With May 1 Approaching a Perfect Storm Could be Heading for those with Student Debt
By Richard Gaudreau
There is a perfect storm brewing surrounding the end of federal student loan forbearance on May 1, 2022. Not only have major federal student loan servicers quit during the pandemic, but the financial data for all servicers is likely to be outdated as much of it will predate when the pause began on March 20, 2020. Some suspect the latest extension from February 1 to May 1 was only necessary to give the U.S. Department of Education (USDOE) enough time to deal with the turmoil created by all these changes. If any further extensions occur, it will only delay these difficulties, not eliminate them. Both PHEAA (often known as Fed Loan Servicing) and Granite State Management are severing their ties with UDDOE, which will affect approximately ten million borrowers. PHEAA rather infamously has been in the news lately for its abysmal handling of the Public Student Loan Forgiveness program. Like the bulk transfer of mortgage debt, the wholesale transfer of this many loans makes it inevitable information transferred may be outdated or inaccurate. This type of systemic dysfunction is likely to fly under the radar until borrowers notice a problem.
For all qualifying loans, the Cares Act suspended all payments, reduced the interest rate to 0%, and stopped all collection actions. Not all federal loans were covered by the Cares Act. Among the approximately 43.4 million federal student loans, there are two types – Direct Loans and Federal Family Education Loans (FFEL). Direct loans, as the name implies, were made directly by USDOE and are all covered by the Cares Act. FFEL loans are a different story. FFEL loans were funded by commercial lenders and guaranteed by USDOE. President Obama discontinued the FFEL program in 2010. Of the approximately 11 million FFEL loans, only 3 million were covered by the Cares Act, an ironic description for the other 8 million borrowers. The only FFEL loans covered were those already in default and owned by the USDOE. Most Perkins loans did not qualify either if they were owned by a college or university. The bottom line is that a federal student loan needed to be owned by the USDOE for it to be covered by the Cares Act.
A Potential Rude Awakening
Borrowers already in default or getting close to it could be in for a rude awakening after May 1. There are about nine million borrowers in default on federal student loan payments at present. Default for student loan purposes requires a borrower to be 270 days behind in monthly payments. Before that, the loan is only delinquent. The distinction is important because when a loan enters default the USDOE can garnish up to 15% of wages merely by sending a notice to an employer. While a borrower has the right to request a hearing, it can be difficult to avoid a garnishment once the notice has been issued. Self-employed or 1099 employees are immune to garnishment, and there are other grounds for objection, but they are fairly limited. Most borrowers in default will only be able to stop a garnishment by curing the default. That occurs in one of two ways:
(1) Rehabilitation Agreement. Rehabilitating a loan out of default requires nine payments in 10 months. Payments are supposed to be “reasonable and affordable,” however, sometimes establishing the amount of payment can be problematic given they are in addition to the amount being garnished. After five months of rehabilitation payments, the garnishment will be released. Once the rehabilitation is complete, the loan will be out of default and once again qualified for things like an Income-Driven Repayment Plan (IDRP). A borrower can only cure a default once through rehabilitation.
(2) Loan consolidation. If there is a garnishment order, consolidating student loans into a Direct loan is not an option. FFEL loans can be consolidated into a Direct loan or multiple Direct loans can be consolidated into one Direct consolidation loan. This will also cure the default. There are resources at studentaid.gov with more specific advice about consolidation, however, I’d be remiss in my duties if I did not mention that borrowers with Parents Plus loans need to be careful in how they consolidate their student loans as they could become ineligible for the best payment plans. See discussion infra.
There is no statute of limitations for federal student loans, but given the collection powers granted to USDOE, it seldom sues borrowers anyway. Consumer advocates had been concerned that USDOE’s right to seize tax refunds after May 1 would lead to the seizure of benefits like the childcare tax credit. Fifty percent of the childcare tax credit was parsed out to borrowers in 2021; however, the remaining 50% is scheduled to be distributed as part of the tax refunds for 2021. The USDOE has recently announced it will not begin seizing tax refunds again until November 1. The 15% offsets against social security that were occurring for federal loans in default have also been put off until November 1. Borrowers in default should make sure they’ve filed their tax returns on time to avoid that outcome. The USDOE announcement did not mention wage garnishments waiting until November 1, so apparently, those will begin again after May 1, although in such a dynamic situation, that may change. Those in default should consider reaching out to their loan servicer in advance of May 1 to put in motion a process that will resolve the default.
