A Loan Program Simplification That Could Drastically Lower Default Rates And Help Struggling Borrowers

By Katy Hopkins, Communications Staff 

An employer withholding process would simplify repayment for federal student loan borrowers, NASFAA Policy Analyst Karen McCarthy explained Thursday at the “Federal Student Loans: Recommendations on Income-Based Repayment (IBR)” forum in Washington, D.C.

The provision is a key piece of a larger recommendation, universal IBR (referred to as “auto-IBR”) for federal borrowers, put forth in a recently-released report by NASFAA and other organizations present at the forum: Young Invincibles, the Institute for Higher Education Policy, HCM Strategists, the Committee for Economic Development, and New America. 

Under the proposal, all federal student loan borrowers would be automatically enrolled in an IBR plan, helping to ensure that borrowers would always have affordable payments. Those manageable payments, in turn, would be automatically deducted from their paychecks through employer withholding. 

Unlike the current income-based repayment formula, which uses a borrower’s prior-year income to determine what’s owed, payments under employer withholding would be based on current earnings, and would automatically rise or fall as a borrower’s income changed. 

“This would advance the principles of fairness and simplicity – we are hoping that it can be as simple as possible from the borrower’s perspective,” McCarthy explained. “Any complexity necessary will happen behind the scenes.”

But even the hidden work wouldn’t need to be overly burdensome. Many employers already use software programs for paycheck deductions, McCarthy explained, so an employer withholding scheme wouldn’t necessitate an ongoing manual process, and would likely add minimal additional burden for employers. 

Much of the work would fall to the Department of Education (ED) and its loan servicers, though the latter would take on an evolved role, McCarthy noted. Under the proposed model, all payments would flow into ED initially. Servicers would be responsible for managing the payments of borrowers who opt out of employer withholding, who didn’t withhold enough, or who wanted to pay more than their required monthly amount. 

The proposal envisions minimal involvement on the part of the IRS; their primary role would be to share year-end earnings information for borrowers with ED. It would be up to ED to then match up the data from the IRS with payments received, and work to solve any discrepancies therein. 

Employer withholding is also a provision in Rep. Tom Petri’s (R-WI) proposed Earnings Contingent Education Loans (ExCEL) Act. It’s a key facet of universal income-based repayment in other countries, the Congressman said. In addition to contributing to the overall income-based repayment report, NASFAA has also released a supplemental paper examining how universal IBR functions in other countries. 

Auto-IBR and employer withholding won’t necessarily eliminate all instances of student loan default, but it would present a dramatically simpler process for borrowers, with enhanced protections compared to the current system. Borrowers in turn would have a greater chance to repay successfully, panelists argued Thursday at the forum. The reports were funded through the Bill and Melinda Gates Foundation’s Reimagining Aid Design and Delivery (RADD) project, and some groups will likely continue to examine some of the recommendations. CED, an organization of academic and business leaders, plans to survey their constituents on the feasibility of employer withholding, Michael Petro, CED’s executive vice president, said Thursday.


  • This is a concept that some of us have been discussing for many years. Allowing loan payments to come out pre-tax at an income based level would improve repayment rates. It would be an optional program, so those not interested would still be able to use the conventional means, but having this option would simplify the repayment system and for many people an auto-draft before they ever get their paycheck gurantees the payment is made for at least the minimum level. Perhaps then additional payments could even be set up on the check, after taxes. This model obviously works for some, not all, but is a great idea.

  • Thanks, everyone, for your comments/questions! The purpose of the Reimagining Aid Design and Delivery project is to thoughtfully consider big changes to the aid programs and start a conversation about them. Some of your questions are answered in the paper, but the general premise behind the employer withholding proposal is that payments would be automatic and would self-adjust as earnings begin, end, or fluctuate. We considered various employment scenarios, but many details would need to be worked out if lawmakers were to seriously consider a move to auto-IBR.

  • And what about the students that come out of prison and borrow, then can't find a job and usually end up back in jail. Many of them are borrowing to survive since noone will hire them. Community colleges are their only alternative as well as poor students with already low credit scores. That's why community colleges have high default rates. How much of the defaults comprise of these students? We need more data.

  • And what about people who are unemployed (for more than 3 years), have economic hardships, etc.? Is the government going to take their unemployment or welfare benefits? What about people who are self-employed, or employed in industries or businesses that are seasonal? A self-employed lawyer may make a big fee on a large case settlement, but have minimal income the rest of the year. And the construction worker whose income all comes in summer would be paying based on about twice the income really earned. What about the person who owns an income tax service and works mostly January-April? And teachers on a 9-month pay schedule? If you apply the formula over each paycheck rather than the year, and force everyone into an IBR payment, some people are going to be paying a much larger percentage of their income than they should be.

  • What about borrowers holding more than 1 job? Also, will it be IBR or PAYE based on current eligibility rules?

  • This seems like a great plan. I wonder if the Dept. of Ed would be willing to deduct loan payments through pre-tax dollars similar to a 401K. Might be a great incentive for all borrowers to enroll. Sign me up!

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