Federal Student Loan Advice For New Grads

Kelsey Gee wrote an article which appeared in the May 13-14 edition of the Wall Street Journal entitled “Outlook is Rosier for Class of ’17”.  Good news for a change.  According to the executive search firm, Korn/Ferry International, salaries, adjusted for inflation, are expected to be up 14% from 2007 for undergrads.  The overall average is expected to be a tad under $50,000; however, the average for software development is $65,232; engineers, $63,036; actuaries, $59,212; and scientists and researchers, $58,773.  A survey conducted at Adelphi University indicates that 2/3 of those responding had at least one job offer.  But, the executive director of career services at Adelphi warned that only about 30% of the class responded to the survey.  He also warned that the average student could expect a 6 month search before landing a job.

A good many of these graduates have federal student loans.  If so, then the student has a six month grace period before payments begin for Stafford loans, and a 9 month grace period for Perkins loans.  There is no grace period for Parent Plus loans.

If you have a subsidized Stafford loan, the government is paying the interest until the end of the grace period.  However, if you have an unsubsidized Stafford loan, you are being charged interest from the time you draw down the money.  The unpaid interest in capitalized onto the principal, so you are paying interest on interest.  Not a good situation (especially if you are a graduate student and are accumulating loans over 5-7 years).  My advice to the undergrad is to contact your servicer upon graduation (or the start of your job) and make arrangements to pay down the interest that is accruing.  It will save you a few bucks.

Also, if you are working in the public sector or a non-profit, look into the Public Service Loan Forgiveness (PSLF) program.  If you are qualified and make 120 payments, you can be eligible to have the remainder of your student loan debt forgiven tax free.  Be careful, though, because you have to have the right type of employer and the right type of payoff plan for this program to kick in.  If you need help in this area, contact a qualified student loan lawyer

And for those students who do not find a job, my advice is, DO NOT let the servicer talk you into applying for a forbearance.  There are better ways to deal with this situation.

 

 

 

Closed School Discharge

For the most part, you have to pay your federal student loans for an extended period of time before the loan balance is forgiven.  And in most cases, even if the loan balance is forgiven, you will have to pay taxes of the forgiven debt.

However, there are some instances where your federal loan can be administratively discharged.  One such instance is when the school closes.  Nowadays, on a fairly regular basis, we hear reports of “for profit” school going out of business.  In 2013, the DOE reported that of 128 schools that had closed in the prior 5 years, 82 were “for profit schools”.

So, how do you qualify for a closed school discharge?  First, it has to be a federal loan.  That means a Direct Loan, a FFEL (Federal Family Education Loan) or a Perkins loan.  This includes a Parent Plus Loan.  Second, the loan proceeds were disbursed after January 1, 1986.  Third, the student was enrolled or on an official leave of absence on the date of closure, or had withdrawn not more than 120 days prior to the date of closure.  Fourth, you have to file an application for discharge of the loan.

Sounds pretty straightforward, but the closed school discharge, like everything with federal student loans, has its own regulations and internal rules.  So, if you do not follow the rules you may find that you do not get the discharge.

Moreover, there are some pitfalls.  First, if you already graduated, then you cannot get the closed school discharge.  I have heard from more than one student that the school from which they graduated had closed, and they should be reimbursed on payments because the education that they received was a useless waste of money.  That may lead to different issues, but it will not get you a closed school discharge.

Second, if the school has numerous branches, the discharge only applies if the branch that you attend is closed.  If you are taking all your courses online, then the closed school discharge applies if the main campus closes.

Third, if you transfer your credits to another school, and continue with your program at the new school, you are not eligible for the discharge.  This also applies to what is referred to as “teach out agreements”.  With teach out agreements, the closing school works out a deal with another school or with a non-closing branch of the school to accept the student into its program.  However, a school cannot force a student to accept a teach out agreement if the courses are being taught at a location different from where the student was enrolled.

If you received a closed school discharge, you do not have to repay the loan, any accrued interest or any collection or administrative fees associated therewith.  Moreover, the student borrower is entitled to reimbursement for any payments made on the loan.  And, if you qualify for the closed school discharge, the amount discharged is not subject to tax.

 

Continuing the Theme

In the last post, we warned the readers to be careful in dealing with servicers who have shown a tendency to push borrowers who are having problems paying back their loans into forbearance rather than giving advice as to how to get into income driven repayment plans.

