Proposal for Overhauling Student-Loan Program Gets Mixed ...

Washington ? Legislation introduced in Congress this week that would overhaul the federal student-loan programs by changing how interest rates are set and how borrowers repay their loans is getting mixed reviews from student-aid advocates.

The bill, sponsored by Rep. Thomas E. Petri, a Wisconsin Republican, is unlikely to progress through Congress anytime soon, but the proposal could be debated as part of the next reauthorization of the Higher Education Act, which would happen next year at the earliest.

Under the proposal, borrowers? monthly payments would be capped at 15 percent of their discretionary income, and the money would be withdrawn directly from their paychecks until their loan was paid off. Also, the interest that accrues on a loan would be capped at 50 percent of its original balance.

The proposal would end most of the government?s current loan-forgiveness programs and eliminate the subsidy that pays the interest on federal loans to undergraduates while they are still in school.

By having loan payments automatically taken out of borrowers? paychecks, the bill would eliminate the need for the Education Department to hire private debt collectors to recover unpaid balances. Complaints against those companies have risen sharply in recent years, as critics have questioned their collection tactics as well as the government?s oversight and management of debt collection.

Automatic deduction of loan payments from paychecks would also all but eliminate defaults on federal student loans. Proponents of the bill argue that this would be an important advantage for borrowers, as default rates have continued to climb recently. Colleges would also presumably benefit because those with high average default rates risk losing their eligibility to participate in federal aid programs.

The National Association of Student Financial Aid Administrators has come out in support of the measure. Justin Draeger, the group?s president, said that the automatic-payment system would protect ?those borrowers who are most vulnerable from the ?life-alternating financial calamity?? of defaulting on a loan.

While borrowers in distress can sign up for an income-based repayment plan to avoid default, many do not because of the administrative burden involved, Mr. Draeger said.

?It?s recognizing that there are some behavioral economics at work,? he said. ?We need to make it as easy as possible for borrowers to stay on the straight and narrow.?

Lauren Asher, president of the Institute for College Access & Success, an advocacy group that helped establish the income-based repayment programs, said that while she shared the goal of simplifying the student-loan process and reducing defaults, parts of the bill would not benefit borrowers.

For instance, she said, the bill would ?take away some key tools for managing federal student debt,? such as forbearance and deferments. The repayment program in the bill would be insufficiently flexible for borrowers who faced a sudden disruption in their earning capacity, she said.

In addition, Ms. Asher said, the lack of loan forgiveness in the bill is problematic.

?When you?re enrolled in one of the current income-based repayment plans, there?s a light at the end of the tunnel,? she said, referring to the loan forgiveness that occurs after a borrower makes payments for 20 or 25 years. ?People need to be able to save for retirement and save for their children?s education.?

Still, she said, some aspects of the bill, such as the cap on how much interest can accrue on a loan, would be welcome changes.

Source: http://chronicle.com/blogs/bottomline/proposal-in-congress-for-overhauling-student-loan-program-gets-mixed-reviews/

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