ARKANSAS LEGAL SERVICES PARTNERSHIP 2014 STATEWIDE CONFERENCE OF LEGAL AID PROVIDERS CLE PRESENTATION STUDENT LOAN ISSUES

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1 ARKANSAS LEGAL SERVICES PARTNERSHIP 2014 STATEWIDE CONFERENCE OF LEGAL AID PROVIDERS CLE PRESENTATION STUDENT LOAN ISSUES JIM DEPRIEST DEPUTY ATTORNEY GENERAL ARKANSAS ATTORNEY GENERAL S OFFICE OCTOBER 15, 2014 I. INTRODUCTION Why student loans? Why now? A. Student Loan Debt Load is Exploding Existing Student Loan Debt now exceeds $1.2 Trillion Over 7 million borrowers in default ARKANSAS: Average Debt: $23, 324 Percent of graduates with Debt: 55% Average Debt of graduates in Federal loans: $21,431 Percent of graduates borrowing Federal loans: 54% NATIONALLY: Average Debt: $25,884 Percent of graduates with Debt: 60% Average Debt of graduates in Federal loans: $21,707 Percent of graduates borrowing Federal loans: 59% B. For-Profit Schools the biggest problem nearly 100% of graduates (and significantly, non-graduates no longer in school) have student loan debt For-Profit Schools the biggest problem for low income students- they are targeted C. For-Profit Schools currently under investigation by the Arkansas Attorney General: Career Education Corp. (CEC) American InterContinental University, Briarcliffe College, Brooks Institute, Brown College, Colorado Technical University, Harrington College of Design, International Academy of Design & Technology, Le Cordon Bleu, Missouri College & Sanford-Brown Colleges and Institutes Corinthian Colleges Everest Colleges, Institutes & Universities, Wyotech, Heald College, QuickStart Intelligence 1

2 Education Management Corporation (EDMC) Argosy University, Western State College of Law at Argosy University, Brown Mackie College, South University, & The Art Institute ITT Educational Services, Inc. ITT Technical Institutes, Daniel Webster College D. Notice to Corinthian students from the CFPB September 16, 2014 Urgent Information for Current and Former Students Enrolled at Corinthian-Owned Schools Today, the Consumer Financial Protection Bureau (CFPB) sued Corinthian Colleges, Inc., owner of Everest, Heald, and WyoTech, for using illegal tactics to induce students into taking out private student loans. The CFPB s lawsuit also alleges that Corinthian violated the law by harassing borrowers to make payments by pulling students from class, and preventing them from attending class, registering, graduating, and receiving a diploma. In recent months, Corinthian Colleges has stated its intent to sell or close many of its campuses. We are publishing this special information for current and former students at Corinthian schools; we urge you to read it carefully so you fully understand your options and obligations on your student loans. Your Student Loans Do I have to repay my federal and private student loans if Corinthian broke the law? You are still responsible for repaying your student loans. However, the CFPB is seeking relief for private student loan borrowers who took out loans after July Some states offer assistance to borrowers if their school closes or is implicated in a lawsuit. You may be eligible for relief if your state offers a tuition recovery fund. To protect your credit record, you should continue to make your loan payments until you fully understand your options. How do I know if I have federal or private loans? Federal loans typically have names such as Stafford, Grad PLUS, Direct, or Perkins. If you aren t sure what kind of loans you have, visit the National Student Loan Database System for Students for a list of all federal loans made to you. Private loans are often issued by a bank, a credit union, your school, or another lending institution. They might use names like private or alternative. Some Corinthian students may have taken out private loans from the Genesis program. Unlike federal student loans, there is not a single website that contains information about all of your private student loans. If you do not know about private student loans you might have, request a free credit report. Private student lenders may report your loans to credit reporting agencies even while you re still in school or in deferment. 2

