Tag: Direct Loan

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?

 

 

 

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.

 

 

 

 

 

Closed School Discharge

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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.