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Bold New Report Proposes Major Reforms to Student Financial Aid

January 30, 2013 | Adam S. Minsky, Esq. Pay-As-You-Earn Policy & Reform

The New America Foundation, a nonprofit think tank, has published a new report proposing a complete revamping of student financial aid and student loan repayment. Given the extent of the student loan crisis in America (student debt has outpaced credit card debt two years ago, over two-thirds of borrowers are having trouble making their payments, and economists have likened the growing student loan debt crisis to the subprime mortgage crisis that triggered the Great Recession), something clearly must be done.

Some of the proposals include:

  • Increasing Pell Grant funding to minimize student loan debt burdens for low-income students.
  • Simplifying federal student loan repayment by having a single income-sensitive repayment plan similar toIncome Based Repayment (IBR) or Pay As You Earn (PAYE).
  • Completely eliminate higher-interest and higher-burden federal student loans such as Grad PLUS loans and Parent PLUS loans (which have led to an exploding parent loan debt crisis).
  • Eliminate education and financial aid-related tax credits and instead provide additional direct financial aid to students.
  • Tie the availability of financial aid to a school’s performance in providing an education and career path for its students, thereby increasing accountability and return on investment.
  • Restore bankruptcy rights to private student loans.

Not to toot my own horn here, but these proposals mirror some of my own proposed student loan reforms that I posted about last year. Clearly, something needs to be done, and we need MAJOR reform. Do you agree with the proposals put forth in this new report? Read the report and decide for yourself.

Pay-As-You-Earn Policy & Reform

U.S. Dept. of Education Announces Electronic IBR Application Process

January 23, 2013 | Adam S. Minsky, Esq. Income-Based Repayment Pay-As-You-Earn

If you’ve been following this blog, then you know all about the complete mess surrounding IBR applications and annual recertification. If you’re a federal student loan borrower, you may have already experienced the joys of this maddening process, and even I wasn’t immune to the dysfunction. Luckily, my problem has been resolved (whew).

Well, there might be a solution on the horizon. The U.S. Dept. of Education has announced the creation of an electronic application and annual recertification process for income-sensitive repayment programs includingIncome-Based Repayment (IBR), Income-Contingent Repayment (ICR), and the new Pay As You Earn (PAYE)program. This would, theoretically, eliminate some of the mistakes caused by the current paper process (such as, oh I don’t know, pages being lost or misplaced) by allowing a borrower to submit everything online. The application would also allow the borrower to link to the federal student loan database and to the IRS to access information on your taxable income and family size, which is used to calculate your payment. This application option should start to be phased in to federal loan servicing this year, I believe.

My initial reaction can be summed up in two words: cautious optimism. I applaud the Department’s efforts to address what can only be described as a holy mess of a bureaucracy that not only inconveniences borrowers, but can actually wind up costing them a lot of money. That said, I’m sure there will be bugs, and I can only imagine what new nightmares await borrowers who are simply trying to do the right thing and pay back their loans. We’ll see.

Click here to read more about the new Electronic IBR Application Process.

Income-Based Repayment Pay-As-You-Earn

Say Hello to “Pay As You Earn!”

January 8, 2013 | Adam S. Minsky, Esq. Articles Pay-As-You-Earn

President Obama’s new federal “Pay As You Earn” (PAYE) repayment program is now available. It is a great program: similar to Income-Based Repayment but with significantly lower monthly payments (based on 10% of discretionary income, instead of 15%) and a shorter repayment period (20 years, instead of 25) before loan forgiveness kicks in. It has strict eligibility requirements, however, that makes many borrowers ineligible:

  • PAYE only is available for Direct loans
  • You must have had no outstanding federal student loans as of October 1, 2007 AND
  • You must have taken out a new federal student loan on or after October 1, 2011

The U.S. Department of Education has released a new Repayment Plan Selection form making PAYE an available option: click here to see the new form.

I also recently did a “Q&A” with Kiplinger’s Personal Finance magazine about the new program: click here to read the article.

