Boston Student Loan Lawyer

Law Office of Adam S. Minsky

Why Does the Dept. of Ed Continue to Contract with Bad Actors?

| Default Private Student Loans

The Dept. of Education is a huge bureaucracy with many internal departments and divisions that handle various education-related operations. It is a vast, complicated organizational structure.

To make things even more complex, the Dept. of Ed outsources many of its student loan operations to private companies, particularly with respect to servicing, billing, and collections.

The Dept. of Ed contracts out its servicing operations to 11 different private companies. For defaulted federal student loans, the Dept. of Ed contracts with over 20 private third-party debt collections agencies to pursue delinquent borrowers.

The problem is that the Dept. of Ed continues to work with companies that have allegedly engaged in serious violations of consumer rights. Take the following examples:

  • The U.S. Dept. of Justice recently reached a $60 million settlement with Sallie Mae, Inc. over allegations that the company charged excessive interest rates to military servicemembers who had federal student loans, in violation of the Servicemembers Civil Relief Act. Despite the very serious allegations against the company, the Dept. of Ed announced that it intended to renew its federal student loan servicing contract with Sallie Mae, which may be worth over $80 million in revenue.
  • Last year, the parent company of NCO Financial Systems, one of the largest debt collection agencies in the country, agreed to pay a $3.2 million penalty to the Federal Trade Commission for alleged violations of the federal Fair Debt Collection Practices Act, which prohibits unfair and abusive debt collection activities. The Dept. of Ed nevertheless continues to contract with NCO for the collection of defaulted federal student loan debt.
  • Another large debt collection agency, Allied Interstate, Inc., agreed to pay a $1.75 million penalty to the Federal Trade Commission for similar violations of consumer protection laws. The Dept. of Ed still pays Allied to pursue defaulted federal student loan borrowers.

These are just a few examples. We essentially have several branches of the federal government pursuing these companies for significant violations of federal law, while another branch of government (the Dept. of Ed) continues to pay these companies to provide the very services for which they were penalized. Is it just me, or is something not quite right with that? Your tax dollars at work, as they say.

NCLC Sues The Dept. of Ed Over Debt Collection

| Default Pay-As-You-Earn Policy & Reform Private Student Loans

This week, the National Consumer Law Center (NCLC), a consumer rights policy and legal advocacy organization based right here in Boston, announced that it is suing the U.S. Dept. of Education under the Freedom of Information Act (FOIA) for its secretive debt collection practices.

By way of background, the Dept. of Education contracts over 20 private collections agencies to collect on its defaulted federal student loans. Taxpayers foot the bill for these collections contracts, which cost over $1 billion in 2011 alone. The Dept. of Education projects that these costs may eclipse $2 billion by 2016. There is widespread agreement that many of these debt collection agencies routinely misrepresent student loan law and violate consumer protection statutes. Nevertheless, this federally subsidized debt collection business is booming, and contracts are routinely renewed by the Department despite widespread abuses.

NCLC stated that they have tried for over a year to obtain information under FOIA on secret contracts between the Dept. of Education and individual debt collection agencies in order to obtain details on Department oversight of the industry, and financial incentives that are provided to the companies. The Dept. of Education failed to fully comply with NCLC’s request, so NCLC filed suit in federal district court.

It will certainly be interesting to see how this turns out. The contract details between the Dept. of Education and debt collectors would shine a huge light on how these operations actually work, and could provide a foundation for reform.

Read NCLC’s press release here.

Sen. Warren’s New Student Loan Refinancing Bill

| Default Policy & Reform Private Student Loans

Senator Elizabeth Warren (D-Mass.) has proposed a bold new bill that allows students to refinance their student loans at lower interest rates.

As many of you may know, interest accrual on student loans can cause loan balances to skyrocket over time, making them very difficult (and very costly) to repay. Federal student loan interest rates are generally lower than private student loan interest rates, but they have been bouncing around a bit during the past decade. Rates on undergraduate federal student loans doubled last year before they were reduced again by a flawed piece of legislation that lowers federal student loan interest rates now, but will allow the rates to explode in the coming years for new borrowers. The interest rate reduction also did nothing to help those borrowers who were stuck with higher rates from earlier years.

