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Some Ideas About Easing Student Loan Debt Burden

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In the last blog, we discussed whether the government will just forgive student loans. The skeptic in me sees this as a long shot. So, what can be done, short of forgiving all students loans, that can ease the burden on borrowers? We are talking federal loans because that is the bulk of the $1.5 of outstanding student loan debt. Here are some ideas:

  1. Eliminate or significantly reduce origination fees. Right now, undergrads are paying a 1.062% origination fee on their Stafford loans. Not onerous. But, let’s look at Parent and Grad Plus loans. The current origination fee is 4.248%. That is highway robbery! Borrow $100K, owe $104,248 right off the bat. Not right. Reduce the origination fee to 1%.
  2. Decrease the interest rates. Right now, interest rates are 4.53% on Stafford loans. But, the interest rate for Parent and Grad Plus loans is currently 7.08%. There is no reason that the interest on Parent and Grad Plus loans should be any higher than Stafford loans. The interest rate should rate should be fixed at say, 4%. And stay at that rate. Yes, it could be a subsidy to the borrower if interest rates increase, but it is much less a subsidy than forgiving all loans.
  3. Right now, federal loans can be forgiven in an income based repayment plan after 20 years (depending on the program). However, after the loan is forgiven, you have to pay federal income tax on the amount forgiven. Out of the frying pan and into the fire. Any cancellation after years of payments should not be a taxable event.
  4. Amend the bankruptcy code on discharge of student loans. Prior to 1978, student loans were dischargeable in bankruptcy. The Bankruptcy Code of 1978 allowed a discharge for undue hardship or after 5 years of payments. In the 1980’s, the law was amended to allow discharge for undue hardship or after 7 years of payments. In the 1990’s, only proving undue hardship translated into a discharge. Undue hardship is extremely difficult and costly to prove. In NJ, you must show that if you paid your loan, you could not maintain a minimal standard of living, that situation will continue for the life of the loan, and you made a good faith effort to repay the loan. The problem for college grads is that the statistics show that their incomes tend to increase the longer that they are out of school. So, it is difficult, absent some disability, to convince a court that your inability to maintain a minimal standard of living will continue for 10-20 years. Go back to the discharge after 5-7 years of payments.
  5. Give employers tax incentives if they contribute to employees’ student loans. The employer gets a deduction, and the contribution is not taxable income for the employee. A recently introduced bill will allow employers to contribute up to $5250 per year tax free to be used for student loan repayment.

Final thought. We have to look at the source of the problem. That is that college and grad school in the US are way too expensive. Over the last 30 years, those costs have risen at twice the level of inflation. It is beyond my pay grade, but something has to be done to bring these costs down.

Student Loans Forgiven?

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We have heard the facts. Over $1.5 trillion in student debt. Students are leaving school with $40,000 in student loan debt for college. Double or more if you add graduate school loans. More and more borrowers are becoming delinquent on their loans. More and more are going into default.

The media reports that millennials are putting off buying a home, getting married or having kids because of their student loan debt. I do not know whether that is a fact, but it is plausible.

We are at the beginning of a new election cycle. More than one politician has said that student loans should be forgiven, in whole or in part. Others are coming up with schemes that involve private parties subsidizing the education of students in return for future employment and undefined repayment plans. Fingers are being pointed (and rightfully so) at the Department of Education which is slow walking application for loan forgiveness under the Public Service Loan Forgiveness Program.

I would venture to say that at least some of the student loan borrowers believe (or hope) that their loans will be forgiven. Why do I say that? Many student loan borrowers tell me this. Moreover, lately my website is getting about one third of the hits that it received a half a year ago. So, some borrowers believe that a bailout is in the winds.

For the last decade, I handled many foreclosure cases. I argued, among other things, that lending institutions engaged in widespread predatory lending and other consumer law violations. For a while in New Jersey (2010-2013), we were able to convince the courts of the righteous of our arguments. Then, the tide turned. It is now very difficult to defeat a lender in a foreclosure action.

Now, there are a lot of reasons, as I see it, that the tide turned. And I will not bore you with all my theories. But, I do believe that a concept called “moral hazard” came into play. In simple terms, that means that your neighbors who were struggling to pay their mortgages were really not moved by the fact that a neighbor who is, in effect, not paying their mortgage for a 2 year foreclosure process should be let off the hook because a loan may be predatory. Or as more than one judge put it, your client took the money, he has to pay it back.

My parents told me to go to college so that I could earn a better living. Statistics indicate that college grads earn over twice as much as high school grads over a lifetime. So my parents were right.

