Prosper Act

The House Republicans recently introduced the Prosper Act which, in part, modifies existed law dealing with the availability and repayment of student loans.  Presently, undergraduates are eligible for Perkins loans which are subsidized and Direct Stafford loans which are subsidized and unsubsidized.  Subsidized means that the government pays the interest on the loan while the student is in school and for a grace period after the student leaves school.  Unsubsidized means that interest accrues from the time that the loan is drawn down but payments are deferred.  When you consider that the current rate of interest on undergrad Stafford loans is 4.29% and the average undergrad is in school for a little over 4 years, eliminating unsubsidized loans translate into a higher monthly payment for students.

The Prosper Act replaces the undergraduate Perkins and Direct loans with what is called a Federal One loan.  It also eliminates the 1%+ origination fee for undergraduate loans and the 4.27% origination fee for Parent Plus and Graduate Plus loans.  That is a savings.  It also increases the aggregate amount that an undergraduate can borrow under the Stafford program from $31,000 to $39,000 for dependent undergrads and from $57,500 to $60,250 for independent undergrads.  These amounts are caps.  Under the proposed bill, the school does not have to offer the cap amount to all students.  For example, it may offer the cap amount to engineering or IT students who have better prospects for a higher paying job upon graduation.  And, by the same token, it may offer less to, say, a history or anthropology major.

Currently, Parent Plus and Graduate Plus loans have no cap.  The parent or student can borrow the cost of attendance less any other aid offered to the student.  The proposed bill limits parents to $56,250.  I deal with many parents who have in excess of $100,000 of Parent Plus loans.  How are they going to make up the difference?  Each case is different, but I would suspect that parents will be forced to take on private loans which traditionally have not been as flexible as federal loans in regard to repayment options.

There are other parts to the proposed legislation which we will address in future blogs.

 

 

NJ Class Loans

In my Student Loan Power Point presentation, I label NJ Class loans as the “pits”.   These loans are financed by bonds issued by the NJ HESAA.  In almost all situations, a co-signer is required.  Interest accrues from day one.  The regulations call for a 30% collection fee.  Collection efforts by the State have been very aggressive, and include administrative wage garnishments, state tax refund intercepts and litigation.

Although deferments and forbearances are allowed, there is no provision for income driven repayment plans.  Since NJ Class Loan program allows loans up to the cost of attendance less other aid/loans, it is not uncommon for students and their guarantors to owe in excess of six figures especially if the student attended graduate school.  Without an income driven payment alternative, students just starting work could be faced with a monthly payment that could be in excess of $1000 per month.  Or their parents.

As originally constituted, the co-signer was still on the hook if the student died.  However, that onerous provision was eliminated about 18 months ago.

In the late fall of 2015, the NJ Senate passed a bill to allow for income driven repayment plans for NJ Class loans.  The bill languished in the Assembly and has been officially declared dead.  Hopefully, with a new governor, this bill will be re- introduced.

New Jersey had a law which allowed for the suspension of professional licenses for failure to pay State and even federal loans.  Many states have such laws which appear to be self defeating.  How is a student going to repay a student loan if they cannot work in their chosen professional?  Well, at least in this regard, New Jersey seems to have come to its senses.  In July, 2017, a bill was signed into law which revoked the professional license suspension statutes.  Give credit where credit is due- this is a step in the right direction.

We will keep you up to date on any new developments on NJ Class loans.

You may want to check out an excellent article on professional license suspension laws which appears at https://www.nytimes.com/2017/11/18/business/student-loans-licenses.html?mtrref=www.google.com

 

 

 

 

Corinthian Colleges/Aequitas Capital Management, Inc.

In the late 1970’s and thereafter, the Higher Education Act (“HEA”) was amended to allow greater access to Title IV federal student loans for students attending “for profit” schools.  Most of these for profit schools provide vocational type courses and cater to lower income individuals who may or may not have graduated high school.  NCLC’s Student Loan Law refers to a statement to a Senate committee from a recruiter for a truck driving school in which he said the the only qualifications for getting enrolled with a student loan are that the applicant is breathing, over 18 years old, and has a driver’s license.

