Assisting Student Loan Borrowers Distress and Disputes

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1 Assisting Student Loan Borrowers Distress and Disputes Joanna K. Darcus, Esq. Homeownership & Consumer Rights Unit 1424 Chestnut Street, Philadelphia, PA Analyzing a Case 1 What kind of loan(s) does client have? 2 What is the status of the loan? 3 Does client have any basis to eliminate the debt? 4 Does client have any basis to put off payment? 5 Can client set up affordable debt payments? 6 How can client minimize harm of debt collection? 2 Tackling Private Loans Unlike the federal government, these lenders DO NOT HAVE special collection powers. Like a credit card But generally cannot get rid of them in bankruptcy. How to resolve them: 1Identify the lender from collection letters or credit reports. 2Request a copy of the promissory note and account history (payments/credits/fees/interest). 3Learn about the repayment options, including discharge and forbearance options. 4Dispute any amount in question. File complaints with the CFPB at 5Decide whether to make payments; obtain written repayment agreements whenever possible. 3 1

2 Dealing with Tuition Debts Tuition bills and repayment agreements Because these are NOT student loans, they are: Dischargeable in bankruptcy, in general. Not enforceable through wage garnishment (in PA) or bank account attachment until after a judgment has been entered. To resolve them: 1Contact the school to get information about the alleged debt. 2Learn the school s collection policies. 3Negotiate a repayment agreement for amounts actually owed. 4 Life of a Federal Student Loan In School Repayment Delinquent In Default Paid in Full or Forgiven (< 270 days behind) (271+ days behind) Seize tax refund Garnish funds Sue 5 Repayment Plans Standard Graduated Extended Income Based Repayment (IBR) Pay As You Earn (PAYE) Income Contingent Repayment (ICR) Income Sensitive Repayment (ISR) 6 2

3 Income Driven Repayment Plans Discretionary Income is the amount by which the borrower s Adjusted Gross Income (AGI) exceeds 150% of the federal poverty level. IBR Plan for those who are not new borrowers on or after July 1, 2014 Generally 15 percent of your discretionary income, but never more than the 10 year Standard Repayment Plan amount; pay for 25 years. IBR Plan for those who are new borrowers on or after July 1, 2014 Generally 10 percent of your discretionary income, but never more than the 10 year Standard Repayment Plan amount; pay for 20 years. Pay As You Earn Plan Generally 10 percent of your discretionary income, but never more than the 10 year Standard Repayment Plan amount; pay for 20 years. Visit: StudentAid.gov/repayment estimator to see how much a borrower might pay under these plans. 7 Common Collection Activities (1) Tax Refund Offset In general, notice is required prior to the first offset. Program is administered by Treasury. They can take the whole tax refund. Joint filers may get partial reimbursement: , Injured Spouse Allocation. Apply for discharge: some require refunds of amounts paid. Cure the default to prevent future offsets. Alternatives: (1) Reduce tax withheld so that no refund is due next tax year; (2) Married borrowers may file taxes separately. 8 Common Collection Activities (2) Federal Benefits Offset In general, notice is required prior to the first offset. Program is administered by Treasury. Supplemental Security Income (SSI) cannot be offset. Ever. Can take up to 15% of other benefits. Must leave borrower with at least $750. Request Review because of financial hardship. (Complete the TOP Hardship Form.) Apply for discharge: some require refunds of amounts paid. Cure the default through consolidation or rehabilitation. 9 3

4 Common Collection Activities (3) Administrative Wage Garnishment In general, notice is required. Can take up to 15% of gross wages if borrower works sufficient hours at high enough rate. Not allowed if borrower was fired within last 12 months. Provide proof of termination from prior employment. Request Review because of financial hardship. Offsets must be suspended if no decision is rendered after 60 days. Apply for discharge: some require refunds of amounts paid. Cure the default through rehabilitation. 10 Loan Cancellation & Discharge Relieving borrowers of the obligation to repay the debt refunding some. Various statutory discharges, such as 1 Total and Permanent Disability 2 Closed School 3 False Certification Applications available online and from servicers/debt collectors. 11 Disability Discharge Total and Permanent Disability: 60 months or longer or will result in death; unable to work. Proven through determination by: 1. Veterans Affairs 2. Social Security Administration 3. Physician s Certification The form is simple, but it must be completed fully and correctly. Post discharge monitoring period follows. 4

5 Practice Pointer #1 Notify all servicers and debt collectors of intent to file for disability discharge. New rules require all collection activity (not including offsets or garnishment) to cease for 120 days once the borrower states an intention to apply. 13 Practice Pointer #2 Prepare for any issues in transmission or processing of discharge application. Fax the completed application so they receive it as fast as possible and you have confirmation of receipt. Also, plan to send it via or certified mail, return receipt requested. Send an authorization form with the application so that you can talk to ED about it. Call to confirm receipt and note the date received. 14 Practice Pointer #3 Tell your client that he may owe income taxes if he receives a disability discharge. ED may issue an IRS Form 1099 C to indicate the discharge of indebtedness was income to the borrower. Add language to your retainer agreement that says that you discussed this with your client and that your client should get help from a tax professional. Does your client have earned income or assets such as home equity? If so, then consider alternatives, such as applying for an income driven repayment plan. If not, then the client may not owe taxes on the basis of his insolvency. 15 5

6 Cure Default: Consolidation Taking out a new federal loan to repay the old one(s). Available for all federal loans Defaulted or Non-Defaulted Apply online at studentloans.gov or print and mail an application. 16 Cure Default: Consolidation Limits Only once with few exceptions, including: 1 Add in more loans 2 Consolidating a non-direct Loan 3 Consolidating to take advantage of PSLF If defaulted, must select income-driven payment plan or make payment. Caution: Borrowers are allowed to include ParentPLUS loans with non-plus loans, but they will lose the IBR option if they do. 17 Cure Default: Rehabilitation Borrower makes 9 on-time reasonable and affordable payments within a 10 month period. Can generally renew eligibility to take out new federal loans within 5 payments. Governed by a written payment agreement. Then loan is supposed to be reinstated to a nondefaulted status and transferred to a new servicer. The Bonus: All reporting of default on credit reports is supposed to be removed. Request by talking with servicer or debt collector and completing enrollment paperwork. 18 6

7 Resources: U.S. Dep t of Educ. Nelnet (Disability Discharge Servicer) (p) (f) Federal Student Aid Ombudsman Group Resources: National Consumer Law Center Student Loan Borrower Assistance Total & Permanent Disability Discharge Self Help Packet Student Loan Law manual and other publications 20 Q + A 21 7