12/11/2012 07:55 pm ET Updated Feb 08, 2013

New Bill Would Cap Student Loan Interest but Eliminate Forgiveness

A soon-to-be proposed bill would drastically change the way federal student loan payments are made, automatically deducting from paychecks rather than leaving it to borrowers to make payments. The bill would also limit the amount of interest a loan can accrue.

Deducted payments would be capped at 15 percent of discretionary income -- what's leftover after the estimated cost of basic expenses, similarly to the new Income-Based Repayment plan (IBR). Now, people have to apply to be enrolled in IBR, and many who would be eligible for and could benefit greatly from the reduced monthly payments it allows, don't know that it's available to them.

The automatic deductions would fix that problem, and ensure that nobody is stuck paying more each month than they have to. A similar system has worked quite well in the U.K., with only 2 percent of people unable to make their monthly payments, Bloomberg reported. With U.S. default rates rising steadily and raising fears of a new financial bubble, this insurance is definitely appealing.

Automatic deductions would also eliminate the need for middlemen collection agencies, the cost of which is reflected in fees that can account for up to 25 percent of a borrower's balance.

Read more at Policymic...