Student loan debt is almost impossible to escape, as many borrowers know all too well. In response to the current problem of borrowers buried under heavy payments and high interest rates, Congressman Tom Petri (R-Wisconsin) recently introduced the Earnings Contingent Education Loans (ExCEL) Act of 2012.
Petri contends that his bill protects borrowers against payments they cannot afford while also ensuring that taxpayers don’t have to subsidize defaulted loans or the cost of loan collection.
Under Petri’s bill, student loan payments would be capped at 15% of a student’s income, after an allowance for basic living expenses. Employers would withhold student loan payments from a worker’s paycheck along with other payroll taxes. In addition, the bill also stops the compounding of interest, capping it at 50% of the balance of the loan at the time the borrower graduates.
The plight of student loan borrowers is unique. While most debt can be discharged in bankruptcy, the discharge of student loans, even private student loans, can only happen under limited circumstances. In addition, statute of limitations laws on debt collection don’t apply to student loans, removing any hope of relief for cash-strapped borrowers.
Once a student defaults on his or her loans, he or she not only has to deal with the consequences of damaged credit and collection tactics, such as wage garnishment and bank account levies, but the lender can also add collection fees ranging from 18.5% to 40% of the loan total, driving borrowers even deeper into debt.
In addition to Petri’s plan, others have offered up ways to address the problem, including student loan forgiveness plans, allowing the discharge of student loans in bankruptcy, and providing additional education to students choosing a degree program so they have a better understanding of the consequences of taking out student loans.