Simplifying Student Loan Payments

Karen Weise at Businessweek breaks down a proposal from a group of “student-aid advocacy and research organizations” aiming to simplify student loan repayment. The plan includes “auto-IBR,” or automatically enrolling all federal student loan borrowers in a repayment plan based on income, and then collecting payments through an employer withholding system. Whoa now.

The plan would change the default payment option from the standard 10-year term to a repayment schedule that’s tied to a percentage of the borrower’s income and eventually forgives the remaining balance after a certain period of time. It also suggests the payments be automatically deducted from a borrower’s paycheck, similar to the way Social Security is collected, an idea championed last year by Representative Tom Petri, a Republican from Wisconsin.

The plan recommends various ways to make this work. One option is to require borrowers to pay 18 percent of everything they earn above $25,000 a year; another sets the payment level at 10 percent of income above $10,000 a year. The proposal also suggests longer terms for borrowers who take out a lot of debt, at least $50,000 or $60,000 in different scenarios. That’s to minimize giving a disproportionate benefit to students who borrow a lot—looking at you, law students!—and could see huge amounts forgiven.

I like the idea of making income-based repayment the standard, since it’s usually more manageable for people and not everyone knows about it, or takes the time to sign up for it. Though 18% of everything you earn above $25k sounds like a lot to me. As of July 1 this year, the new rates for the Pay As You Earn IBR will be set at 10% — it’s been 15% since IBR was created in 2009 (details here).

Now, having your loan payments withheld from your paycheck? On the one hand it seems convenient, if (if!) you can afford your student loan payments. On the other hand, having money automatically taken from you is always a little scary. It would be cool if this were an opt-in thing! Though maybe not so different from setting up auto-withdrawals with Sallie Mae. Do you guys auto-pay most of your bills? I have always been too scared to do anything more than my gas and internet bill — nothing over $50, basically.

Photo: s.mirk

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15 Comments / Post A Comment

honey cowl (#1,510)

I hate auto-pay! Checks for life. There is something very tangible about writing out the numbers. I love that feeling, as much as one can love paying bills.

may june july (#2,862)

@honey cowl no checks over here (mostly because I barely know how mail works). But I also feel uncomfortable with auto-pay. It’s not that I don’t think I’ll have the money, I just need the control.

allreb (#502)

Literally 10 minutes ago I just upped my auto-pay for my student loan by $100. (I just got a COL raise and am putting a lot of my new “extra” money into this, since I’m pretty good at avoiding lifestyle creep. I’d love to get this sucker paid off within a couple of years.)

So… yep, I do auto-pay for my student loans, and at significantly more than my minimum requirement. But I’m also (knock on wood, gulp) steadily employed with a pretty nice salary, so I’m never all that worried about not having the money in my account to cover the auto-debit. I do this with as many bills as possible, since I used to get dinged for late payments because I’d just forget (or would lose my checkbook). The only things that aren’t done automatically are my rent (because my landlord is waaaay behind the times and unable to) and my credit card, because I don’t carry a balance on it most months anyway and I usually pay it all off if possible. (I don’t use it much.) So when a credit card statement comes in, I pay it online, but it doesn’t happen automatically.

But utilities, cable, phone, and student loans all happen on their own so I don’t have to worry about them.

I have two checking accounts – one my paycheck goes into and all my bills come out of and one that I transfer my discretionary money to. I have 95% of my bills on auto pay because otherwise I forget to pay them and it’s stressful to think about all the time, and my discretionary money is in a separate account so I’m not constantly trying to think about what has or has not been paid yet so how much money do I REALLY have left?!?!? I check at least once a week to make sure everything is kosher and then forget about it.

For household bills, I have a joint checking account with Mr. Polka Dots vs Stripes, and he pays each bill monthly. We also continue to get paper statements for those bills. I don’t mess with his system, he doesn’t mess with mine, and we’re good.

wrappedupinbooks (#1,426)

its sort of like this in Australia, I’m not Australian though, so I couldn’t tell you the exact terms over there. 18% does seem pretty high. I just ran the numbers, and for me it would nearly double my minimum payment. I think 10% is totally reasonable though.

nnlsbin (#5,447)

@wrappedupinbooks this is similar to Australia, our loan system is called HELP. The percentage of your income you payback depends on how much you earn up to 8% is taken from you each pay if you earn about $100k a year (I think)

But also we arent charged interest on our loans as they come from the government, its just indexed against the CPI

@wrappedupinbooks Australian system is a required payment.
Basically every citizen can get a low interest (about 3% or CPI) loan from the government for your study costs, and then once you start earning over $50,000 you have to pay it back. It automatically comes out of your paycheck (you don’t get any say over it) but in good news I think it comes out before you are taxed on it. The amount you pays back starts at 4% of your income at $50000, and goes up to 8% once you start earning over $100,000. The other thing to realise is that the average 3 years arts degree costs between $18,000 to $25,000 in AU, and you can do a 4 year engineering or law degree for under $45,000. So its more feasible in general.