3 I am currently employed. Can Corinthian take money from my paycheck to repay my private student loan? The short answer is no, unless they have a court order. If your loan is in default, your school may sell the loan to a debt collector who may take steps to get you to repay. For borrowers in default, it is important to remember that there are major differences between federal and private student loans. The federal government has extraordinary tools to collect on defaulted federal student loans; however, many of these tools are not available to debt collectors seeking to collect on your defaulted private student loan. A debt collector trying to collect payments on a private student loan cannot: Garnish your wages without a court order Seize your federal or state tax refund Garnish your Social Security or Social Security disability check Prevent you from receiving federal student aid to go back to school in the future If your Corinthian-Owned School Shuts Down What are my options if my school is closing? Generally, you have a few options if your school notifies you that it is closing. You may be able to: Withdraw from the school and potentially receive a refund for the costs paid to your school. Complete your program at your campus before closure. If you choose to complete your program, you will not be able to apply for a refund or a loan discharge (to cancel your loans). Accept an offer which allows you to transfer to a comparable program at another Corinthian school at no additional cost. You may be able to transfer to a program at a non-corinthian program, but there may be additional costs. You can review a list of Corinthian schools that are closing here. The Department of Education has prepared other information on policies and benefits for students attending schools that close. What if I took out federal loans to attend a Corinthian-owned school that is now closing? If you have federal student loans and are currently enrolled or recently left a college or university that has shut its doors, you may be able to discharge (cancel) your loans if you apply for a loan discharge. This option is only a possibility if your school closes. If you are attending a school that is sold you may not be eligible for discharge under this process, even if your school no longer offers your program of study. If you do have your federal loans discharged and you end up completing your program at a similar school, you may have to pay back the loans that were discharged. What if I took our private loans to attend a Corinthian-owned school that is now closing? You are still responsible for repaying your student loans. However, the CFPB is seeking relief for private student loan borrowers who took out loans after July Some state laws may provide for relief on your loan if your school closes. Your state may also offer programs that assist students with private student loans in the event of a school closure. 3

4 What if I am offered a teach-out to complete my program? If your school has announced that it is closing, you may be offered a teach out, an arrangement through which you may be able to complete your program and receive your degree or certificate. If you accept a teach-out to complete your program at your school or another school, you will be responsible for repaying all of your student loans. If you decline a teach-out offer and your school closes, you may not have to pay back your federal student loans. Under an agreement between Corinthian and the Department of Education, if you enrolled in a Corinthian-owned school after June 22, 2014, you will have the option to choose to participate in a teachout or opt to receive a refund of your tuition costs. If you enrolled before June 22, 2014, you may not have this option. Your Rights When Dealing with Debt Collectors What are some of the legal limits on what debt collectors can say or do? The Fair Debt Collection Practices Act (FDCPA), the main federal law that governs debt collection practices, prohibits debt collection companies from using abusive, unfair or deceptive practices to collect past due debts from you. Generally speaking, debt collectors may not contact you at an unusual time or place, or at a time or place they know is inconvenient to you. If a debt collector knows that you re not allowed to receive the debt collector s calls at work then the debt collector is not allowed to call you there. If a debt collector knows that an attorney is representing you about the debt, the debt collector generally must stop contacting you and must contact the attorney instead. This is only true if the debt collector knows, or can easily find out, the name and contact information of your attorney. If an attorney is representing you and a debt collector calls, tell them which attorney is representing you and that the debt collector should contact the attorney instead. Can debt collectors tell other people about my debt? No. Under federal law, a debt collector may contact other people but generally only to find out where you live, what your phone number is, and where you work. Debt collectors generally can t contact more than once people you know and they can t say they re trying to collect on a debt. Generally, a debt collector can t discuss your debt with anyone other than; you, your spouse, your parents (if you are a minor), your guardian, or your attorney. If the debt collector knows an attorney is representing you about the debt, the debt collector must contact the attorney instead of you. What is harassment by a debt collector? The Fair Debt Collection Practices Act (FDCPA) says debt collectors can t harass, oppress, or abuse you or anyone else they contact. Some examples of harassment are: Repetitious phone calls that are intended to annoy, abuse, or harass you or any person answering the phone Obscene or profane language Threats of violence or harm Publishing lists of people who refuse to pay their debts (this does not include reporting information to a credit reporting company) Calling you without telling you who they are 4

5 The FDCPA also says debt collectors can t use false, deceptive, or misleading practices. This includes misrepresentations about the debt, including: The amount owed That the person is an attorney False threats to have you arrested Threats to do things that cannot legally be done Threats to do things that the debt collector has no intention of doing What information does a debt collector have to give me about the debt? Any debt collector who contacts you claiming you owe payment on a debt is required by law to tell you certain information about the debt. That information includes the name of the creditor, the amount owed, and how you can dispute the debt or seek verification of the debt. If the debt collector doesn t provide that information in the initial contact with you, the debt collector is required to send you a written notice including that information within five days of the initial contact. Reporting Potentially Illegal Practices What should I do if I believe that Corinthian engaged in illegal practices that harmed me? If a consumer has a complaint related to a private student loan or other financial products offered by a school they can submit a complaint to the Bureau through our website, You can also contact us at students@cfpb.gov. II. CURRENT STUDENT LOAN PROGRAMS Types of Federal Loans William D. Ford Federal Direct Loan Program Direct Subsidized Loans: eligible undergraduate students who demonstrate financial need. Federal government pays interest while in school on at least a halftime basis Current Interest Rate: Undergraduate: loans disbursed between 7/2013 and 7/ %; loans disbursed between 7/2014 and 7/ % Direct Unsubsidized Loans: eligible undergraduate, graduate, and professional students; does not have to demonstrate financial need Current Interest Rate: Undergraduate: loans disbursed between 7/2013 and 7/ %; loans disbursed between 7/2014 and 7/ % Graduate/professional school: loans disbursed between 7/2013 and 7/ %; loans disbursed between 7/2014 and 7/ % Direct PLUS Loans: graduate and professional students and parents of dependent undergraduate students A credit check will be done during application process; adverse credit history may affect eligibility Current Interest Rate: 5

