Overhauling Federal Student Loan Repayment: Part Two

By Deanne Loonin, advocate for student loan borrowers.[1]

In Part 1, I summarized why the current student loan repayment system is broken. In Part 2, I propose a solution.


The proposed new system described below ties student loan repayment to tax filing. It will eliminate private servicers and collectors and eliminate default.

This proposed system is not the same as automatic payroll withholding: There will be no automatic debits from payroll or other sources and borrowers will have the opportunity to seek discharges and raise important defenses to repayment.

I present the general concept below knowing that there will be many details to figure out later.


The I.R.S. will send an annual statement to individual federal student loan borrowers. The statements will show the amount due, if any, for that year and the total balance. The amount due will be based on individual income information that the I.R.S. already has or can easily get. The annual amount owed will be calculated using a fair income-driven formula that will apply to all borrowers. There will also be non-taxable forgiveness of remaining balances after a certain number of years (to be determined) of repayment.


While all borrowers will receive the annual notices, only borrowers required to file and pay federal taxes will be required to respond, ideally in a short section on the annual tax return form. The form should be very easy to use. It could even be modeled on a form the I.R.S. already uses for taxpayers to indicate agreement or disagreement with changes to tax returns.

Borrowers not required to file will not incur student loan debt for that year. Since most individuals in this “non-filing” category are elderly or low income or both, most will not owe anything on their student loans in any case. (The I.R.S. has general information about who is required to file and pay taxes).

Borrowers will check one of the following boxes when responding to the I.R.S. notice:

1. I agree with the amount listed on the statement and will do one of the following:

i. Pay the amount listed in the statement in a lump sum or monthly installments; or

ii. My payment is 0 for the year.

The borrower will send payments to a designated government unit and could set up automatic debit or possibly payroll withholding if that is desirable. Borrowers will always have the right to pay more or prepay without penalty.


2. The amount listed in the statement is incorrect. (This would trigger a designated unit at I.R.S. to set up a phone hearing and to give the borrower an opportunity to provide an explanation). There is no payment owed pending a decision.


3. I have a defense to repayment based on school fraud or other specific defenses or other right to discharge such as total and permanent disability. (This would trigger an information packet to be sent for borrowers to raise defenses or discharge rights, followed by a phone or in-person hearing with a neutral hearing officer). There is no payment owed pending a decision.


Similar to the current system that allows borrowers nine to twelve months to resolve delinquencies, borrowers will have a year to pay their annual student loan repayment obligations. Borrowers will face collection if they have not paid the balance at the end of that period. However, the collection powers will differ significantly from the current system.

There are various ways to enforce payment without resorting to the current overly punitive default system. One way would be to allow tax refund offset of the payment due that year. This contrasts with the current tax offset system in which the government has the power to seize amounts up to the entire balance due. This often means that borrowers, including those relying on earned income tax credits, lose their entire refunds.

Since some borrowers may be able to avoid refunds by increasing exemptions or using other tools, the tax offset collection authority might be combined with a new wage garnishment program that allows for garnishment only from borrowers with sufficiently high annual student loan balances and with incomes above a minimum floor. Regardless of the enforcement mechanism, there will be no private collection agencies involved.

Collection will occur every year to avoid balances carrying over from year to year.


The primary advantages to this plan are:

· Simplified Repayment

· Eliminates the billion dollar servicing and collection industry and its corrupting influence.

Overall, this system will be significantly less expensive to administer and will likely result in similar levels of payments collected. It could even end up costing less than the current system.

· Payment will be Connected to an Existing Tax Filing System that Americans Know about and Use

Although the common wisdom is that everyone hates the I.R.S, the reality is that we are mostly a nation of taxpayers. According to a recent Washington Post article, most Americans view paying taxes as an important civic duty.

In order for this proposal to work, there must be sufficient funding for the I.R.S. to administer the program competently and efficiently.

· The I.R.S. Already has Access to Individual Income Data

In the words of former deputy undersecretary of Education James Kvaal, “Because the Education Department and the I.R.S. are [currently] separated, we’ve built these clunky systems that get in the way of achieving the goals of the income-based program. Linking the two would be much easier for students, and have stronger integrity for taxpayers.”

There are signals that the Trump Administration is interested in moving student aid administration to the Department of Treasury, but it is unclear what this means. It is a terrible idea if it is only about moving the same broken system from one federal bureaucracy to another. This would do nothing to resolve the current conflicts of interest and bureaucratic incompetency.

Under the proposal discussed here, the Department of Treasury would end up involved in student loan repayment only because it is the agency where the I.R.S. lives. The goal is to create a simpler system without private servicers and collectors by tying student loan repayment to tax filings, not to hope and pray that a new bureaucracy can do a better job.

[1] Deanne Loonin is the former Director of NCLC’s Student Loan Borrower Assistance Project. She now works on behalf of student loan borrowers in a number of ways, including as an attorney with the Legal Service Center at Harvard Law School’s Project on Predatory Student Lending. For many years, she was the primary author of NCLC’s comprehensive legal manual, Student Loan Law and has authored numerous policy papers and reports on student assistance topics. Ms. Loonin writes this article in her personal capacity.


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