Tag: loan forgiveness

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.

Some Assistance with NJCLASS Loans with RAP and HARP

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In early 2018, about a half dozen bills were introduced to deal with student loan issues.   Unfortunately,  those bills languished in committee.

In October, 2018 S3125 and S3149 were introduced dealing specifically with NJCLASS loans.  Two months ago, the bills passed both houses of the Legislature and were signed into law. This blog will deal with S3125.  The next, S3149.

S3125  has two parts.  The Repayment Assistance Program (RAP) deals with NJCLASS loans issued in the 2017-18 academic year and thereafter.   If you are facing an economic hardship, you can apply for RAP .  An economic hardship means that the amount that you currently pay on your NJCLASS loan is more than 10% of the total aggregate household income of all the parties to the loan (borrower and co-signer) minus 150% of the federal poverty guidelines for your household size (which becomes your new payment).  The minimum monthly payment is  $5.

You stay in the program for 2 years.  HESAA pays the interest on the bonds.  Your payment is applied to principal which means that after the two years,  your loan  balance will  be lower.  Before your break out the champagne, however, if you are unemployed or significantly underemployed, your monthly payments could be as little as $5 per month.  That means that your loan balance goes down a whopping $120.  But it keeps you out a default, litigation and possible garnishment of your wages.

After RAP,  the student is supposed to make regular monthly payments based on the loan documents.  However, if  the student and co-signer continues to face an economic hardship, the borrowers can qualify for the Household Affordable Repayment Plan (HARP) beginning with loans issued in the 2018-19 academic year and thereafter.  Under HARP, economic hardship means the regular monthly payment exceeds 15% of the total aggregate household income of all parties to the loan minus 150% of the federal poverty guidelines for your household size.  That becomes your new payment subject to a $25 per month minimum.

If you are in HARP, you can expect that your loan balance will probably increase each year because your monthly payment will probably not cover the interest portion of your payment.  Each year, you will have to submit your income information to HESAA to prove that you qualify.  The repayment term is extended to 25 years.  If you stay in the HARP program for 25 years, the balance of your loan  (which is significantly higher)  is forgiven.  Although the law does not say so, I am pretty sure that the forgiven balance will be reported to the IRS, and you may be required to pay taxes on that amount.

If after a given year your income increases so that you do not qualify for HARP, any unpaid interest is capitalized back into your loan, and you must pay that amount over the original loan repayment plan at your contract rate of interest.

RAP and HARP are not open ended.  Only a certain amount of loans can qualify.  That amount is set forth in the bond documents but not in the law.   So, do 10% qualify?  30%?  50%?  Dunno.   It is first come, first served.

Far from a perfect solution to overburdened NJCLASS borrowers and co-signers,  but a start.

 

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.