The Hot New Solution to Student Loans Is Just Taking Money Out of Your Paycheck

If you have student loans in 2019, you also have a somewhat distressingly large number of different ways to pay them back. Besides the standard repayment plan, in which the government calculates a monthly bill based on what you owe, there's a graduated plan for people who want to pay more later, which is somehow different from what the system calls paying-as-you-earn and income-contingent repayment. In other words, deciding to take on debt for what hopefully will be a worthwhile degree is just the first in a series of complicated decisions that may dictate what much of your adult financial life looks like.

Now Lamar Alexander, the Republican chairman of the Senate committee that deals with education issues, is pushing a proposal—one that stands a non-zero chance of passing—promising to condense repayment alternatives into just two clear options. But it could also let the government dip into borrowers's paychecks, making the already-harrowing story of America's student loan system potentially more precarious for people of limited income.

"The option I believe most borrowers would choose would be a repayment plan based on a borrower's income, which would never require the borrower to make payments of more than 10 percent of his or her discretionary income," Alexander told an audience at the conservative think-tank American Enterprise Institute early this month. "And it would make sure that if there was no money earned, there would be no money owed, and that would not affect negatively on the borrower's credit. The other option would be a ten-year repayment plan with equal monthly payments, a lot like a ten-year mortgage."

Alexander, a conservative Republican but not exactly a Trump guy, has signaled he intends to push this change through as part of a reauthorization of the Higher Education Act before he retires at the end of next year.

Automatic payroll deduction is just one example of the student loan reforms being debated in Congress, which also include potentially expanding the tax code so employers can contribute up to $5,250 tax-free annually to workers' balance and making the Free Application for Federal Student Aid (FAFSA) less convoluted. But it's the part that's gained the most traction in the press, not all of it negative. In fact, some experts have argued it could be a real help to the country's $1.5 trillion student debt problem, or at least that it's time for Americans to start thinking of debt payments in the same way they do Social Security—socked away for them whether they like it or not.

"I think this proposal is likely to become law, after some tweaks," student-loan expert Mark Kantrowitz told CNBC.

One potential upside here is that automatic deduction might not require people re-certify their income every year (or else lose access to an income-based repayment plan). This can be an incredibly stressful process—loan servicers are supposed to remind you to do this, but in my personal experience they often do not. In fact, multiple states and the Consumer Financial Protection Bureau have sued servicer Navient for, among other things, allegedly confusing borrowers intentionally about repayment in general and recertification in particular so that they could bilk them for more money. (The company has denied the claims and sought, unsuccessfully, to dismiss at least some of the suits.) Meanwhile, missing paperwork or obfuscated deadlines is one of the main reasons that fewer than 1 percent of the 30,000 people who applied for public-service debt forgiveness last year actually received it. It makes sense to eliminate some of this confusion and streamline the process.

But what consumer advocates have begun to warn about is that extracting loan payments from paychecks amounts to "mandatory wage garnishment." It may not be possible under this new scheme to account for people, say, facing unforeseen medical emergencies to keep more of their paycheck fast. In fact, the National Consumer Law Center quickly filed a policy report called The Dark Side of Payroll Withholding to Repay Student Loans not long after Alexander's speech. In the paper, the authors argue forcing people in the gig economy or with otherwise unstable employment into a system like the one proposed could force them to choose between payments and rent, heat, or food. They also argued it would disproportionately affect people who were middle class or barely scraping by—teachers, cashiers, basically anyone not rich—to begin with.

These are legitimate concerns, though it's worth noting that a much-worse version of this kind of garnishment already exists. If you default on your loans, the entire balance is immediately due in full, plus collection charges up to 24 percent of your balance. That also means the federal government—a.k.a. the world's most powerful loan shark—can just take up to 15 percent of your paycheck. Not quite a baseball bat to the kneecaps, but potentially crippling nonetheless.

The debate may be entirely moot: As Inside Higher Ed noted, getting anything to pass in a hyper-partisan Congress is a challenge. Still, unlike some of the other proposals that have floated in recent years—like eliminating the exemption that makes it so people can't file bankruptcy on student loans—this suggestion by an old-school, business-minded Republican did not immediately seem like a nonstarter on Capitol Hill. Though a similar proposal was dangled but never enacted during the Clinton years, according to the Washington Post, we live in different times. Alexander's idea could catch on given that nearly 40 percent of borrowers were expected to default by 2023—and because it could maybe sort-of speak to anger about the loan system without appearing to let anyone off the hook.

But even if aspects of the proposal might be appealing, it would amount to a tweak of an enormous problem at the margins. This plan wouldn't cancel or forgive anyone's debt. It wouldn't make (some) higher education tuition-free, as just-announced presidential candidate Bernie Sanders has promised. And it definitely would not address the macroeconomic forces that caused the generation-crushing student debt issue to begin with. In that sense, it's a perfect policy for this distressing late capitalist moment—a reform that's too modest to get excited about, full of potential landmines, and might even be doomed anyway.

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