Now, not all non profit schools take advantage of the system and their students.  However, as the number of  for profit schools has grown over the last 35 years, the number of abuses in both the granting and collection of student loans has proliferated.  Given the fact that there is no statute of limitations on federal student loans, many unsuspecting young people, who were only trying to learn a trade, find themselves in a tough predicament.

In an attempt to curtail improper action, DOE instituted the 90/10 rule which requires for profit schools to demonstrate that at least 10% of the income comes from sources other than federal student loans.  That would include tuition payments and private loans among other sources.

Corinthian Colleges was a for profit school which was forced into bankruptcy in May, 2014 after DOE cut if off from federal loans because of a myriad of violations.  The Consumer Financial Protection Bureau (“CFPB”)  brought suit against Corinthian for deceptive loans and predatory collection practices involving a scheme between Corinthian and Aequitas Capital Management, Inc.  The scheme was an attempt to circumvent the 90/10 rule.  Corinthian jacked up tuition costs beyond the amounts that students could obtain from federal loans.  Corinthian then made a deal with Aequitas whereby Aequitas would fund private loans peddled by Corinthian to its students under the Genesis Loan program.  These loans had interest rates up to 15% according to an article published in the Washington Post.  https://www.washingtonpost.com/news/grade-point/wp/2015/10/28/government-watchdog-wins-530-million-lawsuit-against-for-profit-corinthian-colleges-too-bad-it-will-never-see-a-dime/  .  The loans were then sold back to Aequitas.  By adding these private loans, Corinthian (at least of paper) was able to comply with the 90/10 rule since private loans along with tuition count toward the 10% outside funding required by DOE for profit schools.

CFPB obtained a default judgment against Corinthian in the bankruptcy court.  In the meanwhile, the SEC placed Aequitas in receivership.  The CFPB sued Aequitas and recently announced a proposed settlement.  Under the terms of proposed settlement, approximately 41,000 students/borrowers may obtain up to $183.3 million in loan forgiveness.  The proposed settlement is subject to approval by the federal court in Oregon.

We will keep you up to date on this matter.  In the meanwhile, any ex-Corinthian students should actively pursue this matter to determine if their loans may be subject to forgiveness.

 

 

Can You Settle on a Federal Loan?

A frequently asked question from many borrowers is whether they can settle their student loan debt by means of a  reduced, lump sum payment?  Usually, the borrower is behind on payments, and a parent is willing to step up to the plate.  That question leads to my first question, are we talking about a federal loan or a private/state loan?

Let’s assume that the loans are federal loans?  The answer is that you can settle on a federal loan.  The issue is whether it makes sense.

First of all, you can only settle on a federal loan if it is in default.  That means generally that you are behind 270 days on payments.  In other words, you missed 9 payments. Note that a default triggers a slew of collections efforts that do not require a court judgment.

The two main types of federal student loans are Direct Loans and FFEL (Federal Family Education Loans) What deals are the feds willing to make on a Direct loan?  Well, there are general rules which indicate that the government will offer a compromise on a case by case basis based on all the facts and circumstances.    However, the following options were spelled out in the DOE’s 2009 PCA manual (http://www.studentloanborrowerassistance.org/wp-content/uploads/2013/05/2009-pca-procedures.pdf):

100% of principal and interest with no collection fees;

100% of principal and 50% of interest with no collection fees; or

90% if principal and interest with no collection fees.

Note that you cannot demand by right the above options.  The DOE has to agree to such options based on the facts and circumstances of your case.

The other principal type of federal loan is the FFEL which are issued by a private lender but guaranteed first by a guarantee agency and then ultimately by DOE.  Guaranty agencies may compromise or settle for no less than 70% of principal and interest with no collection fees.  The guaranty agency can theoretically give you a better deal, but it does not bind the DOE.  So, if you make a deal for 50% of principal and interest with the guaranty agency, the DOE can come after you for the difference.  It is important to get any compromise in writing and the writing should state that the DOE is bound by the terms of the settlement, and the DOE should sign off on the agreement.

