Student Loans Bankruptcy and Student Loans: NUTS & BOLTS The Options (pressing your plea Prov 6:1-5) Federal loan

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1 Student Loans Bankruptcy and Student Loans: Must prove undue hardship Must initiate an adversary hearing, a separate lawsuit within the bankruptcy where the undue hardship is illustrated. Most can t afford an attorney for the additional litigation costs associated with the additional hearing. In 2008, 72,000 student loans in bankruptcy proceedings, of which 276 attempted discharge, of which 29 resulted in total or partial discharge. Private loans more likely to get discharged as they have fewer repayment options available then federal loans. Some private loans have a universal default clause, meaning if you file bankruptcy on other debts, the student loan becomes due in full immediately. Any loans that are discharged are often a partial discharge. UNDUE HARDSHIP: (must show ALL of the following) o Debtor can not maintain a minimal standard of living for themselves and their dependents if forced to repay the loans, based on current income and expenses,. i.e., income is below 150% of the poverty line. o Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans o Debtor has made good faith efforts to repay the loan(s) Fair Debt Collection Practices Act DOES NOT APPLY to federal student loans (EEs of the Dept of Ed), but does apply to private student loans. NUTS & BOLTS The Options (pressing your plea Prov 6:1-5) Options available depend on two things: (most clients don t know the answer to either of these when I ask) o What type of loan is it? (Federal or Private) 80% of all loans in 2010 were Federal. Federal old program vs new program FFELP or Direct Loan Progam (3/26/2010) Stafford Loan, Perkins Loan, PLUS Loan, Grad PLUS Loan o How far behind are you, and are you in default? Federal Loans: 270 days of non-payment Private Loans: 120 days of non-payment Federal loan Basics Fixed interest rates Standard repayment is ten years to repay the total of the loan. Can be discharged for total and permanent disability. Loan holders must be unable to participate in substantial gainful activity. If qualify for Social Security Disability on a 5-7yr review cycle, you qualify.

2 Made to Students (Stafford, Perkins, Grad PLUS loans) Nearly all students eligible to receive federal loans, regardless of credit score or other financial issues. Interest rates and loan limits determined by congress. As of 8/9/2013, interest rates are linked to the federal 10-year treasury rate, plus a small margin. Rates for new loans change annually, based on the current market. Annual loan limits are generally never high enough to cover an entire year of tuition Student makes no payments while enrolled in at least half time status Grace period of six months begins once student drops below half time status. If student re-enrolls, loans go back into deferment. If the student drops below half time again, they no longer have access to a grace period. Loan forgiveness programs for teachers in specific critical subjects or in a school with more than 30% if its students on reduced-price lunch. For those who are disabled, there is a possibility of 100% loan discharge. Any person employed full-time by a public service organization, or must be serving in a fulltime AmeriCorps or Peace Corps position qualifies for loan forgiveness after 10 years of 120 consecutive payments without being late in a public service position. Loan forgiveness can be considered income by the IRS. Made to Parents (PLUS loan) Higher limits. Can be incurred in amounts up to the entire cost of education, including living expenses, minus other financial aid. Commitment by the parent, not the student. Parents responsible for repayment. Eligibility based on the parent not having an adverse credit history. No grace period. Payments start immediately once the loan is fully disbursed, with the first payment due 60-days after the final disbursement. For Plus Loans made to parents that are first disbursed after 7/1/2008, borrower has the option of beginning repayment either 60-days after the final disbursement is made, or wait until six months after the dependent student ceases to be enrolled at least half time. Deferred while the student is enrolled at least half time. Grad PLUS Loan - available to graduate, and professional students, Graduate students eligible to receive in their own name. Interest rates are the same as Parent Plus Loans. Eligibility based on the graduate student not having an adverse credit history. Interest rate fixed at 7.9%, charged from the date of the first disbursement until the loan is repaid in full. Federal Family Education Loan Program (FFELP) Program eliminated 3/26/2010, no loans made under the program after 6/30/2010. Funded through private/public partnership administered at the state and local level. Private lenders made federally guaranteed loans to students and parents. If a parent or student defaulted, the private lender was reimbursed for its losses by the government. In contrast, with the Direct Loan program, the government lends directly to students using federal funds provided by the US Treasury. Commercial lenders (Sallie Mae) used private capital to finance loans, but received subsidies from the federal government. Stafford Loans and Plus Loans were made under both the FFELP and Direct Loan programs.

