Boston Student Loan Lawyer

Several months ago, I wrote an article about how private student loan lenders penalize the unemployed. One way they do this is by forcing unemployed borrowers (or borrowers facing general financial hardship) to pay a “processing fee” when requesting forbearance. Some lenders force borrowers to pay this fee multiple times for each loan during a forbearance period. Since borrowers who cannot afford their payments often have no choice but to go into forbearance (which can result in rapidly accumulating interest), this has been a way for private lenders to completely take advantage of the most vulnerable borrowers.

Sallie Mae is a major private student loan lender that engages in this practice. Not only did Sallie Mae charge $50 per forbearance request, but it actually charged $50 per loan as well– so for borrowers with, say, five private student loans, they would have to pay $250 for each periodic forbearance request, which must be renewed every few months. Even worse (and this is truly infuriating), these charges were considered “administrative fees” that were not even applied to the student loans at issue. For the record, there is no fee of any kind to request forbearance for federal student loans.

Sallie Mae has now changed its policy. A resourceful young student loan borrower started a petition and generated media attention about Sallie Mae’s practices after she was forced to pay exorbitant forbearance fees during a period of unemployment. Bowing to the pressure and bad publicity, Sallie Mae has now amended its practices so that the forbearance fees are actually applied to the loan principal and not just pocketed by the multi-billion dollar company. While this is only a partial victory (the fees are still required), I see this as an example of a successful effort to bring bad student loan practices to light.

To read more, click here.

Despite our general feeling of “bleh” when it comes to our present Congress’s ability to get things done, there’s actually a lot going on in Washington these days that directly impact student loan borrowers. I wanted to give people a general overview of what’s going on. I’ve blogged about each of these issues separately to some extent, but thought it would be useful to give some updates and tie everything together.

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Interest rates on certain newly-originated federal student loans have been low over the past few years thanks to the College Cost Reduction and Access Act of 2007 (the same law that created Income Based Repayment). This law gradually cut fixed interest rates on newly-originated subsidized federal Stafford loans for undergraduate students from 6.8% down to 3.4% over the past 5 years. On July 1, 2012, these interest rates are slated to return to 6.8% for new federal student loans, making them significantly more expensive.

This change will not have any impact on graduate student borrowers or borrowers who have already entered repayment. It will, however, lead to thousands of dollars in additional interest charges for undergraduate students who take out new subsidized federal Stafford loans starting July 1, 2012. Not exactly a way to reduce student loan debt burdens for college students. There have been a couple of bills introduced into Congress to try to prevent these interest rate hikes from happening, but their chances of passage are unclear.

To read more about these changes, click here.

Rep. Hansen Clarke (D-MI) has introduced an exciting new bill in Congress. If passed, the Student Loan Forgiveness Act of 2012 would make a lot of changes to student loan law that could benefit millions of borrowers. Some of my favorite provisions:

• Borrowers would be able to consolidate their federal student loans and private student loans into a single federal consolidation loan to take advantage of federal student loan benefits. Right now, Direct federal loanconsolidation is only available for federal student loans. This makes private student loans very problematic.
• Borrowers would be eligible for an improved Income-Based Repayment plan, allowing for payments of no more than 10% of discretionary income (instead of 15%) and forgiveness of any remaining balance after 10 years of payments (instead of 25).
• Borrowers who work in public service would be eligible for accelerated public service loan forgiveness after 5 years of qualifying payments (instead of 10).

The bill is certainly an exciting development, and it is encouraging to see that at least one member of Congress is taking the student debt crisis seriously. Of course, the reality is we have a divided, gridlocked Congress that can’t seem to get a whole lot done, even on universally important issues such as the debt ceiling or a national budget. However, if this bill (or one like it) will ever have a chance of passage, we need to spread the word and get people talking. So please share this news and pass it on to friends and family.

To read the full text of the bill, click here.

To sign a petition in support of the bill, click here.

Earlier this year, newspapers reported that student loan debt approached $1 trillion (yes, trillion) and eclipsed credit card debt for the first time in history. One of the major reasons for the ballooning student loan debt in this country is soaring college tuition. When I started at BU back in 2003 (not even 10 years ago), tuition was already sky-high at about $28,000 per year. Now, undergraduate tuition at BU is more than $40,000 per year. Add in room, board, supplies, and cost of living, and it can cost an undergrad nearly $60,000 each year. This isn’t just BU, of course. These tuition rates are mirrored at private colleges and universities across the country. And even public university students are seeing soaring tuition rates as states grapple with budget crises and cuts to education funding (because really, in times of economic turmoil, it makes sense to go after education funding first, right?).

There’s no doubt that tuition is a major factor in the explosion of student loan debt over the past 20 years. In his State of the Union address and his recently-announced budget proposal, President Obama is touting a few new initiatives designed to reign in the cost of college. The initiatives center on two main areas:

• Increasing the availability of college-based financial aid, including low-interest Perkins Loans, federal grants for students with financial need, and work-study funding.
• Changing federal aid regulations for colleges/universities so that schools that maintain or lower their tuition rates will receive greater federal funding than those that increase tuition.

