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Forbearance-Any Good?

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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

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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

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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

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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.

 

 

 

 

 

Continuing the Theme

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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

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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.