6 Loans disbursed between 7/2013 and 7/ %; loans disbursed between 7/2014 and 7/ % Federal Perkins Loan Program School-based loan program Undergraduates and graduate students with exceptional financial need School is the lender Interest rate is fixed 5% III. I M NOT IN DEFAULT, I M JUST DELINQUENT THE ETRAORDINARY and ECEPTIONALLY BAD CONSEQUENCES OF DEFAULT For most federally insured student loans, the definition of default for the purposes of lender remedies is 270 days delinquent in payments. One exception: Perkins loans default defined in loan contract Also, for Private Loans, default defined in the loan contract. But note, extraordinary remedies, except for bankruptcy discharge limitation (see Section VII), are not available to private lenders. A. Tax Refund Offsets -one strategy is to arrange withholding so that there is no refund, but note that tax refund offset does not incur collection costs and is thus a more efficient payment method. Some option for relief based upon hardship. B. Non-Judicial Wage Garnishments generally a max of 15% of disposable income. Operates within the existing 25% max C. Seizure of Federal Benefits max is the lesser of 15% of the benefit or amount by which the benefit exceeds $750. Not applicable to SSI or SSDI. D. For each of the affirmative extraordinary remedies there is Notice/hearing due process E. No Statute of Limitations F. No Bankruptcy Discharge some exceptions (Section VII) G. Substantial Collection Fees which can be capitalized H. Not Eligible for new federal student loans I. Generally, some exceptions, not eligible for income based payment plans IV. AVOIDING DEFAULT OPTIONS A. Most, if not all, low income student loan borrowers should be able to qualify for an affordable repayment plan and avoid default. B. Avoid Default: Choose The Right Repayment Plan (Excerpts from Arkansas Student Loan Authority web site. ) 6

7 Student loan repayment is an important financial responsibility. The result of failing to pay your student loan is default. The effects of default is far-reaching from adversely affecting your credit score to wage garnishment. You are able to avoid default by taking advantage of one of the various repayment plans which are available to assist in managing your student loan debt. Standard Repayment ~ Direct Loans and FFELP Loans With the standard plan, you pay a fixed amount each month until your loans are paid in full. Your monthly payment will be at least $50, and you will have up to 10 years to repay your loans. The standard plan is good for you if you can handle higher monthly payments because you'll repay your loans more quickly. Your monthly payment under the standard plan may be higher than it would be under the other plans because your loans will be repaid in the shortest amount of time. The 10-year limit for repayment also means you may pay the least amount of interest. Graduated Repayment ~ Direct Loans and FFELP Loans With this plan your payments start out low and increase every two years. The length of your repayment period will be up to ten years. This plan may be right for you if you expect your income to increase steadily over time. Your monthly payment will never be less than the amount of interest that accrues between payments. Although your monthly payment will gradually increase, no single payment under this plan will be more than three times greater than any other payment. Extended Repayment ~ Direct Loans and FFELP Loans To be eligible for the extended plan, you must have more than $30,000 in FFELP or Direct Loan debt. Under the extended plan you have 25 years for repayment and two payment options: fixed or graduated. Fixed payments are the same amount each month (like the standard plan), while graduated payments start low and increase every two years (like the graduated plan). Extended repayment may be right for you if you need to make smaller monthly payments. Because the repayment period will be 25 years, your monthly payments will be less than on the standard plan. You may pay more in interest, however, because you will take longer to repay the loans. Remember that a longer repayment term equals more interest over the life of your loan. Income-Based Repayment ~ Direct Loans and FFELP Loans During Income Based Repayment (IBR), your monthly payments are based on your eligible federal student loan debt, income, family size, and state of residence and it is designed to help borrowers experiencing partial financial hardship. You are considered to have a partial financial hardship if the annual amount due on all of your eligible loans exceeds 15% of the difference between your adjusted gross income (AGI*), as shown on your federal income tax return, and 150% of the poverty line amount for your family size. If you are approved for IBR, you are required to annually certify your income and family size. If your annual income and family size information is not received by your annual renewal date, your payment will increase to what you would be required to pay under a Standard 10-year repayment plan. If your loan(s) is not repaid in full after you have made the equivalent of 25 years of qualifying monthly payments and at least 25 years have elapsed, any remaining debt will be eligible for forgiveness. COMING JULY 2014! for New Direct Loan Borrowers Only If you are a Direct Loan borrower who has no outstanding balance on a FFELP or Direct loan on July 1, 2014 OR no outstanding balance on the date you obtain a new Direct loan after July 1, 2014, you will qualify for IBR if the annual amount due on all of your eligible loans exceeds 10% of the difference between your adjusted gross income (AGI), as shown on your federal income tax return, and 150% of the poverty line amount for your family size. If your loan(s) is not repaid in full after you have made the equivalent of 20 years of qualifying monthly payments and at least 20 years have elapsed, any remaining debt will be eligible for forgiveness. 7

