Student Debt Continues to Pile Up

The number of student loans held by subprime borrowers is rising, and more of those loans are going bad, the latest signs that a weak job market and rising debt loads are hurting recent college grads.

In all, 33% of all subprime student loans in repayment were 90 days or more past due in March 2012, up from 24% in 2007, according to a Wednesday report by TransUnion LLC.

TransUnion discovered that 33% of the almost $900 billion in outstanding student loans was held by subprime borrowers as of March 2012, up from 31% in 2007.  Subprime borrowers are the least credit worthy.

Another study, released by Fitch Ratings warned that the difference between college costs and amounts students can borrow under the federal student-loan program will continue to enlarge.

In the five years through last March, the segment of all student loans that were 90 days or more delinquent rose to 11.4% from 8.8%, while the average student-loan balance per borrower increased 30% to $23,829.

Another study, released by credit-score provider Fair Isaac Corp., found that roughly 26 million consumers had two or more open student loans on their credit report in October 2012, up from about 12 million in 2005. A majority of bank risk managers expect student-loan delinquencies to continue to rise.

Repaying debt has become more difficult in part because loan balances have grown and the interest rates on federal loans have increased as a result of a shift from variable-rate to fixed-rate loans. Most federal loans now carry interest rates of 6.8% or 7.9%, versus a rate of 2.875% on federal Stafford loans in May 2005.

If you are in default on your student loans, contact the Zarcone Law Firm for a FREE consultation.

619-800-3082 or alex@financialfreshstart.org.

a new program for college loan affordability

A new federal program should make it easier for some recent college graduates to keep their student-loan payments manageable.

The new program, known as the “Pay as You Earn Repayment Plan,” allows eligible borrowers greatly lower their monthly loan payments and qualify for loan forgiveness quicker than previously.

If your debt exceeds your annual income, the new program will probably work for you.  The new program comes at a time when rising student-loan obligations—amid a still poor job market—have weighed greatly on many borrowers.

Typically, federal student loans must be repaid within 10 years. At current interest rates, that can work out to a monthly payment of roughly $300 for a borrower with $26,000 in debt.

Pay as You Earn, by contrast, limits student-loan payments to 10% of “discretionary income” as defined by government formulas. Borrowers who make regular payments could have the remaining unpaid amounts forgiven after 20 years.

In some situations, borrowers with low incomes could be required to make a zero-dollar payment and would still be considered current on their loan. Monthly payments can increase or decrease each year based on the borrower’s income and family size.

The new program is more generous than the Obama administration’s Income-Based Repayment Plan, or IBR, launched in 2009. IBR caps loan payments at 15% of discretionary income, and borrowers can have unpaid amounts forgiven after 25 years.

Under both programs, borrowers with public-service jobs may qualify for loan forgiveness after just 10 years.

Pay as You Earn is available only to borrowers with federal direct student loans, but other borrowers can consolidate existing federal student loans into a direct loan to take advantage of the program, provided they meet other requirements.

To be eligible for the program, borrowers must have obtained their first federal student loan after Sept. 30, 2007, and received at least one federal student loan after Sept. 30, 2011. Borrowers also must meet eligibility cutoffs based on the size of their debt, their discretionary income and family size.

The new program isn’t for everyone. Since the loan is repaid over a longer time period, some borrowers could wind up paying more interest than they might have otherwise.

To remain in the program, borrowers also must provide their loan servicer with updated information about their income and family size each year.

Under current federal rules, many borrowers could face a tax bill on the amount of debt that is forgiven. Debt forgiven under the public-service loan-forgiveness program is currently tax-free.

If you are being crushed by college loans, please contact the Zarcone Law Firm at 619-800-3082 for a FREE consultation.

Student Loan Debt: False-Certification Discharge

Borrowers are entitled to a loan discharge if they received at least part of an FFEL or Direct loan after January 1, 1986 and if their eligibility to borrow was falsely certified by the school.  The discharge does not apply to Perkins loans, but students should be able to raise the school’s misconduct as a defense to loan repayment because the school is the original lender.

The Department of Education recognizes four bases for a false-certification discharge:

• The school falsifies a non-high-school graduate’s ability to benefit from the program;
• The school enrolls a student unable to meet minimum state employment requirements for the job for which the student is being training;
• The school forges or alters the student loan note or check endorsements;
• The borrower is a victim of identity theft.

If you believe that your student loans should be discharged, please contact the Zarcone Law Firm for a FREE consultation at 619-800-3082.

The problems with private student loans

Private student loans do not have the same range of powerful collection tools as the government.  Generally, they hire third-party debt collectors to pursue borrowers.  As such, they are subject to fair debt collection laws.  Private loan creditors can sue on defaulted loans and obtain a judgment and then employ traditional debt collection tools such as wage garnishments and bank levies.

That being said, private loans are still subject to the heightened bankruptcy dischargeability standards.