Sen. Warren hopes to change that. Her bill allows those students with higher interest rates to refinance their student loans at the current lower rates, which are 3.86% for undergraduate Stafford loans, 5.41% for graduate Stafford loans, and 6.41% for PLUS loans.

How much can this help students? Let’s take a look at someone whose current federal student loans have an interest rate of 6.8%, which was the average rate only a few years ago:

  • With a loan balance of $50,000 and an interest rate of 6.8%, interest accrues at a rate of $283 per month. That means that with a monthly payment of, say, $400 per month, most of that is going to interest and not principal. It’s going to either take higher monthly payments, or a longer repayment term, to repay this loan in full, as compared to loans with lower rates.
  • If that borrower is able to refinance her loans at a rate of 3.86%, interest would accrue at a rate of only $160 per month. Suddenly, that $400 per month payment is going a whole lot further to pay down the balance. Interest rates really do make a difference.

Perhaps most strikingly, Senator Warren’s bill also allows borrowers to refinance their private student loans through the federal student loan refinancing program. This is a huge benefit to private student loan borrowers, who often are stuck with interest rates that exceed 10% and are locked out of other federal student loan repayment programs.

The bill isn’t perfect. Borrowers who have already consolidated their federal student loans are stuck with a 6.41% refinancing option, which is good, but not great. Moreover, defaulted borrowers are locked out of the program. And to pay for the cost of the program, the bill raises taxes on millionaires, which in today’s political climate will make it a tough sell in Congress (despite the broad appeal and popularity of the millionaire tax).

But this proposal would have real, measurable impacts on millions of borrowers if it is enacted. And with more draconian student loan reform proposals coming from the House of Representatives and the Obama administration, it is encouraging to see something that I think would be a net win for student loan borrowers. We’ll see if it passes. Don’t hold your breath.

Check out the bill here.

The “Death and Bankruptcy Clause” In Private Student Loan Contracts

| Cosigners Private Student Loans

If you’re a follower of this blog, then you already know that I’m not a big fan of private student loans. They just stink. They tend to have higher interest rates and stricter repayment terms compared to their federal counterparts, and federal programs such as consolidation and Income-Based Repayment are not available. Private student loans often require a co-signer, something I’m also not a huge fan of because many people don’t realize that the co-signer is just as legally responsible for the loan as the borrower. Like federal student loans, private student loans typically cannot be discharged in bankruptcy (although it is not impossible).

Want to know my absolute least favorite thing about private student loans?

Read More

Yes! A Private Student Loan Refinancing Bill

| Loan Forgiveness Policy & Reform Private Student Loans

First, the bad news. Congress failed to pass a bill to stop interest rates on new federal Stafford loans from doubling. The deadline was July 1. Luckily, most of you won’t be impacted by this. Still, it’s disappointing, to say the least, as Congressional dysfunction and hyper-partisanship continue to rule our federal government.

However, there is also some encouraging news. As I’ve been blogging about recently, there have been a ton of new student loan reform proposals introduced into Congress. Some of them offerbroad, comprehensive reform of the entire system. Others are more targeted towards a particular problem, mostly the interest rate issue. They are coming from both political parties, which I think is great.

The latest reform bill comes from Ohio senator Sherrod Brown, and addresses private student loans. Of the $1 trillion dollars in total student loan debt in the United States, over $150 billion of it is private student loan debt. Private loans are terrible because they typically have inflexible terms and higher interest rates than federal loans, often even higher than the just-doubled interest rates of new federal Stafford loans. In fact, average private loan interest rates are 8-10%, which is, in a word, insane. They also have none of the benefits of federal student loans, such asIncome-Based Repayment, consolidation, and loan forgiveness. The Consumer Financial Protection Bureau recently found that private student loans are holding back the economic recovery.

Senator Brown’s bill, called the “Refinancing Education Funding to Invest for the Future Act,” grants the U.S. Treasury the authority to create a government-backed financing vehicle that would allow borrowers to refinance high-interest private student loans into new loans with much lower interest rates and more flexible terms.

