Category: Student Loans

  • Thoughts on Student Loans and the FRESH Start Act

    Posted by

    Bob Lawless

    A new bill from Senators Durbin and Cornyn promises a way out of student loan debt through a change in the bankruptcy laws. The Fresh START Through Bankruptcy Act of 2021 makes one principal change. After 10 years from the date they first came due, federal student loans would be freely dischargeable. Before 10 years, student loans would be dischargeable only if the debtor could show undue hardship, which is the standard currently. Private student loans would remain nondischargeable at all times except upon a showing of undue hardship. This is not the bill I would write, but it's a step in the right direction.

    How could the bill be improved? First, ten years is too long. It is the entire regular repayment period for a federal student loan. Do we really think that debtors should have to struggle for ten years before becoming eligible for a student-loan discharge. For example, from our "Life in the Sweatbox" paper, 60% of the people who reported they struggled for at least two years before bankruptcy said they went without medical attention and 47% said they went without a prescription they needed. 

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  • The Department of Education Can Help With Student Loans in Bankruptcy

    Posted by

    Pamela Foohey

    With the Second Circuit's decision last week regarding private student loans, student loan discharge in bankruptcy is in the news. As Slipster Adam Levitin blogged, the "big picture" effect of this decision–and the 5th and 10th Circuits–is unclear. They could affect a broad swath of private student loans and they possibly could bring more bankruptcy filings to deal with a portion of people's student loan debt. Regardless, though, federal student loans remain presumptively non-dischargeable.

    If the people who file bankruptcy with both private and federal student loans (which, I suspect, likely is many people with student loans), debtors will need to bring undue hardship discharge requests. A possible additional effect of these decisions may be to increase undue hardship requests, provided that debtors and attorneys think they are worth making. Research by Jason Iuliano (Utah Law) suggests that debtors may be more successful in these actions than the general public or even many consumer bankruptcy attorneys presume.

    For federal students loans, the Department of Education plays a crucial role in undue hardship discharge requests. I recently published an essay in Minnesota Law Review Headnotes, co-authored with Aaron Ament and Daniel Zibel, who co-founded the National Student Legal Defense Network, regarding how the Ed Department should update its internal guidance for determining whether to contest a borrower’s request for an undue hardship discharge. The Ed Department presently seems to be wasting resources going after debtors with little ability to repay, regardless of whether their student loans are discharged. In the essay, we provide two options for how the Department can update its approach to bankruptcies to ensure that it calibrates its actions to make the promise of a fresh start more real for student borrowers.

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  • Second Circuit Holds Many Private Student Loans Are Dischargeable in Bankruptcy

    Posted by

    Adam Levitin

    The 2d Circuit this week joined the 5th and 10th Circuits in holding that the discharge exception in 11 U.S.C. § 523(a)(8)(A)(ii) for “an obligation to repay funds received as an educational benefit, scholarship, or stipend” doesn’t cover private student loans, only things like conditional grants (e.g., a ROTC grant that has to be repaid if the student doesn’t enlist). It’s another important student loan decision. At this point ever circuit to weigh in on the issue has said that private student loans aren’t covered under 523(a)(8)(A)(ii).  Instead, a private student loan, if it’s going to be non-dischargeable, would have to fit under 523(a)(8)(B), but that provision doesn’t cover all private student loans. It only covers “qualified educational loans,” which are loans solely for qualified higher education expenses (itself a defined term).

    In this case, the debtor alleged that the loan was not made solely to cover his cost of attending college, and the loan was disbursed to him directly. The creditor, Navient, did not claim that the loan qualified as a “qualified educational loan,” and instead relied on the 523(a)(8)(A)(ii) exception.The Second Circuit wasn’t having any of it.

    So what does this mean big picture?

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  • A Heroes Jubilee

    Posted by

    Alan White

    Millions of heroes of the pandemic–health care workers, law enforcement and first responders, National Guard troops, public school teachers, and social workers–are suffering needless financial hardship because of student loans. Years ago Congress passed, and president Bush signed into law the Public Service Loan Forgiveness program. After repaying student loans for ten years while working in public service, these workers are entitled to have their remaining debt canceled by the Education Secretary.  In a continual insult to these heroes, the Education Department and its contractor continue to reject 98% of PSLF applications, for absurd bureaucratic reasons I have elaborated on elsewhere.

