Last week, the President announced that he would be creating a “Student Aid Bill of Rights” through a Presidential Memorandum (similar to an Executive Order). The Bill of Rights contains some pretty great items. Here are the highlights:Read More
The U.S. Department of Education contracts out the collection of defaulted federal student loans to nearly two dozen private, third-party debt collection agencies. Borrowers, advocates, and the media have been severely criticizing the Department (quite loudly) after various independent reports accused many of these debt collection agencies of engaging in abusive and deceptive practices that violate federal law. These reports have accused the Department of poor and insufficient oversight of its contractors. Despite this, the Department has repeatedly ignored the criticism and renewed its contracts with many such agencies.
This may be changing. Perhaps in response to the growing chorus of criticism, the Department recently announced that it is terminating its contracts with five of its debt collection agencies, including:Read More
One of the largest for-profit college networks in the country, Corinthian Colleges, recently collapsed under pressure from multiple state and federal lawsuits alleging that the company defrauded tens of thousands of students: first by luring them to enroll with unrealistic promises of gainful employment, then saddling them with predatory debt and a sub-par education, and finally leaving them out to dry with dim or no viable career prospects. Corinthian was essentially forced to shut down.
This has left thousands of Corinthian graduates with unfinished or useless degrees, and an obscene amount of student loan debt. While a recent settlement with the Consumer Financial Protection Bureau will provide some debt relief to borrowers who took on predatory private student loans, many more are still left with crippling federal student loan debt. Activists, and even the Massachusetts state attorney general and other high-level officials, are calling on the U.S. Dept. of Education to forgive this debt on the basis that it should never have allowed Corinthian to benefit from federal aid to begin with.
Recently, student activists have called for a “debt strike,” whereby Corinthian graduates will refuse to repay their federal student loans to protest both Corinthian’s practices and the U.S. Dept. of Education’s complicity in what essentially has been a huge scam.
I was recently asked to give my opinion about this debt strike in an interview with Inside Higher Ed. As the article indicates, I am torn.
My heart is with the activists. Sometimes, you have to shake things up in order to make some change. These students were completely taken advantage of, and if this debt strike gains momentum and calls more attention to the wider problem of federal funding of predatory for-profit colleges, while also providing some relief for the victims of such schemes, I am all for it.
At the same time, my activist heart works in conjunction with my attorney brain. And the fact is that the federal government has enormous powers to ruin people’s lives when you default on federal student loans. Not only does federal default wreck your credit, but the federal government can tack on outrageous penalties, garnish your wages, intercept your tax refund, offset federal benefits (even Social Security), and pursue you for life- all without ever needing to take you to court.
So I support the debt strikers. And I hope they make a difference. I just want everyone who is participating to be aware of the consequences. Because they aren’t pretty.
It’s 2015, and the new Republican Congress will be taking up legislative business soon. Some people think that the discord and dysfunction in Washington is here to stay, since we had a divided government for several years already (and the Republican takeover of the Senate doesn’t change that). Others think that the President will be more willing to compromise on certain issues now, because he wants to leave behind a legacy in his final two years in office.
There are “whispers” of rather major student loan reforms that I have been hearing about lately. Many are simply rumors or speculation. But undoubtedly, student loans continue to be a major national issue, and they’re not going away. Both Republicans and Democrats recognize that the system isn’t working, and both parties have ideas about how to fix it (or at least mend it). I think we are going to see some big changes in the coming year or two in certain areas, and no movement in others.
Here’s my speculation (and that’s all this is- speculation):
Private student loans are, in my opinion, generally terrible. Why? Because their terms and conditions are very inflexible compared to federal student loans and some other types of consumer debt. Private student loan borrowers are typically stuck with whatever interest rate they have (which is often quite high), and they have very little choice about their repayment terms.
When private student loan borrowers experience some sort of hardship or distress and they can’t afford their monthly payments, even on a temporary basis, obtaining any sort of relief from their lender or servicer can be extremely difficult. Deferment and forbearance options are typically quite limited, any change in repayment terms will be temporary (if even offered at all), and default can occur quite quickly once the borrower starts falling behind on monthly payments.
If it can happen to me, it can happen to you.
So here’s the story. I have a small, private student loan with Navient (formerly Sallie Mae) that I’ve been paying for quite some time. I’ve been on automatic debit for years. I’ve written previously about being careful with auto-debit programs and this story illustrates why.
I recently changed banks, and wanted to change my banking information with Navient’s auto-debit program. So I logged into my online Navient account, and completed all of the necessary online forms to change bank account information. Navient issued me a confirmation email saying that if I submitted my request before my next billing statement had been generated, no manual payment would be necessary for the next bill, as the auto-debit would go into effect for that next payment. If I submitted my request after the next billing statement was generated, I would have to make a manual payment for that billing cycle, and the auto-debit would go into effect the following billing cycle. Okay, got it.
I had submitted my auto debit application in November, on a date before my December billing statement had been generated. So, based on Navient’s email, I was expecting that the December payment would be automatically paid via the auto-debit. But, since I’m me, I of course checked my account on the payment due date, just in case there was a problem. Turns out, there was: Read More
As some of you may know, the current system that the U.S. Department of Education uses to collect on defaulted federal student loans is… messy. To put it nicely.