8 *AGI: If you are married and file your taxes jointly with your spouse, your spouse s income is included in your AGI. If your spouse has eligible student loans, his or her loan debt may also be included as part of your eligible loan debt. If you believe that your AGI, as reported on your most recently filed federal income tax return, does not reasonably reflect your current income (and/or your spouse s current income), you may complete the Alternative Documentation of Income form and provide proof of your current income. Income-Sensitive Repayment ~ FFELP Loans Only The Income-Sensitive Repayment schedule allows you to request a reduced monthly installment amount for a 12-month period. Your installment amount will be based on a percentage of your monthly gross income from all sources and the amount of interest that accumulates on your loan(s) each month. Please note, if this schedule is selected, we must collect and review your income documentation annually in order to adjust your payment amount accordingly. You may reapply for up to five (5) years. Income-Contingent Repayment ~ Direct Loans Only This plan is available to all Direct Loan borrowers except borrowers of Direct Parent PLUS loans or Direct PLUS Consolidation Loans. Direct Stafford, Direct Graduate PLUS, and Direct Consolidation Loans (even if they paid off Parent PLUS loans) are eligible. Note that if your loan(s) entered repayment prior to July 1, 1996 and you have been repaying under ICR prior to July 1, 1996, you may have a different ICR payment calculation. During Income-Contingent Repayment (ICR), your monthly payments are based on your eligible federal student loan debt, income, and family size and you are required to annually certify your income and family size. If your annual income and family size information is not received by your annual renewal date, your payment will increase to what you would be required to pay under a Standard 10-year repayment plan. Your ICR payment is the lesser of 20% of your discretionary income OR the amount you would repay annually over 12 years using a standard amortization multiplied by an income percentage factor based your adjusted gross income (AGI*) and whether you are single or married/head of household. If your loan(s) is not repaid in full after you have made the equivalent of 25 years of qualifying monthly payments and at least 25 years have elapsed, any remaining debt will be eligible for forgiveness. *AGI: If you are married and file your taxes jointly with your spouse, your spouse s income is included in your AGI. If your spouse has eligible student loans, his or her loan debt may also be included as part of your eligible loan debt. If you believe that your AGI, as reported on your most recently filed federal income tax return, does not reasonably reflect your current income (and/or your spouse s current income), you may complete the Alternative Documentation of Income form and provide proof of your current income. Pay As You Earn ~ Direct Loans Only NEW! for New Direct Loan Borrowers Only This plan is available to NEW Direct Loan borrowers except borrowers of Direct Parent PLUS loans or Direct Consolidation Loans IF they paid off a Direct Parent PLUS Loan. Direct Stafford, Direct Graduate PLUS, and Direct Consolidation Loans (excluding those that paid off Direct Parent PLUS loans) are eligible. If you are a Direct Loan borrower who has no balance on a Direct or FFELP loan as of October 1, 2007, or has no balance on a Direct or FFELP loan on the date you obtained new loan after October 1, 2007 AND received a disbursement (first or any subsequent disbursement) of a Direct Subsidized, Unsubsidized, or Grad PLUS loan on/after October 1, 2011 OR obtained Direct Consolidation loan from 8

