Is automatic withdrawal the way to curb student loan defaults?
What if student loan payments were treated like Social Security taxes - automatically withheld from a person's paycheck? Fewer people would fall behind and risk having their wages garnished or credit score plummet. But some may struggle to cover living expenses if their education debt takes priority.
Those are some of the central arguments in favor and against a novel policy gaining traction in Washington. Automatic payroll deduction for student loan repayment has long had broad support among liberal and conservative policy wonks, but it could come to fruition with the backing of Sen. Lamar Alexander, R-Tenn.
The chairman of the Senate education panel hailed the idea last week in a speech outlining his priorities for reauthorizing the Higher Education Act of 1965, a federal law that governs almost every aspect of the sector. Although reauthorization has endured fits and starts in a divided Congress, Alexander has pledged to complete the task before he retires next year. As a result, his support for payroll deduction is giving new life to debates over the issue.
Speaking before the conservative think tank American Enterprise Institute last week, Alexander proposed consolidating the existing nine repayment plans into two options.
One would maintain the standard 10-year repayment plan, while the other would expand the Obama-era plan Revised Pay as You Earn, or REPAYE. That program caps payments to about 10 percent of discretionary income - that means earnings above 150 percent of the federal poverty line ($18,735 for a single person) - and forgives any existing balance after 20 years. Alexander would marry that option with automatic payroll deduction.
"Borrowers would never have to pay more than 10 percent of their income that is not needed for necessities," Alexander told the audience. "And if a borrower loses his or her job and doesn't make enough to make a payment, they would not pay anything, and it would not hurt their credit score."
Alexander gave several examples of how the proposal could work for borrowers. Take an engineering graduate with $28,500 in debt and a starting salary of $60,000. The first $18,735 would be untouched, leaving about $41,000 in discretionary income. Therefore, her student loan payments would be about $343 a month. If this borrower never gets a raise, she will pay back her loan in nine years.
Say that same woman attended community college instead, amassed $7,500 in student debt and dropped out after the first year. If she earns $20,000 a year with a discretionary income of almost $1,200, she could expect to pay $120 a month. Anything she owes after 20 years would be forgiven.
"Under this payment system, students will have a manageable payment. Most will completely pay off their loans, which is good for the student and good for the taxpayer," Alexander said. "And it should end the nightmare that many students have worrying how they're going to pay off their student loans."
Some consumer advocates worry Alexander's plan could create an entirely new nightmare for low-income borrowers.
On Monday, the National Consumer Law Center issued a policy paper criticizing automated payroll deduction as shortsighted. The liberal advocacy group argues that many student loan borrowers lack stable employment and have fluctuations in income.
Automatic payroll withholding could mean diverting money from rent or food, the paper said. It could operate much like wage garnishment, depriving families of income to cover necessities. Borrowers should be able to prioritize their expenses and debts in a way that allows them to meet their other obligations, the paper said.
"While the student loan repayment system is in desperate need of overhaul, forced automatic payroll withholding misses the mark," said Persis Yu, a staff attorney and director of the National Consumer Law Center's Student Loan Borrower Assistance Project.
Paycheck withholding was considered during the Clinton administration after a 1995 report examined whether the Education Department should transfer student loans to the Internal Revenue Service. But the idea failed to gain momentum, despite successes elsewhere.
Australia is among a handful of countries that have adopted payroll deduction for student loan repayment. There, payments kick in once graduates start earning at least $44,000 and increase alongside income. The Consumer Law Center paper points out that unlike Australia, income-driven plans in the United States are determined by household income, placing married couples at a disadvantage.
Alexander's push for payroll withholding lends heft to the issue, but it may prove a hard sell for some in Congress. A Democratic aide on the House education committee said Rep. Robert "Bobby" Scott, D-Va., chairman of the committee, is concerned automatic payroll deductions take away incentives to make college more affordable. A Republican aide on the committee said it is a complex idea worthy of discussion. Aides for Sen. Patty Murray, D-Wash., the top Democrat on the Senate committee, declined to comment on policy proposals before negotiations get underway.