Tag: default

Student Loans Forgiven?

Posted by Kevin Hanly on with 0 Comment

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.

Can You Settle on a Federal Loan?

Posted by Kevin Hanly on with 0 Comment

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?

 

 

 

Forbearance-Any Good?

Posted by Kevin Hanly on with 0 Comment

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

Posted by Kevin Hanly on with 0 Comment

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.