This could be a huge benefit to borrowers. A private student loan with a balance of $20,000 and an interest rate of 10% can accumulate almost $7,000 in interest over three years. The borrower would have to make monthly payments of nearly $200.00 just to keep the balance at $20,000 (the balance would not even decrease). However, if that same loan had an interest rate of 3%, only about $2,000 of interest would accumulate over the same three-year time period. The borrower’s monthly payments of $200.00 would not only pay off this interest, but would reduce the principal balance to under $15,000 after three years. So this could be a huge help to borrowers with high-rate private student loans.

To read more about this bill, click here.

Got Private Student Loans? The Consumer Financial Protection Bureau Wants Your Input

| Policy & Reform Private Student Loans

The Consumer Financial Protection Bureau (CFPB) has been gathering information about problems with private student loans for quite some time. From this information, the CFPB put together a comprehensive report about the horrors of private student loans. I’ve also blogged about the problems with private student loans myself. In short, private student loans stink.

Now, the CFPB is seeking input on how we can solve one of the biggest problems with private student loans: repayment management. As you probably know, one of the main issues with these loans is inflexible repayment options. Programs such as Income-Based Repayment, loan consolidation, and loan forgiveness, which are offered for many federal student loans, generally do not exist for private student loans, and it can be difficult to postpone your payments during periods of economic hardship. Often, your only choice is to either pay your minimum monthly payment under the only repayment plan that is offered by your lender, or default. The CFPB is trying to gather information on what private student loan borrowers need to stay afloat, and how they can obtain things like loan modifications or repayment plan adjustments that can make loan repayment more manageable and affordable.

The CFPB wants YOUR input. To read more about what the CFPB is looking for and how you can contribute your thoughts, experiences, and ideas, click here. Submissions must be received by April 8, 2013, so don’t delay!

Senator Introduces Bill to Allow Private Student Loans to be Discharged in Bankruptcy

| Policy & Reform Private Student Loans

There’s some more good news coming out of Congress (if you can believe that). A few weeks ago, Congressman Hansen Clarke introduced the Student Loan Forgiveness Act of 2012 which, if passed, would help millions of student loan borrowers better manage their federal and private student loans. Now, Senator Richard Durbin (D-IL) has introduced a bill to reform the bankruptcy laws for student loan borrowers.

First, some background. Until fairly recently, student loans were very much like other forms of consumer debt (such as credit card debt, auto loans, medical bills, etc) in that they could be discharged through the bankruptcy process. Then, in 2005, Congress and President Bush passed a law that completely changed how bankruptcy laws are applied to student loans. This law made it exceedingly difficult to discharge student debt through bankruptcy, outside of exceptional circumstances. The practical impact of this legal change is that if you can’t pay them off, your student loans (particularly private student loans) may haunt you forever. The 2005 law arguably made student loans (which are supposed to be “good” debt, an “investment” in your future) the worst type of debt you can have.

Senator Durbin’s bill, if passed, could change that. It would restore bankruptcy protections for private student loans (although federal student loans would remain without bankruptcy protections). This would allow borrowers to use the bankruptcy process to discharge private student loans. Of course, like any other legislation right now, it’s anyone’s guess whether such a law could pass in our hyper-political gridlocked Congress.

To read more about the bill, click here.

How Private Student Loan Lenders Penalize The Unemployed

| Private Student Loans

If you’ve read my previous article on deferment and forbearance, then you’ll know that if you find yourself in difficult financial circumstances, there are options to deal with your student loans. Unfortunately, those options differ enormously depending on whether your student loans are federal or private.

For federal student loans, you’ve got a lot of flexibility. You may be able to defer your loans if you are unemployed and receiving unemployment benefits. Deferment is great because it allows you to postpone your payments, and interest that accrues is not added back to the principal until the deferment period ends. You just have to fill out a simple deferment application and, if you qualify, you’re approved. There are generally three years of economic hardship deferment available for federal student loan borrowers.