My opinion of these proposals is mixed, to be quite honest. Much like President Obama’s recent student loan initiative, the policy proposals are rather limited in scope. The proposed increase in financial aid opportunities will certainly help some students, but it is unlikely to have a substantial and broad impact in closing the gap between what a middle-class family can afford and what the actual cost of a college education is. As for the federal aid regulations, the proposed changes would certainly be a dis-incentive for schools to raise tuition, but there is no actual mandate to lower tuition. Importantly, all of these proposals need to be passed by Congress, and given today’s political climate, who knows whether that will happen.

At the same time, I try to keep everything in perspective. The fact that the President is acknowledging that student debt and soaring tuition are serious problems in America is a big deal. And policy changes that essentially trim around the edges of the problem are better than inaction or policies that make things worse. We’ll see where this goes and what becomes of these proposals. In the meantime, make sure your voices are heard on these issues, it’s the only way we’re going to see real changes.

To read more about the President’s proposals, click here.

Recently, the Obama Administration launched a student loan initiative designed to help certain student loan borrowers. The initiative has two parts. Part I deals with a modified Income-Based Repayment program. Part II creates a new type of Direct consolidation loan: a “Special” Direct consolidation loan.

If you remember, consolidation can be a great tool to manage your federal student loans. Special Direct Consolidation loans have a couple of added benefits:

1. Repayment Term. If you were making payments on your federal student loans, and then took out a regular Direct consolidation loan, your repayment term would start over. For example, if you were on a 10 year repayment plan for your individual loans and made payments for two years, your 10 year clock would start over on the new Direct consolidation loan. For Special Direct Consolidation loans, each loan that is consolidated retains its original repayment term. Since you get credit for those prior payments, you’ll pay less over time than you would with a regular Direct consolidation loan.
2. Interest Rate. The maximum interest rate for both types of consolidation loans is 8.25%. However, Special Direct Consolidation loans might be eligible for a 0.25% interest rate reduction, which would mean you’d pay slightly less over time.

Eligibility

To be eligible for the Special Direct Consolidation loan, you must have at least one Direct federal student loan, and one FFEL federal student loan. For an explanation of the differences between these two types of federal loans, readmy previous article on that topic. The following loans are *not* eligible for Special Direct consolidation loans (although they might be eligible for regular Direct consolidation loans): defaulted FFEL loans, Perkins Loans, and certain types of federal health loans. Private student loans are ineligible for any federal student loan consolidation program.

Availability

Special Direct Consolidation loans are being offered from January 2012 until June 30, 2012, so only six months.

We now know what the President’s student loan initiative entails. Unfortunately, while early reports indicated that the initiative involved a “debt swap” that allowed private student loans to be consolidated into federal student loans, it is now clear that this this is far from true. The initiative still has some real benefits for student loan borrowers, but it is significantly limited.

Improved Income-Based Repayment. If you remember, Income-Based Repayment (“IBR”) for federal student loans caps your monthly payment at approx. 15% of your discretionary income, regardless of how much federal student debt you have. This is a huge benefit. Moreover, after 25 years of payments, whatever remains is forgiven.

In 2014, IBR was slated to improve for new borrowers by lowering the payment even further, to 10% of discretionary income, and reducing the repayment period to 20 years. The President has bumped-up the IBR improvement from 2014 to 2012, effectively giving new student borrowers greater relief two years sooner than planned. The changes could lead to a 33% reduction in monthly student loan payments for a borrower on IBR, and knocking off 5 years of payments is a big deal too. However, an important point here is that these changes do not apply to people who are already on IBR; it only applies to students who select IBR starting in 2012.

Loan Consolidation Incentive. While early reports indicated that the President’s proposal involved relief for private student loan borrowers through consolidation, we now know that is not true. This portion of the initiative is geared towards federally-backed loans with a private lender (such as Sallie Mae), entirely different from purely private student loans. Although these loans are already eligible for Direct federal loan consolidation (which is not made clear in the administration’s press release), the initiative encourages students to consolidate their loans through the Direct federal lending program by offering a 0.5% interest rate reduction. Importantly, by consolidating through Direct loans, borrowers might become eligible for IBR.

Although the initiative will produce a real, concrete benefit for millions of borrowers, it falls well short of initial expectations, and does not do much to provide relief for borrowers who are struggling under the weight of oppressive private student loan debt. The IBR changes will only impact people who have not yet selected IBR as their repayment plan, and the interest-rate consolidation incentive is a modest offer for a consolidation program that, essentially, already exists.

A proposed bill in Congress, which is supported by President Obama, would allow private collections agencies contracted with the U.S. Dept. of Education to “robo-call” cell phones of student loan borrowers who are in default. The change “is expected to provide substantial increases in collections, particularly as an increasing share of households no longer have landlines and rely instead on cellphones,” the Obama administration wrote recently. Of course, what the administration did not mention is that collections agencies are authorized to add on collections fees of up to 18% of the balance of a defaulted federal student loan. So everyone wins, except student borrowers.

The bill is strongly opposed by consumer groups, including the National Consumer Law Center, which argues that this bill would give debt collectors more power to harass and abuse student loan borrowers (and any other debtor who has defaulted on their obligation). Indeed, debt collectors frequently violate fair debt collection laws already, but this bill would give them even more flexibility in doing so. Progressive Democrats and consumer rights groups are furious that the Obama administration has the same position as the banking and private debt collection industries.

For more on this bill, click here and here.

To register your opposition to the bill and contact your Congressional representative, click here.

To contact the White House and express your view, click here.