ThatJenn (#916)

I understand the allure of auto-pay, and used to use it, but stopped around the time I started using Mint/actually using a budget. Because I have the budget laid out for the month, it’s easy to remember that I need to make my payments each month, and I have a routine: my second paycheck of the month gets transferred wherever it needs to be (I have two checking accounts, for plot-related reasons) as soon as it comes in, and on the 1st I pay all my recurring, set bills for the month. I’m watching and waiting for the variable bills to come in over the course of the month based on when I paid them the month before, too.

That said, I do love that a lot of my costs come out of my paycheck before I even see it! Those things almost feel “free” to me, because I was never getting that money to begin with. My take-home pay is around 70% of my gross pay, after taxes (I have no state or local taxes and am not in a high tax bracket at the federal level), part of my retirement contribution, parking costs, health insurance, medical reimbursement account, and short term disability/life insurance. It would feel very different to get all that money in cash and have to pay those bills separately each month.

I’m not sure I’d want any kind of auto-pay on a major loan like student loans, whether from my checking account or right from my paycheck. Opt-in would definitely be better for those paying, I think, though I understand that auto-deduction is “simpler” and lower risk for loan providers.

When I think about income-contingent repayment being automatic, it sounds really great for people who act in good faith. Then I remember that I know someone who has done the math and decided he cannot ever afford to get a real, above-board job because his student loan payments would be too high (he currently makes ~$10k/year as an adjunct, lives on his wife’s income, and pays $0 towards his loans). I don’t think he’s at all in the majority, but I think a lot of politicians who would vote on any bill like this would *believe* he could be – that this could be a disincentive to work hard, make money, and repay loans in a timely fashion.

rhinoceranita (#5,858)

LOL just ran the numbers. My minimum payments are over 18% of my monthly take-home income. It’s about 22% w my new job and it was about 30% a couple of months ago.

CubeRootOfPi (#1,098)

The lender for my loans reduces the interest rate by a bit (not much, but every bit counts) if I do auto pay, so I do that.

I assume the payments taken out from the paycheck wouldn’t be tax deductable?

highjump (#39)

But you end up paying more interest over the life of the loan. And I fear this will just make people complacent about the actual cost of college. High tuition private schools with large endowments that put students in a lot of debt will end up being subsidized by the forgiveness policies.

Lily Rowan (#70)

18% for your income ABOVE $25K, right? That’s very very different from 18%.

I didn’t make more than $25K a year for a couple of years after I graduated college (in Olden Days), and that was when I had the hardest time making my payments and did some damage to my credit score in addition to building up my credit card debt.

And I autopay as much as possible.

hollanding (#6,076)

This just inspired me to sign up for FedLoan’s autopay in the promises of a 0.25% rate reduction. Since I put “pay student loan” on my calendar every month (then shift it around according to payday), it would be nice to remove.

chevyvan (#2,956)

I auto-pay almost all my bills, but not through the biller. I set up bill pay through my credit union (but I’m sure you can do this through any bank). The bank receives the bill and I tell the bank how quickly to pay the bill ahead of time. You can also tell the bank not to automatically pay a specific bill over $X (so you’re not accidentally overcharged or whatever). This system is totally worth the time investment to set it up. Also, there are no fees for bill pay at my credit union.

I have one student loan that I auto-pay through the lender b/c they give me a slightly lower interest rate specifically if I use their auto-pay system. I reserve a specific savings account for this withdrawal and have reminders set up on Google Calendar so that I know a few days before the money is scheduled to be withdrawn (always at the end of the month). I’m sure they do this because they think you’re more likely to incur overdraw and late fees, etc. They are shady as f***, but I will beat them at their little game, oh yes I will!

BananaPeel (#1,555)

If it means interest rates go down, to compensate for the cost savings automation provides, sign me up. But this should be opt-in, probably. Also, If you make $45k/yr before tax, as I do, 10% of your income over $25k is $300 per month. Which is more than I pay under the current system, but I would be paid off sooner.

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