Boston Student Loan Lawyer

The New York Times is out with a sobering article about the exploding business of student loan debt collection. One industry representative witnessed an organized protest comprised of student loan borrowers and later wrote, “I couldn’t believe the accumulated wealth they represent — for our industry. . . . It was lip-smacking.”

As the cost of education goes up while student loans remain widely available and the economy sputters ahead, student loan default rates are skyrocketing and debt collectors are cashing in. If you remember, the federal government has draconian collections powers that make student loan debt unlike any other kind of debt. And increasingly, the government and private student loan lenders are turning to dozens of third-party debt collection firms that are incredibly skillful at tracking people down and making them pay up. The U.S. Dept. of Education paid$1.4 billion last year to third-party debt collectors, according to the article. $1.4 billion. That’s not a typo. And since the government, via these debt collectors, can usually get back about $0.80 on the dollar for defaulted federal loans, there is little incentive for them to work harder at helping borrowers avoid default in the first place.

Don’t take my word for it; read the article here.

And when you’re done, please check out the National Consumer Law Center’s new report on defaults.

This is a common question today, unfortunately. On the one hand, a college degree is usually a requirement for most entry-level positions. On the other hand, degrees are becoming increasingly diluted and expensive. Decades ago, all you needed was a college degree to get ahead in life, and it was relatively affordable (especially for public universities). Today, even some graduate degrees do not guarantee much in the way of reliable, gainful employment. How many people with Master’s degrees are still working in the same position as before? How many law grads do you know who are bar-tending? How many Ph.D students have become so insanely specialized that they cannot find someone to hire them? And of course, the cost of these degrees is just out of control. A Bachelor’s degree can easily cost $150,000.

So. Is college still worth it? According to two new studies, the answer is “yes.” Here’s why, according to the studies:

• While recent college grads have certainly been struggling, the economy has added thousands of new jobs for workers with a Bachelor’s degree or higher. Meanwhile, the number of jobs lost for people with just a high school diploma (such as construction or manufacturing positions) is just shockingly high. And those jobs are unlikely to come back.
• A college degree can bring in an additional $1.3 million in lifetime earnings, depending on where you went to school and what you studied.

That said, there is of course the problem of debt, and it’s hitting the middle class the hardest. “About 40 percent of students left school with debt, and the average was about $22,000. But students from families earning between $40,000 and $59,000 were saddled with $6,000 more on average than peers from families earning less than $40,000. Students from the next tier – family income between $60,000 and $99,000 – had $4,000 more in debt than their lowest-income peers.”

So. Is a college degree worth it? I haven’t decided. Clearly the answer is not black and white. What’s clear though is that the system needs to change.

To read more about these two new studies, click here.

In October of 2011, President Obama announced a new student loan initiative aimed at helping student borrowers better manage their debts. One piece of this initiative was the creation of a new type of federal consolidation loan, called a Special Direct Consolidation loan.

The Special Direct Consolidation loan’s main benefit is a very modest (fraction of a percentile) interest rate reduction. The eligibility requirements are, in my opinion, rather silly: you have to have at least one Direct federal loan and one FFEL loan, but only FFEL loans can be included in a Special Direct Consolidation loan. So if you’re looking to consolidate all of your federal student loans and you have a mix of Direct, FFEL, and other federal loans, your non-FFEL loans will have to be consolidated separately via a different process. Because of that, and because the benefits of the “Special” consolidation loan are modest (at best), a lot of borrowers have concluded that the Special Direct Consolidation loan is not really all that “special,” and I tend to agree.

That said, for borrowers who meet the eligibility criteria and want to take advantage of the interest rate incentive, time is running out. The Special Direct Consolidation loan is only available until June 30, 2012, so it’s now or never. To read more about the Special Direct consolidation loan, click here.

As if the entire student loan industry wasn’t bad enough, there are new players trying to enter the field to take advantage of student borrowers. A few weeks ago I blogged about student loan debt-settlement companies. Here’s another one for you: student account debit card companies.