Articles Pay-As-You-Earn

U.S. Dept. of Education Issues New Regulations for “Pay As You Earn” Program and Other Fed Loan Issues

November 13, 2012 | Adam S. Minsky, Esq. Pay-As-You-Earn Policy & Reform

Last week the U.S. Department of Education released some new regulations governing various federal student loan issues. Here’s a handy overview of the details:

  • The “new and improved” IBR program, as I’ve been calling it, will be called the “Pay As You Earn” program. This new repayment plan option for “new borrowers” will allow for monthly payments of 10% of discretionary income (as opposed to 15%) and a 20-year repayment term (as opposed to 25 years), with forgiveness of the remaining balance thereafter. As I’ve written about previously, this is a great repayment plan option, but it won’t be available to most borrowers who have already graduated and are in repayment now. The regulations confirm that the Dept. of Education will exclude most of these borrowers from the “Pay As You Earn” program.
  • The regulations also attempt to streamline the process for applying for a discharge of federal student loans on the basis of Total and Permanent Disability. Specifically, the regulations allow for some Social Security Disability determinations to support discharge applications, and the regulations make it easier for a representative to assist the borrower in the discharge process.
  • Finally, the new regulations try to address some of the ongoing problems with federal loan servicing by offering simpler IBR recertification forms.

Ultimately, these new regulations are a mixed bag. They certainly include some positive changes for federal student loan borrowers, but they do little to aggressively address systematic problems with the federal loan borrowing and servicing system. To read all the details on the new regulations, click here.

Pay-As-You-Earn Policy & Reform

8 Ways Federal Student Loan Default Can Ruin Your Life

July 31, 2012 | Adam S. Minsky, Esq. Default Pay-As-You-Earn

Federal student loans are, to put it bluntly, a very different kind of debt. As young, idealistic high schoolers and college freshmen, we’re taught that college is necessary to get ahead in life, and (unless you come from serious wealth), the ticket to that ride is paid for with student loans. Moreover, nearly all financial aid award packages from schools include at least some federal student loans (unless you get a full scholarship). All you have to do is sign!

No one tells you the ugly side of federal student loans, however, and many people do not realize the very serious consequences that can result from defaulting on your federal student loan obligations. No other type of consumer debt is like this. It’s pretty remarkable.

  • Without a court order, the federal government or federal loan guarantor can garnish your wages. They can seize a sizable portion of your paycheck (up to 25% in some cases), every single pay period.
  • Without a court order, the federal government or federal loan guarantor can seize your tax refund. Makes the IRS look tame.
  • Without a court order, the federal government can offset federal benefits, such as Social Security or disability payments. In poverty? Too bad.
  • Collections agencies will report defaults to all three credit bureaus, which will lower your credit score significantly.
  • Federal law authorizes private collections agencies to tack on “collections costs” of anywhere from 18.5% to 25% of the defaulted loan balance. This is how collections agencies profit off of defaulted borrowers– and it’s the taxpayers who often foot the bill. Federal student loan debt collection is a multimillion business that involves dozens of private contracted third-party debt collection agencies.
  • You are prohibited from obtaining new federal financial aid while you are in default. So if you defaulted before you finished your degree, you’re stuck.
  • There’s no statute of limitations, which means the government can collect on your federal student loans for the rest of your life. That means that if, for instance, your wages are being garnished, they will continue to be garnished until the loan is completely paid off.
  • The federal government or loan guarantor can sue you in court.

Luckily, there are lots of programs to help keep people from defaulting. There’s Income-Based Repayment to keep monthly payments relatively affordable, consolidation to help with repayment management, and loan forgivenessoptions as well. Deferment and forbearance are also available if you find yourself unable to make your minimum payments.

Bottom line? Avoid federal student loan default. Seriously.

Default Pay-As-You-Earn

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Books by Adam S. Minsky

The Student Loan Handbook for Law Students and Attorneys

The Student Loan Handbook for Law Students and Attorneys

Student Loan Debt 101

Student Loan Debt 101: The Definitive Guide to Understanding and Managing Your Student Loans

Student Loans for Parents and Cosigners

The Student Loan Guide for Parents and Cosigners

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