    Another act of Congress, the HEROES Act of 2003 gives Education Secretary Cardona clear legal authority to fix this failure and cancel hundreds of thousands of student loans now. The HEROES Act allows the Education Secretary to waive any regulation or even statute as necessary to ensure that no individual or class of people experiencing hardship because of a national emergency suffers financial harm because of the emergency. With a few simple waivers of unnecessary rules, the Education Department could implement PSLF loan cancellations for hundreds of thousands or even millions under existing legal authority.

    A broad, one-time effort to extend PSLF relief to all those eligible could happen in a few simple steps. First, the federal loan servicing contractors could identify ALL borrowers who entered repayment more than ten years ago and who are not currently in default, and send every one of them an invitation to fill out a simple form asking if they have been working in public service. Second, the existing maze of paperwork created by the Department’s rules could be waived in favor of a simple one-page form. The PSLF applicant need only certify under penalty of law that they worked full–time for at least ten years and still work in a qualifying job. The form’s checklist of jobs should include the words of the statute: 

    a full-time job in emergency management, government, … military service, public safety, law enforcement, 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, social work in a public child or family service agency, public interest law services (including prosecution or public defense or legal advocacy on behalf of low-income communities at a nonprofit organization), early childhood education (including licensed or regulated childcare, Head Start, and State funded prekindergarten), public service for individuals with disabilities, public service for the elderly, public library sciences, school-based library sciences and other school-based services, or [a job] at a [501(c)(3) tax exempt organization].

    Any borrower signing and returning the form should immediately have all federal student loans cancelled. The Department should provide adequate funding to its contractors to fully administer this PSLF jubilee.

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  • Student Loan Relief Update

    Posted by

    Alan White

    Student loan relief provisions required by the CARES Act expire on September 30. Those protections included 1) for all federal direct loans: zero interest and automatic payment forbearance, 2) credit towards IDR and PSLF forgiveness for the 6 months covered by the Act, and importantly, 3) suspension of wage garnishments and other collections on defaulted loans. The Act called for student loan borrowers to receive notice in August that payments will restart October 1 and that borrowers not already in income-driven repayment plans can switch, so that borrowers with no or little income can remain on zero payments (but not if they were in default.)

    The President’s Executive Memorandum calls on the Secretary of Education to take action to extend economic hardship deferments under 20 U.S.C. 1087e(f)(2)(D) to provide “cessation of payments and the waiver of all interest” through December 31 2020.  These deferments are to be provided to “borrowers.” The Memorandum does not specify which loan categories (Direct, FFEL, Perkins, private) should be included, nor whether relief to borrowers in default should continue. Advocates also note that the Memorandum is vague as to whether borrower relief will continue automatically, or instead whether students will have to request extended relief, as under the Education Department’s administrative action just prior to passage of the CARES ACT. As of this writing the Education Department has posted no guidance for borrowers or servicers on its web site. Servicers will need guidance soon, and borrowers meanwhile will be receiving a confusing series of CARES Act termination letters and conflicting information about the latest executive action. UPDATE – USED has apparently issued guidance to collection agencies saying that borrowers in default are included in the Executive action so that garnishments and other collection should remain suspended through December 31, 2020.

    The HEROES Act passed by the House would extend all borrower relief until at least September 30 2021, would bring in all federal direct, guaranteed and Perkins loans, and would grant a $10,000 principal balance reduction to “distressed” borrowers. The House also included an interesting fix to the Public Service Loan Forgiveness program so that borrowers will not have to restart their ten-year clock towards loan forgiveness when they consolidate federal loans. In lieu of any extended student loan relief, Senate Republicans have proposed that borrowers just be shifted to existing income-dependent repayment plans. Existing IDR plans already allow zero payments for borrowers with zero or very low income, but do not stop the accrual of interest. They are not available to borrowers in default, so wage garnishments and collections for borrowers who were in default before March would resume October 1 under the Republican proposals.

  • California sues Devos over PSLF

    Posted by

    Alan White

    California's Attorney General has filed a lawsuit against Betsy Devos challenging the failure to discharge student loans under the Public Service Loan Forgiveness program. The suit asserts that US Ed's failure to create a simple and effective application process injures the state of California by discouraging qualified workers from seeking or staying in state jobs. California joins New York and Massachusetts AGs who have filed similar lawsuits. Secretary DeVos has had a poor record of compliance with court orders compelling student debt relief, but hope springs eternal.