Increasingly, colleges and universities are outsourcing the management of student accounts and disbursed student loans to private companies. Instead of placing your loan disbursements into your student account, the funds are disbursed into accounts held by a specialized debit card company. The company then charges exorbitant fees to students- debit card fees, account maintenance fees, balance fees, etc, netting tens of millions of dollars in profits each year. What’s worse is that at many schools, colleges co-brand their own school’s name with that of the student account company, giving students the impression that the company is fair and legitimate, or even part of the college itself. This is remarkably similar to stories from a few years ago where college financial aid offices got a little too cozy with private student loan companies (and guess who paid the price then, too?).

It seems everyone has something to gain by taking advantage of young people who are just trying to get an education and get ahead in life. To read more about student account debit card companies, check out this story and this story.

Student loans are a special type of consumer debt. They are unlike credit cards, medical bills, auto loans, or home mortgages.

Almost anyone can get student loans when you go to school, and sometimes you don’t even need to go through a credit check. Once you get a student loan, it can follow you forever. Federal loans in particular have no statute of limitations (meaning the debts will never expire), and both private and federal loans can almost never be discharged in bankruptcy.

This wasn’t always the case. 2005 legislation passed by Congress and signed by President Bush amended the bankruptcy code to restrict bankruptcy discharges of student loan debt. There is currently pending legislation to reintroduce bankruptcy protections for some private student loans, but for now, it doesn’t look like the bill is going anywhere. Thus it remains exceedingly difficult to discharge any student loan in bankruptcy.

Difficult, but not impossible, as a recent case makes clear. To discharge student loans through bankruptcy, a borrower must prove what’s called an “undue hardship” or “undue burden.” This legal test is, despite the mushiness of the term, a tough standard to meet, as you essentially have to show that exceptional circumstances will prevent you from ever paying back your debt. One recent former law student (who did not graduate) with over $300,000 in student loan debt passed this test. She is 63 years old, diagnosed with Asperger’s syndrome and is unable to get a job because of her condition and inability to complete law school. A bankruptcy judge discharged her student loan debt, writing “[T]o expect Ms. Todd to ever break the grip of Autism and meaningfully channel her energies toward tasks that are not in some way either dictated, or circumscribed, by the demands of her disorder would be to dream the impossible dream.”

This case is a great example of the fact that it is not totally impossible to discharge student loan debt in bankruptcy. It is also, however, a stark reminder of how exceptional your circumstances must be to have a shot at this. To read more about this story, click here or here.

Things are all sorts of crazy right now when it comes to the Dept. of Education’s federal loan servicing system. Check out last week’s article for a good summary of the chaos. But now, there might actually be a quirk that is working in favor of student loan borrowers.

First, some background. Let’s talk grace periods. A grace period is the chunk of time after you graduate where no payments are due. It’s a free pass, so to speak, built into student loan repayment that allows you time to find a job and get settled before you have to start paying up. Different loans have different grace periods. Federal Stafford loans, for instance, have a 6-month grace period, while Federal Perkins loans have a 9-month grace period. Even most private student loans have grace periods.

Not all student loans have a grace period, however. Federal Grad PLUS loans, one of the most common and easily-obtainable federal student loans available for students in graduate school, traditionally have had no grace periods. That means that you’re going to get billed the month after you graduate. In an economy that’s still recovering from the Great Recession, this can take recent grads by surprise, and many are unprepared to cough up a hefty payment that quickly.

Well apparently, this may not quite be the case anymore, at least not for everyone. I’ve been getting several reports that for some graduating graduate school students whose loans are serviced by www.MyEdAccount.com, there is now a 6-month grace period for Grad PLUS loans. I don’t know where this came from. What I do know is that it is not universal; that is, some people whose loans are serviced by www.MyEdAccount.com still have no grace period for Grad PLUS loans. I don’t know what is going on with other federal loan servicers.

