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Student loan bill would end debt collectors’ role

Congress will consider overhauling debt collection in the $100 billion-a-year US student loan program, replacing it with automatic withdrawals from borrowers’ paychecks tied to their income — a system­ used in Britain.

A bill that Representative Tom Petri, Republican of Wisconsin, plans to introduce would require employers to withhold payments from wages in the same way they do taxes. Payments would be capped at 15 percent of the borrower’s income, after basic living expenses.

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The bill follows growing concern about the burden of $1 trillion in outstanding student loans, which now exceeds credit-card debt. Under the new system, the government would no longer hire private debt-collection companies and charge fees that add as much as 25 percent to borrowers’ loan balances, leaving defaulted former students even deeper in the hole.

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

Borrowers would no longer have to negotiate with collectors and loan-servicing companies, which offer a confusing array of deferral and forbearance options after a job loss or illness. The Education Department would manage the withdrawals, with help from the IRS. Borrowers currently must ask to be enrolled in income-based repayment programs; many don’t, because they don’t know about them.

In the election campaign, President Obama promoted an income-based program as a way to make it easier for students to pay back their loans. His challenger, Mitt Romney, said it would encourage students to take on more debt.

Last year, 5 million borrowers were in default — generally meaning they had failed to make payments for at least 270 days — on $67 billion in loans, more than twice the amount in 2003. Through the new system, based on experience in the United Kingdom, 98 percent of borrowers could meet their loan payments through automatic payroll withholding, according to Petri’s office.

Last year, debt-collection companies, working directly for the Education Department or state agencies, got about $1 billion in commissions.

Such collections, which can follow borrowers into retirement, ‘‘can ruin people’ lives,’’ said Justin Draeger, president of the National Association of Student Financial Aid Administrators, a nonprofit group.

The bill would tie the interest charged to Treasury market rates. Currently, students in the most popular program pay up to 6.8 percent. The plan would also cap interest owed at 50 percent of a loan’s face value at graduation, giving a break to lower-income borrowers, who take longer than the standard 10 years to repay. Student loans can only rarely be canceled through bankruptcy.

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