  • We Can Cancel Student Loans for Essential Workers Now

    Posted by

    Alan White

    While the House HEROES bill's scaled-down student loan forgiveness is unlikely to become law, many essential workers are eligible for student loan cancellation now under existing law. The Public Service Loan Forgiveness program covers all police, firefighters, public school teachers, nurses, soldiers, prison guards, and contact tracers, among others. Once public servants complete 10 years of payments, the law says they get their remaining federal student debt cancelled. So far nearly 1.3 million public servants are working towards their PSLF discharges, but the US Education Department has granted only 3,141 discharges out of 146,000 applicants.

    In the month of March, 5,656 borrowers applied for PSLF. 114 received a discharge.  Meanwhile another 15,000 entered the pipeline by having their first employment certification approved, bringing the total to almost 1.3 million public servants. 

    I have written elsewhere about how Congress and the Education Department could fix this program, even without new legislation.

    The average total student loan debt discharged for PSLF borrowers is more than $80,000. For a median income earner, monthly payments range from $250 to $900 depending on the payment plan. PSLF discharges can yield an immediate and significant savings for these workers. 

  • PSLF update

    Posted by

    Alan White

    The success rate for Public Service Loan Forgiveness applicants has doubled. From 1% to 2%.

    Thinking they have completed their 10 years of payments, 140,000 student loan borrowers had applied for cancellation through February 29, and about 3,000 had received a discharge, including 1,300 under the “temporary expanded” PSLF who were put in the wrong repayment plan by their servicers.

    1.3 million public servants have had their employment approved for eventual cancellation of their student loans after 10 years of repayment. Two-thirds are in public sector jobs and one-third work in the nonprofit sector. Their average debt is $89,000, although a median would be a more useful number (graduate school borrowers extend the long right-hand tail.)

    The pace of approvals is undoubtedly affected by quarantines of servicer employees. Pennsylvania and the federal Education Department should consider making student loan cancellation workers at FedLoan/PHEAA essential, and staffing up this program.

    USED now releases monthly rather than quarterly #PSLF data.

  • 11th Circuit: Student Borrower Consumer Claims not Preempted by HEA

    Posted by

    Alan White

    An 11th Circuit panel ruled last week that student loan borrowers may assert state law misrepresentation claims against a student loan servicer that falsely told them their FFEL loans qualified for Public Service Loan Forgiveness. The servicer, joined by USED, argued that the Higher Education Act preempted the borrowers' state law claims, because the HEA mandates certain disclosures and expressly preempts state laws that would require additional or different disclosures. Attorneys general and consumer lawyers around the country have been battling various versions of these preemption and related sovereign immunity arguments. 

    Kate Elengold and Jonathan Glater have posted an excellent article, the Sovereign Shield, summarizing the state of play.

  • CARES ACT Student Loan Relief

    Posted by

    Alan White

    The CARES Act signed into law last week suspends payments and eliminates interest accrual for all federally-held student loans for six months, through September 30. These measures exclude private loans, privately-held FFEL loans and Perkins loans. The other five subsections of section 3513 mandate important additional relief. Under subsection (c) the six suspended payments (April to September) are treated as paid for purposes of “any loan forgiveness program or loan rehabilitation program” under HEA title IV. In addition to PSLF, this would include loan cancellation at the end of the 20- or 25- year periods for income-dependent repayment. Loan rehabilitation is a vital tool for borrowers to get out of default status (with accompanying collection fees, wage garnishments, tax refund intercepts, and ineligibility for Pell grants) by making nine affordable monthly payments. This subsection seems to offer a path for six of those nine payments to be zero payments during the crisis suspension period.

    Subsection (d) protects credit records by having suspended payments reported to credit bureaus as having been made. Subsection (e) suspends all collection on defaulted loans, including wage garnishments, federal tax refund offsets and federal benefit offsets.

    Finally, and importantly, subsection (g) requires USED to notify all borrowers by April 11 that payments, interest and collections are suspended temporarily, and then beginning in August, to notify borrowers when payments will restart, and that borrowers can switch to income-driven repayment. This last provision attempts to avert the wave of default experienced after prior crises (hurricanes, etc.) when, after borrowers in affected areas had been automatically put into administrative forbearance, the forbearance period ended and borrowers continued missing payments. Whether the “not less than 6 notices by postal mail, telephone or electronic communication” will actually solve the payment restart problem will depend a great deal not only on the notices but also the capacity of USED servicers to handle the surge of borrower calls and emails. At present servicers are struggling with handling borrower requests because many employees are in lockdown or quarantine.