In 2016, DOE officials, at the request of the Obama administration, sent out memoranda to servicers advising them to be more proactive in helping borrowers manage and/or discharge their debt (“2016 memoranda”).  The problem from the servicers’ point of view is that providing the services requested in the 2016 memoranda would require more sophisticated representatives to deal with the borrower’s issues.  Those reps need to be trained, and then be paid a salary commensurate with their enhanced abilities.  Moreover, the reps will need to spend more time with borrowers to try to arrive at a workable plan.  Bottom line- what the 2016 memoranda requested is much more expensive for servicers and, undoubtedly, will cut into their profit.

Servicing contracts for student loans are awarded on a multi-year basis by the Federal Student Aid Office.  The current contracts are set to expire in 2019.  The general consensus of experts in the area of student loan servicing was that the reforms called for in the 2016 memoranda would be considered seriously in evaluating which companies get  the new contracts.

Navient is in consideration for the 2019 servicing contracts. In January, 2017, the CFPB and the attorneys general of Illinois and Washington filed lawsuits against Navient.  Among the allegations were that Navient did not adequately inform borrowers about more affordable income driven repayment plans, lost paperwork and misapplied payments. The lawsuit, the numerous complaints by individual student loan borrowers to the CFPB ombudsman, and the attendant negative publicity associated therewith, could not enhance their chances of being awarded a new contract. One would think.

But, the pushback is well under way.  About two weeks ago, the National Council of Higher Education Resources, one of the student loan industry’s main lobbyists, set letters to the House and Senate appropriations committees urging that Congress direct the DOE to look at the new servicing contracts to reduce unnecessary and burdensome requirements.  This week, Education Secretary DeVos rescinded the 2016 memoranda stating that the proposed contract process has been beset by moving deadlines, changing requirements and lack of consistent objectives.  DeVos emphasized that the DOE should create a loan servicing environment that provides the highest quality customer service while limiting the cost to taxpayers.  No details on what any of that means. Navient shares increased in value by 2% of the day of DeVos’s announcement.  So, Wall St. is betting on Navient being there when the smoke settles.

According to Rohit Chopra, the former student loan ombudsman at CFPB, the DeVos directive is a big win for companies that have run roughshod over borrowers.

What does this mean to the average student loan borrower?  There may be a restrictions on repayment plans.  But, if that happens, it will be down the line.  On a more practical level, servicers will be given a more free hand to aggressively pursuing student debt.  And don’t expect these servicers to be user friendly.

Our advice is to be pro-active, and to seek help early on in the process.

Straight Talk

It is spring break time.  So, you can expect to see stories about young people going to Florida, the Caribbean or Mexico to party.  Nothing new.  However, this year, there have been a slew of stories about students supposedly using their student loan money to fund the party.  A recent Forbes article by Kate Ashford stated that a recent poll of students indicated that 30.6% of students stated that they are using student loan money to help pay for spring break this year.

Why would students do that?  An Investor Business Daily editorial indicated that just under one-half of millennials believe that their student loans will be forgiven.  After all, Bernie Sanders advocated for forgiving student loans.

So, if the loan is forgiven, who is left with the bill?  The taxpayer.  Sometimes that approach may have some validity on a societal basis if the beneficiary is truly needy.  However, the bottomline is that people with a college degree or higher make significantly more money than people with only a high school degree.  So, in effect, the student loan borrowers looking for blanket amnesty are expecting less fortunate people to pay their debt.  Not going to work, especially considering the outcome of the election.

Lets get real.  Student debt is over a trillion dollars, and up 17% since 2013.  Student loan debt is rising at a rate 3 times inflation, and it is not getting better.  Moreover, on federal loans, the Department of Education has many nasty tools to insure that they are going to collect their money.  The loan is hardly ever dischargeable in bankruptcy, and the DOE can garnish your wages, grab part of your social security check and your full tax refund without even going to court.  Private lenders got all the benefits of non-dischargeability without having to make concessions to borrowers on repayment plans geared to income (Congress really dropped the ball on this one).   Borrowers are not going to get a political bailout, and face a daunting task if they default on either a federal, state or private loans.

Who do you turn to?  Your friendly servicer.  According to the government, the servicers are there to advise the student about the best way to deal with their students loans.  But many just push you into forbearances. In the short run, that may forestall payments.  However, the accrued interest is just added to your principal debt.  So, you leave forbearance owing more than you entered.  In January, the CFPB filed a 66 page complaint against Navient alleging, among other things, that Navient pushed federal loan borrowers with long term employment issues into forbearances instead of income driven plans.

Your student debt is not going to go away miraculously.  You are going to have to deal with it.  We are here to help.