Student Loan ABCs: Helping Borrowers in Default. Deanne Loonin Persis Yu

Transcription

1 C4 C4 Student Loan ABCs: Helping Borrowers in Default Deanne Loonin Persis Yu

2 STUDENT LOAN ABCs: HELPING BORROWERS IN DEFAULT November 2013 Consumer Rights Conference NCLC Resources NCLC list serve SLBA web site ( Manual and other publications Case consultations Policy advocacy Deanne Loonin Persis Yu National Consumer Law Center National Consumer Law Center 2013 Additional Resources ED Ombudsman CFPB Student Loans Guaranty Agency Ombuds/customer service Project on Student Debt Student Loan Debt by the Numbers $1.1 trillion Approximate amount of outstanding student loan debt (second only to mortgages) $26,682: Average outstanding balance for borrowers with student debt 1 in 8: Share of borrowers with more than $50,000 30%: Share of borrowers in repayment that are delinquent on a student loan Source: CFPB (May 8, 2013)

3 Importance of Student Loan Issues Education is a key ticket out of poverty. Education costs are rising, more students are borrowing to go to school. Predatory private loan market (not only in the past). Not all students benefit financially from higher education (proprietary school issues) Very difficult to escape student loan debt. Extraordinary Government Collection Powers Administrative Wage Garnishment No court judgment necessary Intercept Tax Refund Including Earned Income Tax Credit Offset Social Security benefits Except Supplemental Security Income (SSI) Lawsuits No Statute of Limitations Can follow the borrower forever The Good News There is almost always something you can do to deal with federal student loan debt. (Private loans are much more difficult). It s critical not to ignore the bills! Key Issues and Definitions Types of Loans A basic understanding of the different types of loans is critical because the programs have different rules and regulations. Government vs. Private Loans Different Types of Government Loans

4 Federal Loans Governed by Higher Education Act statute and regulations Federal Loans have loan limits Interest Rate Limits and fee limits Subsidized and unsubsidized for undergraduates Types of Loans Federal Stafford Subsidized Does not accrue interest while in school Unsubsidized Does accrue interest while in school Perkins PLUS Parent Grad Consolidated Private Loans Direct v. FFEL Federal Direct Loans are made directly by the federal government to students. Federal Family Education Loans (FFELs) are guaranteed loans made by private lenders. No more new FFELs after July Loans made prior to 2010 still out there. FFELs often confused with Private Loans Made by same or similar private lenders Q: Why don t borrowers know what kind of loan they have? A: It s Complicated! Who is holding the loan: Government Entity Private Lender School Stafford Direct Federal Student Loans FFEL PLUS Perkins Private Institutional Traditional Sub Unsub Grad Parent

5 Figuring Out the Type of Loan **Check out NSLDS ( PIN Number Types of Loans Private loans have TILA disclosures and often high rates! No co-signers for federal loans Not on NSLDS (see handout on web site) Other Types of Loans Look out for institutional loans State loan programs Other federal agencies What to do for Private Loans Review Agreements Any promises? Negotiate with creditors Statute of limitations does apply Collector rights similar to other unsecured debt (except for limited bankruptcy) Look for other violations

6 CHECKLIST for Federal Student Loans Key Options In order of most complete remedy 1. Cancellation 2. Deferment or other postponement 3. Modify repayment, including consolidation 4. Compromise or settlement 5. Challenge collection Canceling Federal Student Loans Death and Disability School Related Closed School False Certification Unpaid Refund Profession-related (including Public Service Loan Forgiveness) (see ch. 9 of manual and web site) Bankruptcy Hard but not impossible (ch. 10) Total and Permanent Disability Unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that: Can be expected to result in death, Can be expected to last for a continuous period of 60 months, or Has lasted for a continuous period of 60 months. Proving Disability Three Options: 1. V.A. Process (no reinstatement period) 2. SSA Medical Improvement Not Expected 3. Doctor Certification Forms available at: disabilitydischarge.com/home/

7 Tips for Disability Discharges Counsel borrowers about reinstatement period (new forms) Send all applications to Nelnet (under new system as of July 1, 2013) Limited refunds unless V.A. process Possible tax consequences Focus on Getting Out of Default Cancellation and Repayment What is Default? After 270 days, loan goes into default Accelerates loan, 100% of loan is due Collection of loan is sent to private third-party debt collectors Borrowers often subject to aggressive and, sometimes, illegal collection tactics Risk Factors for Default Students who attend for-profit or 2-year community colleges are more likely to default than their peers at 4-years institutions Higher Debt Load, except: Graduate school Less than $5,000 more likely to default Educational attainment Students who withdraw or drop-out Student who do not have a high school diploma Demographics, e.g. race, age, parents educational attainment

8 The Traditional Borrower Characteristics of default similar to definition of non-traditional students. The Non-Traditional Borrower A nontraditional student is one who: delays enrollment; attends part time; works full time; is financially independent; has dependents other than a spouse; is a single parent; or does not have a high school diploma. Nontraditional students actually outnumber traditional students. Low income and non-traditional students are more likely to rely on student loans than their high or middle income traditional student peers.

9 Getting Out of Default Rehabilitation vs. consolidation Counsel borrowers using hand-out. Modifying Repayment Repayment Strategies Prior to Default Borrowers typically have a standard (10 year) repayment plan Borrowers can switch plans (more options prior to default) Extended Repayment Graduated Repayment Income-Based: ISRP, ICRP, IBR (including PAYE) IBR and PAYE In Brief Annual federal student loan payments (under a 10 year plan) must be greater than 15% of the difference between AGI and poverty. Poverty Line In 2013, U.S. poverty line is $15,510 for a family of two Note: 10% for Pay as You Earn (more recent borrowers) (see handout on web site)

10 IBR and ICR Forgiveness 25 years of payment required Possible tax consequences (Note: Change to 20 years for PAYE, newer borrowers)

11 Should I consolidate or rehabilitate my federal student loan? Consolidation Consolidates previous loan(s) into one new loan. Allows you to get out of default quickly without making any preliminary payments. No resale requirement. No need to negotiate reasonable and affordable payments with collectors. Rehabilitation You must rehabilitate each individual loan. After the rehabilitation process is over, you still have the same loan, but it is now current. Requires nine payments in a ten month period to get out of default. For federally guaranteed loans, the rehabilitation process is not complete until the loan is sold. Must negotiate reasonable and affordable payments with collectors to get out of default. Collectors may try to pressure you into paying higher amounts than what is reasonable and affordable. You will need to show proof of income and expenses to negotiate payment amount. One time deal. With either of these options, you only get 1 chance to get out of default. Fees of up to 18.5% will be added to the balance. Collectors cannot come after you once the consolidation or rehabilitation process is complete, as long as you stay current. Allows you to have access to flexible repayment plans which calculate your payment based on your income. If you stay current with your payments, any remaining balance on the loans will be forgiven after a certain period of time (20 or 25 years depending on the program).. Slightly worse for your credit report because the notation indicating that you were in default will remain on your credit report for 7 years. Slightly better for your credit report because the notation indicating that you were in default will be erased. Other negative information remains. You might lose some legal rights and defenses. You retain your prior legal rights and defenses. Repayment Calculators - Estimate your monthly payments: Income-Based Repayment (IBR): Income-Contingent Repayment (ICR): Standard, Extended, and Graduated Repayment: For more information about student loan consolidation, rehabilitation, and repayment, visit: Boston Headquarters: 7 Winthrop Square, Boston, MA Phone: 617/ ; Fax: 617/ Washington Office: 1001 Connecticut Ave, NW, Suite 510, Washington, DC Phone: 202/ ; Fax: 202/