Alexander's Loan-Repayment Overhaul

Proposal to automatically deduct loan payments as a share of borrowers' paychecks promises big improvements but raises questions over some new complications, too.

February 19, 2019
 
Sen. Lamar Alexander, chairman of the Senate Education committee

Student advocates have for years complained about the complex set of options borrowers must navigate to repay their student loans. Student loan borrowers are faced with a dizzying nine repayment plans based on their income, in addition to a standard 10-year loan-repayment plan.

There's a growing consensus that Congress should reduce those options to one income-based option on top of the standard plan.

Senator Lamar Alexander, the chairman of the Senate education committee, would go one step further, calling for loan payments to be automatically deducted from borrowers' paychecks.

Alexander put forward the idea this month as part of a package he portrayed as an attainable plan for tackling the burden of student loan debt through legislation to renew the Higher Education Act. Although Alexander is motivated to pass a law thanks to his pending retirement, reaching a deal in a divided Congress is still widely seen as a serious challenge; many Democrats and advocates for students have clamored for ambitious, and expensive, federal solutions to college affordability. The framework advanced by Alexander instead focuses on making the student aid currently available work more effectively. He's prioritized making loan repayment more manageable, simplifying the process to apply for federal financial aid and judging colleges based on students' loan repayment.

While the proposal to reduce the myriad repayment options for borrowers already has broad support among higher ed interest groups, getting buy-in for making student loan payments work more like payroll taxes is more uncertain.

Jessica Thompson, director of policy and planning at the Institute for College Access and Success, said streamlining the repayment plans available to borrowers is "an overdue change." But she said paycheck withholding for loan payments is "in reality a lot more complicated than it sounds."

The Upside of Automatic Payments

In the rollout of his framework for the Higher Education Act this month, Alexander said he expected most borrowers would choose the income-based repayment option, in which they would never have to spend more than 10 percent of their discretionary income on student loans. And if they lose their job or don’t make enough money, they wouldn’t owe anything on their loans, he said.

“Under this new repayment system, students will have a manageable payment and most will completely pay off their loans, which is good for the student and is good for the taxpayer,” Alexander said. “This new option should end the nightmare that many students have of never being able to afford their student loan payments.”

Beth Akers, a senior fellow at the Manhattan Institute, said enrolling more borrowers into the plan with more protections would likely be a positive development. She said she wasn't sold on paycheck withholding being the only option for loan repayment but said there would be clear benefits. Automatic payments could eliminate “unnecessary defaults,” which occur when a borrower has the financial ability to pay their loans but fails to do so because of challenges navigating the repayment process, Akers said.

"The idea that payroll withholding could be a substitute for our broken loan-servicing system is appealing," she said.

It could also save borrowers the hassle of filing paperwork with a loan servicer if their income fluctuates during the year, said Jason Delisle, a resident fellow at the American Enterprise Institute. And they wouldn’t have to worry about recertifying their income annually, another bureaucratic requirement that causes some borrowers to lose access to income-driven repayment.

“If I don’t recertify, my payment jumps,” Delisle said. “That’s a huge flaw in the current system.”

Researchers and policy groups have debated the concept of automatically withholding student loan payments as a solution to loan default and delinquency for several years.

University of Michigan researchers Sue Dynarski and Daniel Kreisman published a Brookings Institution paper in 2013 arguing for automatic student loan payments based on a borrower’s income. Dynarski called for that model again in a New York Times op-ed last year.

"Some people oppose this approach, arguing that payroll deduction elevates student loans over food and rent as payment priorities," Dynarski wrote in the Times. "But this misses the strongest protection of payroll withholding: it automatically cuts payments to zero when earnings drop low enough, putting loans at the bottom of the payment hierarchy."

A 2014 policy paper from the National Association of Student Financial Aid Administrators, Young Invincibles and New America said a well-designed automatic income-based repayment program would have tremendous potential for addressing defaults.

"Borrowers would no longer fall behind on payments because the loan program is confusing," the paper concluded. "For borrowers who procrastinate, postpone or forget to make payments, payroll withholding keeps them on track."

But the groups said the idea would come with serious implementation challenges and could create serious burdens for employers and borrowers.

Potential Complications

Justin Draeger, president and CEO of NASFAA, said Alexander offered a “credible proposal” to simplify the loan-repayment process but cautioned that it wouldn’t be a panacea. The proposal would basically make loan repayment work a lot more like paying your taxes. Payroll withholding is rarely precise, so many borrowers could end up paying more at the end of the year -- or find out they overpaid.

Some skeptics of the proposal have argued for maintaining additional options when borrowers can’t make payments. Persis Yu, a staff attorney at the National Consumer Law Center, said payroll withholding could make it difficult for some struggling borrowers to prioritize other costs when they encounter financial emergencies like sudden hospital bills.

“There’s no way to get around the fact that you can’t make a formula that works for everybody,” she said.

A brief released by NCLC last week also raised concerns about employers’ access to borrower information. And it argued that payroll withholding could be unworkable for borrowers with multiple sources of income. Delisle said proponents should acknowledge the potential challenges and the fact that payroll withholding won’t make loan payment completely automatic.

"What you’re getting is tracking income in real time," he said. "And you’re doing away with annual certification errors that spike loan payments."

Likely Democratic Demands

House Democratic legislation released last year also endorsed streamlining repayment plans. The bill, dubbed the Aim Higher Act, would offer a standard and an income-driven repayment plan. But Democrats in the House and Senate are likely to demand that an update of the Higher Education Act include more aid to students so they don’t have to take out significant loan debt to begin with.

Alexander's proposal, though, is purposefully narrow in its scope to advance his framework for the student loan system.

"You have to pick your policy priorities," said Draeger of NASFAA. "It seems to me what we're targeting is people who are delinquent or who default because they couldn't manage their loans."

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