People, this is a little weird, and I’m skeptical. Regardless of who your federal loan servicer is, if you have Grad PLUS loans and you are graduating, I would just monitor your account closely and regularly verify whether or not a payment is due. While I certainly welcome grace periods for Grad PLUS loans (why on earth is there no grace period for these loans, anyway?), my impression (and my concern) is that this new so-called grace period is the result of the continuing bureaucratic mess at the Dept. of Education, and not the result of a well-intentioned policy change.

I’ve been blogging about problems with the new federal student loan servicing system for months. Consolidations are being messed up. Borrowers are being kicked off of IBR. Students who are still in school are being told that they have entered repayment. Public Service borrowers are seeing their loans change hands yet again.

Well, finally the news media is reporting on these problems. Obviously negative publicity isn’t a complete solution here, but it is absolutely key in bringing these issues to light and pressuring the Dept. of Education to clean up its act. Thank you to everyone who has contributed their stories to me, to the National Consumer Law Center, or to the news media. Here are some links to news articles on these issues. Please share!

ProRepublica

Inside Higher Ed

Chronicle of Higher Education (and yours truly is quoted in this one!)

You may have heard of debt settlement firms before. These are often dubious for-profit companies that promise to eliminate all your debts and wipe your credit report clean — all for a cheap fee. Sound too good to be true? Well, many times it is, and debtors who use these firms often just replace one type of debt with another type of debt, and their headaches only continue. Check out this article, which provides some good reasons why debt settlement firms can be problematic, and read this one about states taking legal action against some debt settlement firms for deceptive practices.

Given that total student loan debt in America has reached $1 trillion and surpassed credit card debt for the first time in history, it’s no surprise that these shady companies are trying their luck with student loan debtors.

Be forewarned: these firms are trouble.

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The following is a guest post by Carlin Sack from Binksty.com. Binksty.com provides an integrated online student loan management program to help student loan borrowers deal with their debt.

College students vie for it. Education experts advocate for it. Even President Barack Obama endorsed a college “report card.” The idea of a uniform report card used to assess colleges is supported by many and the hype over it has only increased since Obama’s January speech at University of Michigan regarding the affordability of a college education.

Higher education activists call for a report mandated by the federal government that gives specific items of “consumer information” for every college. Others say that this information already exists elsewhere, so there is no reason for interference by the federal government.

But any current student who is choosing between colleges and is looking for accessible information about actual costs of receiving a degree would vouch that it is not easy to find.

Students just really want to know the answer to one question: “Will this debt be worth it?”

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The new loan servicer for federal Direct loans contracted with the Department of Education is a complete and utter disaster (yeah… I said it). They have been causing major problems for borrowers on Income-Based Repayment, and they have also been messing up Direct Loan Consolidations. They cannot seem to do anything right, and I’m really not exaggerating here.

Well, they are causing yet another new problem, and this one is particularly important for borrowers who are still in school. Apparently, the new servicer is reporting that some federal loans enter repayment this March or April, even when the borrower does not graduate until May or June and has an in-school deferment until that point. When contacted, the customer service representatives are informing borrowers not to worry, it is just an error. But I’ve also been getting stories from other borrowers that these loans may actually enter repayment prior to graduation. For borrowers who have already set up automatic debit from their bank accounts (this is particularly true for borrowers who had been in repayment before returning to school full-time), the Dept. of Education might actually withdraw payments automatically from your bank account.

This is a complete nightmare. Borrowers who are presently in school and technically in deferment might want to consider canceling automatic debit if it is already set up, at least until you graduate. In-school borrowers should also check myedaccount.com and www.nslds.ed.gov to determine the status of all federal loans. Watch your mail for any bills that come in. If you’re billed while in deferment, you’ll want to call the loan servicer and figure out what to do (and their wait times can be obscenely long, because hey, why have effective customer service when you can’t do anything else right anyway?).