According to a news article recently posted on the Collections and Credit Risk website, Congress may be reforming how they collect billions of dollars annually from students in the Federal Student Loan Program.
Collections for student loans may be replaced with automatic withdrawals from borrower’s pay checks linked to how much income they make. The model system being looked at is currently being used by the United Kingdom. In theory, this could mean that the feds no longer need to hire collection agencies to collect their debts, saving up to 25 percent of the loan balances that are charged by the collection agencies for collections. Legislation might be introduced as early as this week.
Collections Reform in a Nutshell
In a nutshell, the new system for collections would allow the government to collect up to 15 percent of the borrowers’ income after allowing for basic living expenses. The Internal Revenue Service (IRS) would assist the Education Department in managing the withdrawals. The IRS already has the power to garnish wages, tax refunds, and in some circumstances, Social Security funds, to collect on the student loans. Student loans are currently not eligible for discharge in bankruptcy cases and there is no statute of limitations.
Collections of Student Loans Part of Recent Election News
Collections of student loans has been a hot topic the past few years because of the estimated $1 trillion of loan debt that exceeds even credit card debt.
President Barack Obama and Mitt Romney duked it out in this past election over proposed system of paying back the student loans. Romney said the system would make it too easy for students to get the loans and would create more debt. Obama claimed the withdrawals would make it easier for the students to pay back the loans.
What History Teaches Us About Collections of Student Loans
In 2011, 5 million student loans were defaulted, meaning students had not made payments on the loans within the past 270 days. In real time money, that comes out to about $67 billion. That amount is more than twice the defaulted amount in 2003.
Collection agencies, in 2011, received an estimated $1 billion in collection fees for their successful efforts in collections. Students indebted to the loan process have to pay back not only the loan amounts plus interest, but they have to pay for the collection fees too.
What a Successful Collections System Might Look Like
Based on the United Kingdom’s system and a report made by Wisconsin Republican Representative Tom Petri, 98 percent of the borrowers in the United Kingdom met their loan payments through the automatic payroll withdrawal system. It seems to me that comparatively, the United States potentially can retrieve up to 98 percent of its current student loan debt without having to tack on the 25 percent of collection fees to the borrowers.
That seems like a win-win-lose situation to me. The government wins because it will collect more of the student loans and replace the borrowed money back into its coffers, and the student wins because the new system takes their living expenses into consideration and gives them a simpler and less costly way to pay the money back. The only loser seems to be the federal student loan collections agencies. I wonder if their lobbyists contributed to the Romney campaign this past election.
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