3 Direct Loans (New program replaced FFELP 3/26/2010) Funds disbursed directly to the school. Funded by US Treasury through the Dept of Education, then to the college or university, then to the student. Subsidized or unsubsidized depending on financial need. Guaranteed by the US Dept of Education, either directly or through guaranty agencies. Undergraduates typically receive a lower interest rate, while graduate students typically can borrow more. Grace period of six months. Stafford Loans Guaranteed repayment to lender of student defaults (FFELP) Lower interest rate than a private loan. Strict eligibility and borrowing limits Now available to students directly from the Dept of Education through the Direct Loan program. Deferment of payments while enrolled as a full or half time student. Deferment continues for six months after leaving school. Can be subsidized or unsubsidized. Subsidized available for those that demonstrate financial need. Interest is paid by the federal government while the loan is in deferment. For unsubsidized loans, interest accrues while the student is in school, and is in deferment though enrollment. Unpaid interest is capitalized (added to the loan principal). Interest rates based upon the date the loan was disbursed. May also vary by undergraduate and graduate levels. Interest rates do not vary by default risk. All students receive the same rate regardless of their major, future employment prospects, or credit score. Interest rates are fixed for the life of the loan. Rates for academic year are 3.86% for undergraduate loans (both subsidized and unsubsidized), and 5.41% for graduate loans. Perkins Loans Need-based loan offered by the US Dept of Education, subsidized by the federal government. For undergraduate and graduate students. The college is the lender. Payments are made to the college. Interest rate is fixed at 5% for the duration of the 10-year repayment period. Nine month grace period. Loan limits of $5,500 per year, with a lifetime maximum loan of $27,500 for undergraduate students. For graduate students, the limits are $8,000 per year, $60,000 lifetime (including undergraduate loans). Eligible for loan cancellation for teachers in designated low-income schools, and teachers in designated shortage areas such as math, science, and bilingual education. A percentage of the loan is cancelled for each year spent teaching full time. Cancellation also applies to Peace Corps Volunteers. Cancellation occurs on a graduated scale: 15% for year 1, 20% for years 2 & 4, 30% for year 5.

4 Private Loans - Basics Made to students and parents. Higher limits than federal loans. Based on the credit history of the applicant. Higher cost than federal loans. Typically variable interest rates, tied to one or more financial indexes, such as Prime rate or BBA Libor. Some require up front origination fees. Amount based on credit history. No payments until after graduation Used to supplement when federal loans, grants, and other forms of financial aid are insufficient to cover costs. Not guaranteed by a government agency. Made to students by banks or finance companies. Not eligible for Income Based Repayment plans. Usually have less flexible payment terms, higher fees, and more penalties. Can have a co-signer. May be necessary based on the credit history of the applicant. Grace periods with no payments due until after graduation. Most private lenders offer six months, but can range as high as twelve. Can not be discharged for total and permanent disability. Can only be discharged through bankruptcy, which is very difficult School-Channel Lower Interest rates The school signs off on the borrowing amount. Funds are disbursed directly by the school. Direct-to-Consumer Not certified by the school. The school does not interact with the loan processing at all. Loan proceeds are disbursed directly to the student. Higher interest rates, but process quicker than school-channel. No 3 rd party certification that the loan amount is appropriate for the education financial needs of the student. Fastest growing segment of education finance. Advertised as No FAFSA required, or funds disbursed directly to you. Federal Loan Consolidation Can consolidate Stafford Loans, PLUS Loans, and Federal Perkins Loans into one debt. Can consolidate after default IF the lender has not yet filed a default claim. To consolidate a defaulted loan, the borrower must make three voluntary, full, on time payments. On time defined as within 15 days of the due date. Can consolidate defaulted loan into the Direct Loan program immediately without prior payments if the borrower agrees to repay using Income Contingent or Income Based repayment plan. Reduced monthly payments, but a longer term for the loan. Can choose terms of 10 to 30 years. Terms vary based on the balance of the loan. Fixed interest rate for the life of the loan. Calculated on the weighted average of the interest rates of the loans being consolidated. Capped at 8.25%. Grace periods and special forgiveness circumstances are not carried over to the consolidation loan. Consolidating causes the borrower to lose the subsidized interest benefit on a Perkins loan.

5 Income-Based Repayment Plan Only available for Federal Loans First became available 7/1/2009 Also available for those in default Not available for PLUS loans for parents For those with low income and high debt Caps payment is 15% of disposable income for up to 25 years, at which point the balance is forgiven. For loans in the Direct Loan program and you work full time in public service, loan is forgiven after 10 yrs. Discretionary income is the amount of income in excess of 150% of the poverty line. Payments under an IBR tend to be lower than payments under a garnishment for low and moderate income borrowers. Income Contingent Repayment Designed to make repaying easier for those pursuing jobs with lower salaries, such as careers in public service. Monthly payments take into consideration the borrowers income, family size, and total amount borrowed. Monthly payment is adjusted annually based on income and family size. Only available from the US Dept of Education. Not available for private loans or FFELP loans. Only available for federal direct loans. PLUS loans are not eligible. Maximum repayment period is 25 years. Any remaining debt will be forgiven. Can consolidate FFELP loans into a federal direct consolidation loan for the purpose of electing an income contingent replacement plan. If payments don t cover the interest, unpaid interest is added to the principal (capitalized) once per year. The capitalization is capped at 10% of the original loan amount. If you work full time in public service, loan is forgiven after 10 yrs. Also available to those in default o Caps payment at 20% of discretionary income, balance forgiven after 25 years. o Discretionary income defined as income in excess of 100% of poverty line. o Only available for the Direct Loan program. o For loans in the Direct Loan program and you work full time in public service, loan is forgiven after 10 yrs. o Borrowers who have defaulted can be required to repay under the income contingent plan. Income Sensitive Repayment Plan Alternate to the Income Contingent Plan for FFELP loans. Set to a fixed monthly payment of a percentage of gross monthly income between 4% and 25%. Must be greater than or equal to the interest that accrues. Borrowers can reapply each year.