Unlike the federal student loan programs, there is no comprehensive federal law requiring private student lenders to offer particular types of relief or flexible repayment.  Private student loan borrowers are generally at the mercy of their creditors.  To that end, private lenders have been generally inflexible in trying to assist financially distressed borrowers.

Deferments and Forbearances

Most lenders provide an in-school deferment option.  However, interest usually accrued during the deferment period.  Now, many lenders are requiring that borrowers pay interest while in school.

Lenders may offer forbearance plans, but borrowers must affirmatively inquire about such plans and many private lenders that do offer such plans charge fees for forbearance requests.

Defenses if You are Sued

General contract defenses – forgery, mistake and fraud, for example – are available to challenge the enforceability of the loan agreement.  Statute of limitations defenses are also allowed for private loans (but no government loans).

A borrower can also sue a lender and/or the lender’s collection agency for unfair debt collection practices.  This won’t eliminate the obligation to pay the loan, but it may give the borrower leverage in negotiation as well as a set off against the amount owed.

Also, private lenders are subject to certain truth in lending disclosures.  Failure to meet such disclosures can give rise to a private cause of action against the lender

If you are having financial difficulty with a private education loan, please contact the Zarcone Law Firm at 619-800-3082 for a free consultation.

Did your school close? You may be able to discharge your student loans

The Secretary of the Department of Education is required to discharge a specified loan if you are unable to complete the program due your school’s closure.  The regulations provide this discharge if the branch of the school which the student attended closed.  For example, if you attended branch 1, there is no right to discharge if only the main campus or branch 2 closed.  On the other hand, if branch 1 closes, you have a right to a discharge even if all other branches stay open

The regulations provide for a discharge if you were still enrolled at the time of the school’s closure or if you withdrew from the school not more than ninety days before the school’s closure.

A school’s closure date is the date at which it ceases offering all programs at a particular branch, not when it stops offering the particular program in which you are enrolled.  Nevertheless, when a particular program at a location ceases four or five months before the branch closes, this would seem to be an appropriate situation for the Secretary to extend the ninety-day period because of the exceptional circumstances related to the school’s closing.

Borrowers can obtain closed-school discharges if the school closed before they completed a program, even if the school issued the borrower a diploma or other certificate.  On the other hand, if a student completes a program, there is no discharge even if the borrower never received a diploma or certificate.

You must apply for the discharge.  Guarantors must forbear collecting once you’ve applied.

If you have loans due for schooling you received at a closed school before receiving your certificate or diploma, you may be eligible to discharge your loans.  Please contact the Zarcone Law Firm at 619-800-3082 for a FREE consultation.

Property and Asset seizures to collect federal student loans

Federal student loan collection power have grown so much over time that the government rarely sues borrowers, opting instead for an array of extra-judicial collection tools.

Tax Refund Offsets

The tax refund offset program involves a blanket seizure of almost all tax refunds due to debtors who are in default on their student loans.  Amounts offset may include “special” payments such as economic stimulus refunds.

Bankruptcy and Tax Offsets

Filing a personal bankruptcy petition before the offset activates the United States Bankruptcy Code automatic stay provision.  The stay prohibits virtually all actions against the debtor’s property, including intercepts of owed tax refunds based on a student loan default.

Non-Judicial Wage Garnishment

Both the Higher Education Act and the Debt Collection Improvement Act authorize administrative wage garnishment.  This means you can have your wages garnished without having a judgment entered against you.  You can have up to 15% of your disposable pay garnished for default on a student loan.  Guaranty agencies can also garnish your wages.

Seizure of Federal Benefits

You can also have your federal benefits offset.  Offset is explicitly allowed against Social Security benefits for instance.

If you are in default on your student loans, please contact the Zarcone Law Firm at 619-800-3082 for a FREE consultation.

Student Loan Default Problems? Rehabilitation May be the answer.

If you are in default on your student loans, you can renew eligibility for new loans and grants and cure the loan default by rehabilitating the defaulted loan.

Loan rehabilitation for loans may be requested after you have made nine payments within 20 days of the due date during a period of 10 consecutive months.

Collection does not necessarily cease during the rehabilitation period.  It will only stop if the rehabilitation agreement specifically provides for an end to collection efforts.  Otherwise borrowers will continue to face the usual range of collection efforts, including tax offset, even though they have made a repayment commitment and are in the process of rehabilitating the loans.

Neither the loan guaranty agency nor the Secretary shall demand more from you more than what is reasonable and affordable based on your total financial circumstances.  This calculation includes both you and your spouse’s income and expenses including housing, utilities, food, medical costs, work-related expenses, and dependent care costs.  You will need to provide back up documentation.  Basically, the Department of Education sets out minimum percentages that you have to pay on your loans.  Of course, if you are dealing with a collection agency, collection agencies get more money the more you pay.

If you are in default on your student loans and would like to explore rehabilitating the loans, please contact the Zarcone Law Firm at 619-800-3082 for a FREE consultation.