Now, lets look at student loans. Basically, we have 3 categories of people out there- 1) people who went to college and paid for it; 2) people who did not go to college and are making about 1/2 as much as college grads; and 3) people who are going to college and have a lot of debt. Say you are in category 3. Ask yourself a question. Do you really think that people in categories 1 and 3 think it is fair that you get to dump your student loans. The people in category 1 paid their loans. The people in category 3 are going to make 1/2 what you are going to make. Moral hazard. You bet, and worse than in the foreclosure scenario. Why, because in the foreclosure scenario, the bank takes the hit. In the student loan scenario, the taxpayers take the hit. And if you think that only rich taxpayers will take the hit, I got a bridge to sell you.

Now, I cannot predict the future. Our next president may be able to forgive student debt. But, a lot of taxpayers are going to find out that they are the one’s paying off other people’s student debt in the form of higher taxes or lesser services. And they will vote accordingly in the next election.

In the next blog, I will throw out some practical ideas on how to deal with this real problem.

NJ Class Loans- Is Settlement an Option?

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Recently, I posted a blog on a new law that allows for income based repayment plans for certain NJ Class loans under certain conditions. A step in the right direction but not a giant step.

At the same time, the Legislature passed another bill (S3149) which is entitled “An Act concerning the default and rehabilitation of NJ Class Loans…” Once again, less than the eye meets.

The Act defines what constitutes a default-failure to make an installment payment for at least 180 days if the loan is payable monthly or 240 days if loan is paid less frequently than monthly. That is an improvement. On the bulk of the loans, you have to miss at least 6 payments before HESAA (Higher Education Student Assistance Authority) can come after you.

The Act also states that a party in default can enter into a settlement agreement either pre or post judgment based (1) on the terms of the loan and (2) the borrower’s ability to pay. The request must be in writing. HESAA shall acknowledge receipt of the request within 15 days. Within 30 days of the parties coming to oral argument as to the settlement, HESSA will provide a written settlement agreement to be signed by the parties. I am skeptical about the ability of the borrower to actually negotiate terms with HESAA counsel. I would think that you submit your income and expenses to HESAA and they offer you a “take it or leave it” deal. However, if HESAA is operating in good faith, it should be better than the payment you could not afford Now, here is the key-if the loan is financed by the issuance of bonds, the settlement agreement cannot violate the terms of the trust indenture.

If the borrower makes 9 on time payments out of 10, the loan shall be considered rehabilitated and HESAA will report to the credit agencies that the loan is no longer in default. Note, if after rehabilitation, the borrower misses 6 payments, then the borrower is in default again. At that point, the borrower cannot rehabilitate again.

Historically, NJ Class Loans have been a difficult problem for borrowers. There was no right to an income driven repayment plan. More importantly, you could not consolidate or rehabilitate out of default as with federal loans. Finally, the attorneys representing HESAA were generally inflexible and aggressive. Why? I could think of a few reasons but I will focus on the fact that NJ Class loans are funded by bonds. And the bondholders need to get paid as per the indenture and not one penny less.

Think of that for a second. If HESAA allows income based repayment and many students with lower incomes take advantage of that program, then the chances are higher that at any given time there is going to be less money in the fund than is needed to pay the bondholders. Then, HESAA would be in default unless the Legislature bailed it out with general tax funds. It does not appear that the Legislature wants to have the taxpayers bail out student loan borrowers.

Once again, I am forced to the conclusion that S3149 is helpful but no panacea. That does not mean, however, that if you are in default, you should not at least take advantage of the offer for settlememt

Bankruptcy Court Grants Partial Discharge of Student Loan

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In August, 2019, a Bankruptcy Court in Oregon granted a partial discharge of a student loan owed by an attorney who represents indigent criminal defendants. The attorney paid her student loans for 11 years. Notwithstanding, she owed about $198,000 to ECMC on federal loans, and over $50,000 on private loans sold to National Collegiate Student Loan Trusts. The Debtor defaulted on the NCSLT loans. The trusts accelerated the loans and filed suit.

The Debtor filed under Chapter 7 and then filed an adversary proceeding to discharge the student loans. The Debtor settled with ECMC to allow an income based repayment under REPAYE. Based on her income, the monthly payment to ECMC was set initially at $479 per month. She went to trial against the trusts.

To obtain a discharge of a student loan debt, a debtor must show that excepting the debt from discharge would impose an undue hardship on the debtor and the debtor’s dependents. Undue hardship is not defined in the Bankruptcy Code. In determining whether an undue hardship existed, Oregon court applied the Brunner test. (It should be noted that bankruptcy courts in New Jersey also apply the Brunner test.)

