Just over a month after the Obama administration issued an order accelerating a legislative rule change to the Income-Based Repayment (IBR) program that would benefit debtors with federal student loans, a new bill is now in Congress to revise the student loan system yet again. This time the goal is to eliminate the costs the government pays to collect on defaulted student loans.
According to an article in Bloomberg, in 2011 five million borrowers had defaulted on $67 billion in loans, and the government paid another one billion dollars to private collection agencies to recover them even though debtors with federal loans can change their repayment plans to IBR and pay nothing. Obviously, debt collectors don’t get paid when debtors change their repayment plans and end up paying zero in monthly payments, so they have no incentive to tell the borrowers about IBR. Clearly cost savings can be had, and that’s what the bill purports to do, but that’s not all the bill will do.
Adopting ideas used in Great Britain and elsewhere, instead of a system in which debtors mail checks or set up direct deposit lines to their federal creditors, employers would withhold debtors’ student loan payments from their paychecks checks like Social Security. The government would limit itself to 15 percent of the debtors’ adjusted gross incomes, similar to the older version of IBR, to ensure student debtors would still have enough to live on. To ensure the debts don’t balloon out of control when debtors’ incomes are low, interest on federal student loans would be limited to 50 percent of the outstanding principal at the time debtors enter repayment.
There is a catch: The loan forgiveness aspects of IBR would be eliminated. This means that people working in public interest positions would still have to pay on their loans after ten years, and those working in the private sector would not have their loans cancelled after twenty years. The bill’s goal is to ensure that the government gets all its money back, even if it means garnishing debtors’ Social Security checks. The article doesn’t say, but the bill does not appear to place any cap on how much federal student loans debtors can take out. For example, PLUS loans are limited by cost of attendance minus other aid, which allows many programs to increase their tuition indefinitely, leaving the debtor holding the bag if the degree doesn’t pan out.
Aside from that potential flaw, there’s no loss taking business from debt collectors. At the same time, if you have student loans and aren’t eligible for IBR, talking to a bankruptcy lawyer can help you assess your options. Filing a Chapter 7 bankruptcy can help you discharge other debts and free up income for your student loans.
For more questions about student loans, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