Economic hardship forbearance is another option for federal student loan borrowers. You don’t need to be receiving unemployment benefits to qualify, so it often is a good option for recent graduates who haven’t landed a full-time job. The biggest downside to forbearance is that, unlike deferment, interest is added back to the principal during the forbearance period. That means that your loan balance can grow more quickly the longer you remain in forbearance. However, forbearance is easy to obtain (no application required) and, like deferment, you have up to three years available.

Private student loans are a whole other ballgame. Private student loans in general have much more limited flexibility than federal student loans. Deferment is rarely an option, and forbearance is quite limited. If forbearance is available, your loan balance can rapidly balloon because private student loan interest rates tend to be higher than those of federal student loans.

To make matters worse, private lenders often take advantage of borrowers in untenable situations by forcing them to jump through hoops and pay fees. For example, many private lenders will require borrowers to complete complicated financial hardship applications showing all sources of income and all expenses, in order to determine “eligibility” for forbearance. This is, of course, a tedious exercise for an individual juggling several low-paying jobs or trying to find employment. Some private lenders will make borrowers re-apply for forbearance every few months, thus forcing borrowers to go through this process over and over again while they are dealing with the burdens of unemployment or under-employment.

On top of that, private lenders may even charge forbearance “fees.” To even begin the tedious forbearance application process, a borrower in financial distress may have to pay flat fees ($50, $100, sometimes more), money that does not go towards the loan in question but goes right into the pocket of the commercial lender. These borrowers are thus hit twice financially: first for the forbearance fee, and then for the interest that accumulates during the forbearance period.

Unfortunately, there’s just not a whole lot that can be done about this. Private lenders have a lot of power, and there is inadequate government regulation. To read more about how some are fighting back on this, check out this article.

State Student Loans: The Worst Kind of Student Loan?

| Private Student Loans

Most student loans fall into two categories: federal student loans and private student loans. Federal student loans have unique rights and benefits. Private student loans are generally more problematic and are much more inflexible when borrowers have trouble making their payments.

Defaulting on your federal student loans is dangerous because the federal government can garnish your wages, seize certain federal benefits, and intercept your tax refunds, all without a court order. In some ways, this makes federal student loan defaults more dangerous than private student loan defaults, since private lenders need to take you to court first in order to forcibly collect from you. The flip side, however, is that there are usually clear ways of bringing federal student loans out of default: either through a special repayment program called “rehabilitation,” or consolidation. While private student lenders do not have the same collection powers as the federal government, rehabilitation and consolidation exist only for federal student loans; they not options for bringing private student loans out of default. (For more on default, check out my previous article on the subject.)

State-based student loans are, in my opinion, a monstrous hybrid of federal and private student loans. These loans are usually originated by a quasi-public state agency or a state-supported non-profit organization. Thus they are often very attractive to students who are seeking to avoid the big, bad banks and commercial lenders. Moreover, these loans often have somewhat more favorable terms than purely private student loans, such as lower interest rates, longer repayment terms, or more flexible forbearance options.

If you ever default on a state-based student loan, however, you’re in trouble. Many state-based lenders retain some of the scary collections powers that the federal government does: without a court order, the state can seize state benefits, intercept state tax refunds, and in some cases, garnish your wages. To make matters worse, because state-based student loans are not federal student loans, they are ineligible for federal rehabilitation or consolidation programs to bring the loans out of default. This means that, much like a defaulted private student loan, you’re effectively stuck with it, and there’s not a whole lot you can do unless you can reach a settlement agreement.

My advice? Avoid state-based student loans.

Consumer Financial Protection Bureau Is Seeking Personal Stories About Private Student Loans

| Policy & Reform Private Student Loans

The Consumer Financial Protection Bureau (CFPB) is a new federal government agency with a mission to provide better oversight and stronger regulation of the financial industry. CFPB has put out a call for personal stories aboutprivate student loans. As you may know, private student loans are exceptionally risky and problematic for millions of student loan borrowers: they often have higher interest rates, little flexibility, and can’t be discharged in bankruptcy, meaning student borrowers could be stuck with them forever.

We’ve got less than 60 days to tell CFPB about all the problems associated with private student loans. If you have a personal story that you’d like to share, please visit CFPB’s private student loan portal and tell them your story. Let’s fill their inbox and hopefully, we can make some real change.