New Government Program May Help with Student Loans

The new version of a federal program called Pay-As-You-Earn may help college students escape crushing student loan debt.

A recent Chicago Tribune report described how proposed changes to the program may help make repayment far easier than what is currently available and might ease the burden on many students who took out loans in the past year.

The changes do not affect family or private loans, but may prove a major boon for those with federal subsidized or standard federal loans.

Details on the Proposed Changes

The proposed changes mirror the system currently in place in the U.K.

Repayment of loans would involve a 10 to 15 percent deduction taken from the income of those indebted over the course of 20 years. After 20 years, any remaining balance would be eliminated. This could save students from the hassle of debt collection and violations of consumer rights perpetrated by abusive debt collectors.

The payment would be based on the student's income and the size of his or her family.

Annual adjustments would help ensure that the repayment deductions remain manageable and accurate. Borrowers with outstanding Federal Family Education Loans can consolidate them in the Direct Loan program to qualify.

The Mess of Student Loan Debt

Student loans pose a major problem for students after college.

Low starting wages and/or the lack of good jobs generally contribute to an accrual of debt among younger workers just out of college.

It's all too easy for young people to find themselves harassed and hounded by debt collectors for money that they just don't have, and for debt that cannot be discharged in bankruptcy.

One solution would be to bring bankruptcy protection back for student loans, as we've written about here, which was all but eliminated in 2005 with the Bankruptcy Abuse Prevention and Consumer Protection Act.

Barring that, income-based repayment plans such as the one described above could be a partial solution to the mess.