The amount of the discount for a lump sum payment is rather underwhelming.  Why won’t the DOE and guaranty agencies make a better deal?  The reasons are many but two main reasons are that federal loans give the borrower the option to pay according to his or her income.  And, the collection powers of the federal government are so strong that they know they are going to get their money- one way or the other.

So, the answer to the question of whether you can settle on a federal loan is yes, but the real question is why would you want to?

 

 

 

Federal Student Loan Repayment Plans

A student is required to sign a promissory note when she or he borrows money from the US Department of Education.  The note, however, does not have specific repayment terms.  What happens is that when you finish of leave school, you will be contacted concerning what payment plan will be applied to your loan.  You have the following options:

  1.  Standard Repayment- the loan is for a term of 5-10 years;  your payment goes to interest and principal so that the balance is paid in 60-120 payments.  This payment plan usually has the highest monthly payment.  At the same time, with a standard payment you pay the least amount of interest over the term of the loan.  If you do not pick a payment plan, DOE will default you into a standard plan.
  2. Standard (post 2006)- For Direct consolidation loans, the standard repayment option calls for a 10 year repayment if the amount due is less than $7500 and is extended to 30 years if the amount due is equal to or greater than $60,000.
  3. Graduated Repayment- payments start low but increase over the term of the loan which is 10 years.  This option works for students who expect to see steady increases in salary over the period.
  4. Extended Repayment- if the amount due exceeds $30,000, then you can repay on a standard or graduated repayment basis for up to 25 years.
  5. Income Driven Plans (IDR)- this is a generic term for repayment plans that are based on income.  You must specifically apply for a particular IDR program or you can request that the servicer put you into what it believes will be the least expensive program for you (do not recommend that approach).   You have to re-apply each year and provide proof of your income.  After you have made required payments for the term of the plan (20-25 years), the balance is forgiven.  However, that balance is reported to the IRS a debt forgiveness income and you may be liable for taxes at that time,
  6. IDR’s include the following:  Income Contingent Repayment (ICR), Income Based Repayment (IBR), PAYE plan and REPAYE Plan.  Each program has its own requirements and terms.
  7. If your income is low enough, the payment under a given IDR can be less than the interest that is accruing on the loan(s).  In such case, the interest is being capitalized into the principal, and the balance actually gets larger.
  8. You are not locked into one repayment plan during the term of your loan.  In fact, many students switch repayment plans to suit their specific needs at the time.

Repayment plans have specific eligibility requirements, especially IDR’s.  In many cases, it makes sense to consult with an experienced practitioner in this field to understand what your options are, and you obligations for each option.

 

Student Loans and Bankruptcy- Another Perspective

Frequently, I have someone call me to inquire about bankruptcy because they cannot afford to pay their student loan debt.  I explain to them that bankruptcy discharges student loans only if the debtor can demonstrate to the court what is called an “undue hardship”.  While under the right circumstances, a debtor can prove “undue hardship”, it is a very high hurdle for most prospective debtors, and expensive  Not only do you have to pay for the bankruptcy, you are required to file an adversary proceeding; that is, a lawsuit within the bankruptcy.  To the extent that the lender opposes the discharge, this means all the elements of litigation- pleadings, discovery, court conferences, motions and trial.  It adds up.

However, that does not mean that bankruptcy cannot be part of a strategy to deal with your student loan debt.  Just as the average homeowner is not going to get out of paying her mortgage, the average student loan debtor is not going to be able to immediately walk away from her student loan debt.  But, you can take steps to make the payments affordable so that you are not sued (if private loan) or subject to an administrative garnishment or social security intercept (if a federal loan).

