New Year, New Taxes?

Student Loans - ExCEL ActIn December of 2012, Wisconsin Republican Representative Tom Petri introduced a bill that, if accepted, would change student loan payments as we know them. Petri proposed that loan payments be taken out of the borrower’s paycheck, similar to the way taxes are currently taken. He is calling this the ExCEL (Earnings Contingent Education Loan) Act.

The principle on which the ExCEL Act is based is not a new idea. This type of student loan payment system is similar to those used in New Zealand, Australia and the UK. America has over $1 trillion dollars in outstanding student loan payments. Last year alone, over 5 million borrowers had fallen behind more than 270 days on their payments. With Petri’s new method, he has stated that nearly 98 percent of people would be able to make payments towards their student debt.

The new withholding method would be income based. No more than 15 percent of the borrower’s income could be drafted. The income in consideration would only be the amount of paycheck left after basic living expenses were covered.

What are the borrower’s benefits to using this method? The government would not have to use the services of debt collection companies, thus saving the borrower the fees that the collection company charges. Instead of falling behind on payments and paying late fees, borrowers would have a certain percentage taken out of each paycheck. This system also protects the borrower if he/she loses employment. When paychecks stop coming in, student loan debt “tax” stops being removed. This allows the borrower time to establish employment without the weight of monthly loan payments.

Petri stated in an email, “This doesn’t mean leaving taxpayers on the hook if a student borrows too much-everyone would still pay back what they borrowed under this system. It does mean providing much stronger protections against the kind of financial ruin that is all too prevalent in our current system.”

There is a current method already established in the U.S. that allows borrowers to enroll in an income-based plan to repay student loan debt. Many people do not chose this option because it is not an opportunity that is widely publicized.

The ExCEL Act proposes that there be a capping of interest rates. Legislation would tie interest charged to Treasury market rates. Currently, some loan companies are charging as much as 6.8% interest on their student loans.  The amount of interest owed would not exceed more than 50% of the loan’s face value at the time the borrower graduated. In order to cap the interest rates, the bill will eliminate subsidies. These subsidies allow low-income students not accrue interest while still in college. The ExCEL Act will also eliminate any loan forgiveness programs. Usually these programs are for careers that are public service oriented, like police officers, teachers or social workers. This act would not affect those already enrolled in the forgiveness programs.

The ExCEL Act is to be voted on sometime early this year.

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