The Dept. of Education contracts with over 20 individual private third-party debt collection agencies to pursue defaulted federal student loan borrowers. Individual student loan accounts are often shuffled from agency to agency, leaving borrowers confused and unsure about who is actually handling their student loan. The government has paid these agencies billions of dollars over the past several years, but numerous reports have chastised the Department for shoddy oversight, allowing abuses and violations of the law to run rampant. The Department continues to contract with agencies accused of serious, systematic violations of the law. Meanwhile, default rates are only getting worse.
Something clearly isn’t working.
When people talk to me about my student loan law practice, most will assume that my clients are all struggling 20-somethings with overwhelming loads of student loan debt. People are always surprised when I tell them that I actually have many clients who are parents struggling with the debts that they incurred to pay for their child’s education. It is natural and understandable that parents want to pay for their kids’ educations. But many do not realize the dangers of parent debt until it’s too late.
The most common type of parent loan is a Parent PLUS loan. A Parent PLUS loan is a federal loan taken on entirely by the parent; the student has no legal responsibility, only the parent. Over $10 billion in Parent PLUS loans are disbursed every year. And they are some of the worst student loans out there. Here’s why:
- Parent PLUS loans have very high interest rates, the highest among any type of federal student loan. Right now, interest rates for Parent PLUS loans are 7.21%. However, it is common for loans disbursed in prior years to have interest rates in excess of 8%, and under current law, they may rise as high as 10.5% in the coming years. That’s $1,050 in interest per year for every $10,000 disbursement.
- Parent PLUS loans incur origination fees, which can be over 4% of the disbursed loan balance. Combined with the high interest rate, this makes PLUS loans exceptionally expensive.
- Parent PLUS loans are not eligible for income-driven repayment, such as Income-Based Repayment (IBR) or Pay-As-You-Earn (PAYE). This is particularly problematic for parents who take out large Parent PLUS loans and intend to retire in the relatively near future. That may no longer be possible with huge monthly loan bills. (Parent PLUS loans can be repaid under Income-Contingent Repayment (ICR), an older and less-favorable income-driven option, under certain circumstances, but this can still be tough for many parents).
- Parent PLUS loans are federal student loans, which means they are subject to the draconian collection powers of the federal government if the loan goes into default. This includes wage garnishment, tax refund interception, and, if the parent is disabled or retired, the offset of Social Security benefits. There is no statute of limitations on the collection of this type of debt, meaning it will follow the parent to the grave.
So if you are a parent and you want to help pay for your child’s college education, it’s advisable to do this through a long-term savings plan. Relying on Parent PLUS loans may be a decision you live to regret.
Many private student loans allow for, or even require, a co-signer. Most of the time, the co-signer is not the person actually enrolling in school. The cosigner is the student’s parent, spouse, boyfriend, girlfriend, cousin, or friend. The cosigner believes, genuinely, that she is helping the student go to school to get an education. All the cosigner is doing (says the conventional wisdom) is enabling the student to get that loan that will pay for tuition, so that the one they love can get ahead in life. And that loved one will, of course, get employed upon graduation and promises (promises!) to pay that loan back.
What many people do not realize, however is this: The cosigner is just as legally responsible for the loan as the borrower.
What does this mean? If the borrower can’t or doesn’t pay, the co-signer is still on the hook. Even more disturbing, many private student loan contracts have what I call a “death and bankruptcy clause” that can be quite dangerous. Under this clause, if the co-signer or the borrower dies or declares bankruptcy, the entire balance of the loan will become due immediately, and if not paid in full, the loan goes into default. This means that if either the borrower or the co-signer experience some sort of catastrophic health or financial breakdown during the life of the loan, the loan can be in danger of defaulting, putting the other party in grave danger. This is particularly worrisome where a borrower has a private student loan cosigned by an elderly grandparent, or a parent is the co-signer on a private student loan where the child has become unable to pay.
Luckily, there may be a way out. Many private lenders allow for something called a “co-signer release,” where the lender will agree to release the co-signer from all legal responsibility on the loan under certain conditions. These conditions vary from lender to lender, and the specifics may be outlined in the loan’s original promissory note. In my experience, these conditions are often either a “buyout” (a lump-sum payment by the co-signer), or an installment arrangement (a series of on-time monthly payments over the course of time, ranging from 12 to 48 months). If the condition is met, the co-signer is released from all legal responsibility on the loan.
If you are a co-signer or borrower and you are concerned about the long-term financial stability or health of the other signer on the loan, a co-signer release may be a good pre-emptive measure to protect yourself from an unnecessary (and, arguably, unfair) default. If you want to learn more, review your loan promissory note and contact your private loan lender to get some more information about the process and requirements.
Students are moving into their college dorms this week, but recent graduates are just beginning to struggle with their student loan debt as grace periods end and their loans enter repayment. As many of you know, student borrowers often have little to guide them in navigating the byzantine world of student loan servicing and repayment management.
With that in mind, I am thrilled to announce the launching of my book: “Student Loan Debt 101.” The book is a concise, user-friendly guide to understanding critical concepts that will enable borrowers to better manage their debts. Topics include:
- Student loan types and subtypes
- Key players
- Interest rates
- Deferment and forbearance
- Repayment plan options
- Loan forgiveness
- Default prevention and resolution
- Reform proposals
After months of hard work, the book is now available on Amazon. In the coming weeks, I will be making the book available on other platforms, and I will also be offering a print version. My hope is that this will be the first in a series of pocket guides that will help borrowers understand and manage their student loans.