Under Brunner, to show undue hardship, a debtor must demonstrate that, given current income and expenses, she cannot maintain a minimum standard of living if the student loans were to be paid according to their terms; that this situation is likely to persist for a significant portion of the repayment period; and the debtor has made a good faith effort to repay the loan. In many cases, the second prong of the test (situation likely to persist) creates difficult proof problems for the college educated, younger debtor without health issues.

The debtor’s schedules indicated negative income of $474. However, the Court found that some of her expenses were not reasonable and were backed out. Given the monthly payment to ECMC, however, the Court found that the Debtor could not maintain a minimal standard of living if she had to pay the NCSLT loans which could come to over $900 per month based on the Oregon wage garnishment statute. That got the debtor over the first prong of Brunner. In regard to the second prong, the court found that the debtor was in a niche practice and her opportunity to generate more income over the life of the loans was not realistic Moreover, if her income increased, her monthly payment to ECMC would increase. I believe that judge conducted the proper analysis of the second prong; however, many courts would have looked at her age and law degree, and concluded reflexively that she could have sufficient future earning power to make the payments.

The Court also found that the debtor acted in good faith. 11 years of payments coupled with the fact that the trusts were under no requirement to give the debtor an income based repayment plan that she could afford.

The Court found that the debtor proved an undue hardship under the Brunner test. However, the Court did not discharge the NCSLT loans in total. Because some of her expenses could be cut, and there was a likelihood that her income could increase somewhat in the future, the Court discharged roughly $35,000. However, the Court said that if the debtor trimmed her expenses, she could afford to repay $16,500 of the NCSLT loans at 0% interest.

I believe this is a good result based on a thorough analysis by the judge. However, we are talking about an unpublished opinion out of Oregon. NJ bankruptcy judges are not bound by this opinion but should consider the thoughtful analysis of that court.

College Tuition: Out of Control

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A recent article in NJ Advance Media compared the tuition costs of NJCU ( the old Jersey City State), St. Peter’s University and Stevens Institute of Technology, and projected out tuition costs through 2037. The results are disturbing, to say the least.

The study deals with tuition and fees only, and assumes a 2% increase each year. The study does not include room and board which could add another $10,000 to $20,000 to the equation. For 2019, NJCU has tuition and costs of $12,386. St. Peter’s, $37,677 and Stevens, $52,598. If you add in $15,000 for room and board, we are talking over $52,000 per year to go to St. Peter’s.

But, there are projected increases. In this study, they assume 2% per year (although colleges have raised their tuition over the last 20 years more than twice the inflation rate). So, by 2037, you can expect tuition and fees to be $31,390 for NJCU, $83,740 for St. Peter’s and $107,349 for Stevens.

So, what is going to happen? Well, we see many presidential candidates saying that all student loan debt will be forgiven. But “forgiven” means that the taxpayers foot the bill. Frankly, that is not feasible. College grads earn significantly more than non-college grads over their lifetime. How can you have people earning less money subsidize people who earn more money? Also, people who sacrificed to avoid student loan debt will be subsidizing those who took the money. I may be wrong, but I do not see the American people buying into that scenario.

Something has got to give. I do not have a crystal ball, but I see a combination of initiatives that can reduce the cost of college to the student.

Administrative expenses at colleges have grown exponentially over the last 40 years. Much of that is the result of the government becoming more involved. A balance has to be found which will insure that fundamental student rights are fostered but without having a dean and staff for every group on campus. Belt tightening is in order.

529 programs have to be expanded and modified. Although 529 plans originate in the Internal Revenue Code, in practice it is a federal/state program. Each program is specific to your state. Currently, most investments in education savings plans allow earnings to grow tax free, and allow the taxpayer to withdraw up to $10,000 per year for a qualified educational expense. Given the current tuition rates, qualified withdrawals need to be increased.

Most colleges and universities (private and public) have endowments. Ivy League colleges are using some of their vast endowments to provide grants to their students whose family earns less than $100-125,000 per year. Now, very few colleges have the endowment of a Harvard or Columbia, but colleges can be required to set aside a fixed percentage of the earnings on their endowments for financial aid in the form of grants. To insure that colleges actually follow through on this initiative, failure to comply with set asides could subject the endowments to tax.

Finally, the Bankruptcy Code was modified in the late 1990’s to make student loans non-dischargeable except in cases of undue hardship. Undue hardship is very difficult to prove in court, believe me. However, before the 1978 Code, student loans were dischargeable. Under the 1978 Code, you could discharge the balance on your student loans if you made payments for 5 years. In the 1980’s, the law was amended so you had to make 7 years of payments to get a discharge. Congress should look back to the future and come up with a rational compromise to assist our students in debt so they can move on with their lives.

NJ Class Loans

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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.

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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?

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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

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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

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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.