Student loan payments might soon be withheld from borrowers’ paychecks under a new law proposed by Congressman Lee Zeldin, who wants to replace current student loan repayment plans with a single, income-based model.
“The current loan system for our students is broken,” Zeldin said yesterday at a press conference at Long Island University in Riverhead. “This legislation will help fix it.”
Currently, federal student loan borrowers can choose from a number of different repayment options to pay off their debts, ranging from fixed payments to income-based payments that are tied to a percentage of the borrower’s salary.
Zeldin’s “ExCEL Act” would replace all those options with one model that is similar to the income-based options that exist today, but would deduct payments automatically from borrowers’ paychecks. All new federal student loans would be repaid using this plan, while borrowers with existing loans would be given the option to switch from their current repayment plan to the new one.
“It would lower the cost of student loans to the American taxpayers by dramatically reducing the default rates,” Zeldin said.
With student loan debt soaring to unprecedented heights, more and more borrowers have been forced to default on their student loans in recent years – at great cost to both the borrower and the government.
One of out three federal borrowers have either defaulted on their student loan debts or are in a deferment or forbearance process, according to a 2013 report by the Consumer Financial Protection Bureau.
“How many times have we heard of that student who graduates with a whole lot of debt, and before they even have an opportunity to get their feet under them, they’re already crushed with repaying their student loans?” Zeldin said.
Not only can exorbitant debt be devastating to young college graduates with entry-level salaries, but it also means that the federal government is taking a loss on defaulted loans that will never be repaid. Defaulted student loans will cost the government $20 billion over the next decade, according to another report by the Congressional Budget Office.
“It is time to replace the current system with an individualized loan repayment program tailored to each individual student’s needs,” Zeldin said.
When a borrower starts a new job, paperwork that is already submitted to the Internal Revenue Service would be used to determine a monthly payment based off the borrower’s salary. That payment would then be withheld from the borrower’s paycheck.
The amount of that monthly payment would fluctuate automatically with changes in salary and jobs. When a borrower starts earning more money, the monthly payment would increase; if the borrower starts a new job with a lower salary, the payment would decrease.
Should a borrower become unemployed or if the borrower’s salary falls below the payment threshold, both payments and accrual of interest would be suspended.
“My bill streamlines the paperwork process and only requires an individual to enroll in the program once, as opposed to once per year as current law requires,” he said.
The bill also would prevent interest from accruing if the total amount of interest, both paid and unpaid, equals 50 percent of the loan’s balance when it entered into repayment.
The bill is currently in the House Education and Workforce Committee.
