Simplifying Student Loan Payments

Karen Weise at Businessweek breaks down a proposal from a group of “student-aid advocacy and research organizations” aiming to simplify student loan repayment. The plan includes “auto-IBR,” or automatically enrolling all federal student loan borrowers in a repayment plan based on income, and then collecting payments through an employer withholding system. Whoa now.

The plan would change the default payment option from the standard 10-year term to a repayment schedule that’s tied to a percentage of the borrower’s income and eventually forgives the remaining balance after a certain period of time. It also suggests the payments be automatically deducted from a borrower’s paycheck, similar to the way Social Security is collected, an idea championed last year by Representative Tom Petri, a Republican from Wisconsin.

The plan recommends various ways to make this work. One option is to require borrowers to pay 18 percent of everything they earn above $25,000 a year; another sets the payment level at 10 percent of income above $10,000 a year. The proposal also suggests longer terms for borrowers who take out a lot of debt, at least $50,000 or $60,000 in different scenarios. That’s to minimize giving a disproportionate benefit to students who borrow a lot — looking at you, law students! — and could see huge amounts forgiven.

I like the idea of making income-based repayment the standard, since it’s usually more manageable for people and not everyone knows about it, or takes the time to sign up for it. Though 18% of everything you earn above $25k sounds like a lot to me. As of July 1 this year, the new rates for the Pay As You Earn IBR will be set at 10% — it’s been 15% since IBR was created in 2009 (details here).

Now, having your loan payments withheld from your paycheck? On the one hand it seems convenient, if (if!) you can afford your student loan payments. On the other hand, having money automatically taken from you is always a little scary. It would be cool if this were an opt-in thing! Though maybe not so different from setting up auto-withdrawals with Sallie Mae. Do you guys auto-pay most of your bills? I have always been too scared to do anything more than my gas and internet bill — nothing over $50, basically.

Photo: s.mirk