How can bankruptcy help?  Well, lets say you have $100,000 in student debt and make about $50,000 per year.  You are single with no dependents.  Your rent is high because rents are high in northern  NJ.  Your withholding taxes take 20-25% of your gross income.  Utilities, cable, phone, food, car loan or lease and insurance,an occasional night out (the basics).  Your budget is tight so you used the credit cards they sent you.

So you have $30,000 of credit card debt, about $5,000 of medical expenses that the insurance did not cover. Besides the basics, you are looking at about $500 in monthly payments for credit cards (just above minimums) the hospital (so they don’t sue you).  And then you have to pay your student loans.

A standard repayment in this example is over $1000 per month. But  Income Based Repayment ( IBR) and  REPAYE are less than half that.  Getting close.  If somehow, you could get rid of some of that non-school loan debt, you might be in a position to afford the student loan debt.

A Chapter 7 bankruptcy could discharge the credit card and medical debts.  That would free up over $500 per month.  More importantly, those underlying debt are discharged.  Gone forever.

When you come to Kevin Hanly, Esq. LLC for a student loan analysis, we look at your entire financial picture to arrive at a strategy to make your student loan debt more affordable.  Most times that includes an income based repayment plan. Sometimes, it includes considering and maybe filing bankruptcy.

To get a better idea how bankruptcy works, you can check my bankruptcy website and blog at bankruptcy.kevinhanlylaw.com.

Forbearance-Any Good?

According to the regulations, forbearance of federal loans involves a loan holder agreeing to a “temporary” stoppage of payments, an extension of time for making payments or acceptance of less than the full amount due.  The key term in the foregoing definition is “temporary”.

Over the last year, I have had the opportunity to talk with many people who have student loan debt.  A fair amount of them have told me that they could not afford their federal student loan payment, called their servicer, and were put into a forbearance.  Some have told me that they have been in a forbearance for two or three years.  Wrong.

That’s just not me talking.  Recently, the Consumer Financial Protection Bureau (CFPB) sued Navient, the largest servicer of student loans for, among other things, steering borrowers into forbearance rather than analyzing their situation and directing them to a more appropriate repayment plan.  Why is forbearance not appropriate?  Well, first of all, interest accrues during the forbearance period.  That could be up to 5 years for Direct and FFEL loans and three years for Perkins loans. Borrowers come out of forbearance owing sometimes more than 150% of what they owed when they entered forbearance. More importantly, when the borrower leaves forbearance, that interest is capitalized into the unpaid principal.  At that point, the borrower is paying interest on interest.

Why do servicers do this?  Since we have not had testimony in the Navient case, we do not know their rationale or excuse.  However, some of the opinions include that it makes life easier for the servicer- many forbearances are granted over the phone.  Also, many proprietary schools (for profit) place students in forbearance to avoid defaults especially during periods when their default rate is being monitored by the government.

What should you do if you cannot afford your federal loans?   Well, you could consider an income driven repayment plan.  This would make payment affordable (in some cases $0) and you still get credit toward loan forgiveness.

Are there any circumstances where a forbearance is a good idea.  Yes if the forbearance is temporary.  An example would be that you are close to default date, have applied for an income driven repayment plan, and are awaiting a decision which can take up to 90 days.  Rather than slip into default, it would be wise to obtain a forbearance until the decision is made.

Be smart in dealing with your federal student loans.  There are options out there.  Reach out for help.  An experienced student loan attorney can be of real help.

Student Loan Deferment Basics

Student loan deferment is a temporary method to stop payments and keep you out of default during the deferment condition.

A few basic rules:

1.  You cannot get a deferment if you are in default.

2.  If you have a subsidized loan, the government pays your interest during deferment while if you have an unsubsidized loan, interest accrues during the deferment period and is capitalized quarterly.

3. Although the concepts are basically the same, each loan program (e.g., Direct Loan, FFEL, Perkins) has its own specific guidelines.

4.  You have to apply in writing for a deferment.

Related to deferments are grace periods.  If you have a Stafford loan (college), the obligation to pay begins after graduation or after the student is enrolled less that half time.  However, you given a grace period of six months to make actual payments.  For Plus loans, the obligation to repay begins 60 days after the final loan disbursement.  There is no grace period, which means that you need to get a deferment if you are still in school but not making payments.