9 an application received on/after October 1, 2011, and all of the underlying Direct and/or FFELP loans were first disbursed on/after October 1, 2007 you may be eligible for Pay As You Earn. You will qualify for Pay As You Earn if the annual amount due on all of your eligible loans exceeds 10% of the difference between your adjusted gross income (AGI*), as shown on your federal income tax return, and 150% of the poverty line amount for your family size. If your loan(s) is not repaid in full after you have made the equivalent of 20 years of qualifying monthly payments and at least 20 years have elapsed, any remaining debt will be eligible for forgiveness. *AGI: If you are married and file your taxes jointly with your spouse, your spouse s income is included in your AGI. If your spouse has eligible student loans, his or her loan debt may also be included as part of your eligible loan debt. If you believe that your AGI, as reported on your most recently filed federal income tax return, does not reasonably reflect your current income (and/or your spouse s current income), you may complete the Alternative Documentation of Income form and provide proof of your current income. C. Deferments- as a general rule, a deferment is not as advantageous as a payment plan. Borrower must apply and show economic hardship. Also, military and peace corps deferments. One advantage is that interest will not accrue during the period of deferment D. Forbearance- temporary stoppage of payments or lower payments. Must apply. Generally discretionary with the lender. Note that interest continues to accrue. One advantage of a forbearance is to avoid default status while you apply for a consolidation loan. V. DEFAULT WHAT NOW? A. Consolidation loans a one-time option; cannot consolidate defaulted consolidation loans. And collection costs will be added to the loan. But, payments will be income based. B. Rehabilitation not nearly as advantageous or easy to achieve as default avoidance strategies. Although the payments required in rehab must be reasonable and affordable, the standard is not as advantageous as other income-based payment solutions, with the lender having greater discretion in setting the amount. Generally, must have 9 timely payments in 10 - month period. C. Compromise and Write-off- federal loans only, not private loans -similar to the IRS Offer in Compromise. The Department of Education, upon application, makes a finding that the debtor is unlikely to ever be able to make full payment. But partial payment is required and maximum waiver of principle and interest is 30%. Not much of a remedy. D. Collection Costs added to principle and interest accruing and paid first. Average about 20% of payments, and earned by the collector only with debtor payments. E. FDCPA applies to most student loan collectors and collection activities. All federal student loans in default are now assigned to private collectors. F. Because of extraordinary collection remedies, collection suits have been, until recently, relatively rare. As with mortgages, it behooves the advocate to check the standing of the named plaintiff. Also, important to note that statutory discharges (section VI) cannot be used as litigation defenses, but rather must be administratively pursued. For private loans, all standard contract defenses apply. Ex. SOL. 9

10 VI. DISCHARGES NO, NOT BANKRUPTCY A. Closed School Discharge When the school closes prior to the completion of the student s program. Must be current student or not more than 90 days out. DOE determines closure date. Relief outstanding principle, interest, fees, charges all cancelled, plus reimbursement for monies paid. Also, any existing default removed, and credit history fixed. Apply to guarantor or DOE. No time limit, but must be an affitmative application, not a defense. B. False Certification Discharge four bases 1. School falsifies non-hs grad student s ability to benefit from the program. Ex. 24% of incoming Corinthian students in 2008 not HS grads. Testing requirements. 2. School enrolls student who cannot meet minimum employment requirements for target job. Ex. Criminal record, age, physical or mental condition. 3. School forges or alters student loan note or check endorsements 4. ID theft C. Unpaid Refund Discharge applies when the student signed up, but never attended, or withdrew within time frame for refund, and refund not received. Relief varies, generally cancels unearned loan amounts. D. Disability Discharge must be total and permanent. Similar to SS standard. SSDI or SSI award suffices. DOE can reinstate depending on future earnings. E. Profession-related several categories. Public service, teaching. Not all that generous. Complex rules. Note: none of these apply to private loans. But, same facts may support a claim against the school on school-originated private loans. VII. BANKRUPTCY THE LIMITED AVAILABILITY OF A DISCHARGE 11 U.S.C. 523 (a) (8) student loan debt (IMPORTANT: including private student loans) generally not dischargeable. Discharge only upon an affirmative finding of undue hardship. Three elements to the undue hardship claim: 1. Cannot pay and maintain a minimal standard of living; and 2. Situation likely to persist; and 3. Student made good faith effort to pay Note: the 8 th Circuit has adopted a totality of the circumstances approach. VIII. REPAYMENT ASSISTANCE SCAMS Radio and direct mail solicitations. Misrepresentations of special ability to assist of access to government programs. State Student Loan Authority offers the same assistance for free. 10

11 IX. RESOURCES HELPFUL WEBSITE LINKS: Free Application for Federal Student Aid U.S. Department of Education Student Loan Fderal Student Aid Information Website National Student Loan Data System Consumer Financial Protection Bureau FinAid, Student Guide to Financial Aid NCLC Student Loan Manual 11