6 Economic Hardship Deferment 3yr limit, must reapply each year. (Private loans may charge a deferment fee) o Unemployed, or income below 150% of the poverty line, receiving support under federal or state public assistance program o Available for FFELP and Direct Loans, but not Perkins Loans. o Not automatic, must apply for and submit documentation to support the reasoning for the deferment. o Do not stop making payments until deferment is granted. Forebearance 5yr limit, must reapply each year. Allow borrower to postpone or reduce the payments, but interest continues to accrue. (Private Loans 1yr limit in increments of 3 or 6 months) Not automatic, must apply for and submit documentation to support the reasoning for the forebearance. Do not stop making payments until forebearance is granted. Granted in extreme financial hardship conditions, when borrower is not eligible for a deferment. Difference between deferment and forebearance is that on subsidized Stafford loans, Perkins loans, and portion of a consolidation loan that paid off a subsidized Stafford loan, the government pays the interest on deferments but not forebearances. Interest continues to accumulate capitalized. Causes the loan to grow larger and larger. Extended Repayment (low paying job generating insufficient funds to repay the debt, no hope of a better job) o If you owe more than $30,000 in federal loans with one lender, you can extend payments up to 25 years without consolidating. o You can switch repayment plans once per year (extended repayment, income based, income contingent) o Less expensive long-term than deferments and forebearances, as no interest is accruing during a time of no payments being made. Federal Loan Cancellation o Death Discharge If the borrower, or student on whose behalf a parent took out a federal PLUS loan, dies. o Total & Permanent Disability Discharge If a doctor certifies that the borrower is totally and permanently disabled, the loan will be subject to a 3-year conditional discharge, at the end of which the loans may be permanently discharged. o Most private loans do not include cancellation provisions. Some have a compassionate review process through which cancellation can be requested for death or total and permanent disability of the student.

7 Loan Rehabilitation o For Federal education loans, including Perkins loans and loans in the Direct Loan program. o One time opportunity. If you redefault, you will not be able to rehabilitate the loan a second time. o Removes the default from your credit history. (May take up to 90 days once the rehabilitation is complete). o Delinquencies reported before the loan defaulted will not be removed from the borrowers credit report. o Loan is no longer considered to be in default status. o Regain eligibility for federal student aid after making six consecutive full and voluntary on-time payments over the course of six months. o After making 9 of 10 consecutive payments within 20 days of the due date, you can apply to have the loan rehabilitated. o Payments must be reasonable and affordable. This is determined by the guaranty agency, considering the borrowers disposable income and financial circumstances. Payment amount can be below the required $50 per month minimum or the interest that accrues, whichever is greater. Monthly payment considered to be reasonable and affordable if it is at least 1% of the current loan balance. o Become eligible for options available before the loan defaulted, which may include deferments, forebearances, choice of repayment plans, loan forgiveness, eligibility for additional student aid. o Wage garnishment ends, and the IRS no longer seizes tax refunds. o FFEL loans usually require the loan be sold to a lender after the rehabilitation is complete. (May take up to 90 days once the rehabilitation is complete). o Outstanding collection costs are added to the balance of the loan (capitalized). Settlements o Dept of Education will want the full payment received within their fiscal year ending September 30 th. o In most cases, must be paid within 90 days of the settlement offer. o Monthly installments may be allowed, but must be completed by the end of the fiscal year. o Settlements accepted are usually 115% of the original loan balance or the default claim paid at the time of the default. (for comparison, 6.8% paid over 10 years is 138.1%) o Collection agencies are authorized to accept the following without approval from the Dept of Education: Waiver of collection charges Current principal balance plus half of accrued but unpaid interest At least 90% of current principal and interest balance

8 Public Service Organizations Public service jobs include, among other positions, emergency management, government (excluding time served as a member of Congress), military service, public safety and law enforcement (police and fire), public health (including nurses, nurse practitioners, nurses in a clinical setting, and full-time professionals engaged in health care practitioner occupations and health care support occupations), public education, early childhood education (including licensed or regulated childcare, Head Start, and State-funded prekindergarten), social work in a public child or family service agency, public services for individuals with disabilities or the elderly, public interest legal services (including prosecutors, public defenders and legal advocacy on behalf of low-income communities at a nonprofit organization), public librarians, school librarians and other school-based services, and employees of tax exempt 501(c)(3) organizations. Full-time faculty at tribal colleges and universities, as well as faculty teaching in high-need subject areas and shortage areas (including nurse faculty, foreign language faculty, and part-time faculty at community colleges), also qualify Websites