Types of Deferments:

  1.  Graduate School Deferment- You can apply for deferment while in graduate school which defers payment not only on your graduate loans but also on your undergraduate loans for a period of 6 months after graduation or 6 months after you are enrolled less than half time.
  2.  Hardship Deferment- You graduated and are working but (a) are on public assistance, (b) earn less than 150% of the poverty level for family of your size or c) are involved in certain types of employment like the Peace Corp.  The hardship deferment is for a maximum of three years, but is given in one year increments.  At the end of each year, you must submit updated documentation/information to confirm that you are still eligible.
  3.  Unemployment Deferment-  You are out of a job.  The simplest way to prove this is to provide proof that you are receiving unemployment benefits.  Or you can prove that you registered with an employment agency and have actively been looking for a job.  The unemployment deferment relates back to the time you become unemployed (up to 6 month look back) and lasts for up to three years.
  4.  Military Deferment-  You are in the military or National Guard and on active duty during a war, military operation or national emergency.  The deferment lasts for 180 days after the demobilization date for each period of service.

You should note that the requirements relating to each type of deferment have and do change based on changes in the law by congress and/or regulations by the executive branch.

Deferments are a short term solution to keep you out of default. In certain case, like the unemployment deferment, there are better solutions to keep you out of default.  Those solutions will be the subject of future blogs.

 

 

Feedback From Public

This week, I had the opportunity to speak to a Rotary group about student loans.  I have been a member of Rotary, an international service organization, since the late 1980’s.  All clubs meet on a weekly basis.  A meal is shared and then club business is addressed.  At least 1-2 times per month, there is a guest speaker.

During the lunch, I had the opportunity to speak with the Rotarians at my table, all of whom have adult children who are finished with school.  All remarked how expensive college and graduate schools have become over the last 25 years, and that the high cost of post secondary education was postponing young people from marriage, buying a home, and/or having children.  The consensus was that this is not good for society.  I agree.  What was interesting about this conversation was that they all were of the opinion that a the biggest culprit for this almost exponential increase in post secondary education costs was the federal government. (and this was a town that went blue in 2016).  They reasoned that by making money readily available to students, the federal government actually encouraged schools to raise their costs of attendance far beyond the rate of inflation.  Although there are many reasons for the increasing in cost of education, they certainly have a point.

My speech went about 5 minutes over what I had planned, but only 2 or three of the audience appeared to be glazing over or nodding out.  Most of the presentation dealt with federal loans- the programs (Direct Loan, FFEL, Perkins); types of loans (Stafford, Parent Plus, Grad Plus, Perkins); deferments and forbearances; repayment plans (Standard, Graduated, and the various income driven plans); and how you get into and out of default.  The presentation concluded with a brief discussion on private loans and bankruptcy.  While the group seemed attentive, they did not react much until I started speaking about loan servicers.  That led to more than a few groans and chuckles.

After the talk, I had the opportunity to speak with 3 audience members who had specific questions.  All started out by saying that either they or their children had been trying in vain to get straight answers from their loan servicers.  Given their comments and the general reaction during my speech, even the casual observer senses that servicers are not doing a satisfactory job.

This anecdotal evidence is borne out by the fact that the Consumer Financial Protection Bureau (CFPB) has sued Navient, the largest servicer of federal and private loans, for failure to properly advise students about their options, losing documents and misapplying payments, among other things. The Bureau seeks to obtain permanent injunctive relief, restitution, refunds, damages, civil money penalties, and other relief for Defendants’ violations of Federal consumer financial laws.

It does not give students and their parents much confidence when the largest servicer of student loans is being sued by the government for failing to do its job.

The new administration knows that there is a problem with student loan servicing.  One of their solutions is to reduce the number of servicers to a single servicer.  I do not think that is a good idea.  With no competition, what incentive would this lone servicer have to fly right (especially considering that the administration is also vowing to eliminate the CFPB)?  Another solution is that servicing should be turned over to the IRS.  As crazy as this sounds, there is some bi-partisan support in Congress for this action.

