay off the entire loan has made required payments for 20 years, would be eliminated.

Meanwhile, ensuring that student loan payments are made by deducting the amounts due from individuals’ paychecks would, of course, also benefit the U.S. economy.

“This doesn’t mean leaving taxpayers on the hook if a student borrows too much—everyone would still pay back what they borrow under this system,” Petri said in an email to Bloomberg. “It does mean providing much stronger protections against the kind of financial ruin that is all too prevalent in our current system.”

Petri is currently the only lawmaker planning to introduce the bill, and it is expected that there will be some changes in the proposed legislation once other lawmakers weigh in with their views.

Related coverage:

ABA Journal: “The Law School Bubble: How Long Will It Last if Law Grads Can’t Pay Bills?”

ABAJournal.com: “Law Grads ‘Indentured Servants’ to Loans, Law Prof Says; Law School Crisis a Symptom of Weak Economy”

CBS News: “Student loan debt nears $1 trillion: Is it the new subprime?”

Roll Call: “Petri Preparing Plan to Overhaul Federal Student Loan System”

Give us feedback, share a story tip or update, or report an error.