IMHO, none of the proposed solutions to the servicer problem will insure good service to the consumer.  In the short run then, students and their parents might consider consulting and utilizing experienced student loan counselors (either attorney or non attorney) in assisting them with servicer and other student loan issues.

 

Federal Loans

A quick review of federal loans:

-you will need to fill out a FAFSA

-Two federal loan programs.

1. The first is the Federal Family Education Loan Program (FFEL) which was created by the Higher Education Act of 1965.  A bank or Sallie Mae is the usual lender.  The lender is insured by a guaranty agency, which is usually a state agency .  In New Jersey, the NJ Higher Education Student Assistance Authority acts as a guaranty agency for FFEL loans.  If a borrower defaults on a FFEL loan, the lender is paid by and transfers the loan to the guaranty agency.  The guaranty agency attempts to collect the loan.  If the guaranty agency does not collect, it is paid by and transfers the loan to the US Department of Education (ED).  The FFEL program was  discontinued as of July, 2010.  Note, however, that there are still many FFEL loans outstanding.

2. The second program is the William D. Ford Federal Direct Loan Program (commonly known as the Direct Loan Program) which was created by the Student Loan Reform Act of 1993.  With Direct Loans, the lender is ED.  If you received a federal loan after June 30, 2010, it is a Direct Loan.

-Types of loans: Stafford, Perkins, Parent Plus, Graduate Plus

1. Stafford

For undergraduate students, Stafford loans are either subsidized or unsubsidized.  With a subsidized loan, no interest accrues until six months after graduation or six months after you leave school.  A subsidized loan is based on need.  With an unsubsidized loan, interest begins to accrue once the funds are disbursed.  With either type of loan, payments are deferred until six months after graduation or six months after you leave school.  With unsubsidized loans, the accrued interest is capitalized into the principal, so you are paying interest on interest.  Therefore, it is wise to pay down the interest portion of the unsubsidized Stafford loan each year while you are in school.  For graduate students, the unsubsidized loan program has ended; therefore, all new Stafford loans are unsubsidized.

The maximum amount of Stafford loans for dependent undergraduates is $31,000 (with maximum of $23,000 subsidized); for independent undergraduates, $57,500 (with maximum of $23,000 subsidized).  For graduate students, the maximum amount of Stafford loans is $138,000; for medical students, $224,000.

2. Perkins

Perkins loans are based on exceptional need.  The limit per year for undergraduate students is $5,000 with a cumulative limit of $27,500; for graduate students the yearly limit is $8,000 with a $60,000 cumulative limit which applies to both undergrad and graduate loans.  The interest on Perkins loans is subsidized and the deferment period is 9 months after graduation or 9 months after leaving school.

3.  Parent Plus

In this case, it is the parent or step parent of a dependent student who borrows the money.  The parent and student must not be in default of any federal student loan.  The parent must pass a credit check. Moreover, the parent or step parent must be a US citizen or an eligible non-citizen.  The annual loan limit is the cost of attendance less any other financial assistance received.  Beginning on or after October 1, 2016, a 4.276% origination fee is withheld by ED at the time of the disbursement and the remainder is disbursed into the student’s account.  Interest accrues upon disbursement and payments begin 60 days after disbursement (unless the parent specifically requests and receives a deferment).

4.  Grad Plus

The graduate student must be enrolled at least half time in a degree granting program.  The student must pass a credit check  The annual loan limit is the cost of attendance less any other financial assistance received.  Beginning July 1, 2013, the interest rates on Grad Plus loans is variable with a maximum of 10.5% (ouch).  Interest accrues from date of disbursement.  Payments begin six months after graduation or six months after you leave school, and the accrued interest capitalizes into the loan so you are paying interest on interest.  The origination fee is 4.276% and the balance is disbursed to the student’s account.