Income-Driven Repayment Plans
When clients first contact a student loan lawyer, they often have trouble stating with any degree of certainty whether their loans are federal or private. That’s because some servicers like Navient service both types. There is a federal website – studentaid.gov – which will clarify the answer to this question, as only federal loans appear. The site also contains contact information like the current servicer, and a text file containing the history of all of their federal student loans, including the type and the amount. This site will also indicate whether a loan is in default and in danger of resulting in a garnishment after May 1.
Borrowers would be well-advised to contact their servicer in advance of the May 1 restart to make sure their records are accurate, and future payments will be based on current financial information. See discussion infra. For borrowers not yet in default and not on an income-driven repayment plan (IDRP), entering into one soon might make sense. The income-driven repayment plans are as follows:
(1) PAYE AND REPAYE, NEW IBR – Best IDRPs but not available for all loans. For eligible loans, this requires a payment of 10% of discretionary income for 20 years, with the balance forgiven. Discretionary income is income beyond 150% of the poverty level (family of 1 in NH this number would be $19,120, family of two would be $26,130). So, for someone with an Adjusted Gross Income of $100,000 in a family of two with $150,000 of federal student loans, their payment would be approximately $615.58. Yearly certifications change the payment each year, so upon retirement, the payment can go down to as low as $0, depending on what retirement income is available to a borrower.
(2) IBR (Income-Based Repayment). Payment determined by 15% of discretionary income for 25 years. In the above example, the payment would be $923.38.
(3) ICR (Income Contingent Repayment). Payment determined by 20% of discretionary income for 25 years. In the above example, the payment would be $1,231.16 per month
The studentaid.gov website contains forms and much more information about IDRPs, as well as a payment calculator to figure out what your payment will be under a particular payment plan. In the above example, for instance, a married couple might consider the possibility of filing taxes separately if this will make the Adjusted Gross line much lower on the tax return that USDOE uses to arrive at an appropriate payment. This doesn’t work for all IDRPs. Student loan law can be a labyrinth of regulations, and servicers often fail to point out obvious solutions to the borrower. One problem I’ve seen on a regular basis is borrowers being told they do not qualify for an IDRP because they have Parents Plus loans. That’s true as far as it goes, but the simple fix for this problem is to consolidate a Parents Plus loan into a Direct consolidation in order to become eligible for the Income Contingent Repayment plan (ICR). ICR is the least favorable IDRP, but it can be a lot better than a standard repayment. One borrower I represented cut his payment in half merely by a consolidation. That being said, there are some traps for the unwary in consolidating Parents Plus loans. Since they are only eligible for ICR, the IDRP with the highest payment formula, it is essential that a borrower does not consolidate any other loans like Stafford loans with them as part of the consolidation. If they do, they will make the Stafford loans eligible only for ICR rather than a more favorable payment plan like IBR.
Borrowers who may be out of work as of May 1 may consider asking for a forbearance instead of an IDRP. This is generally a bad idea because interest after May 1 will again begin to accrue and, at some point, will get capitalized onto the loan balance. Capitalized interest is one of the more pernicious features of student loans as it causes the loan balances to snowball out of control. Navient and other services have faced complaints that they steer borrowers towards forbearance instead of less expensive alternatives. At least for federal loans, an unemployed borrower is often better served with entering into an income-driven repayment plan. An unemployed borrower may end up with a monthly payment of $0/month which will count towards the 10-to-25-year IDRP payment periods after which forgiveness of the balance occurs.
If a borrower had a loan in a Public Student Loan Forgiveness (PSLF) job when Covid hit, the forbearance period running under the Cares Act counts toward the 10-year PSLF period, as long as a borrower remains in a PSLF occupation. All the months during the Cares Act forbearance will also count for borrowers in an IDRP as of March 13, 2020, as if they had been making payments during that time. That’s the good news. The bad news is that many borrowers working for a nonprofit or a public sector job found their salary cut during the pandemic. If a borrower begins missing payments, it might jeopardize their ability to continue in the IDRP and lose out on the forgiveness that will occur at the end. Borrowers on IDRPs are required to submit documentation every year to recalculate their payments based on present income. The USDOE is relaxing this rule until July 31, allowing borrowers to self-certify their income without providing the usual documents. Borrowers with an automatic deduction out of their bank account prior to March 20, 2020, should not assume a servicer will merely continue to take payments. Some servicers will, and some won’t. Contacting a servicer in advance of May 1, particularly if it is a new one, is one way to safeguard against getting blindsided by unexpected problems.
Is Consolidation the Right Move?
Borrowers with significant federal student loan debt sometimes ask if it is a good idea to consolidate their federal loans into private loans to lower the interest rate. That is generally a bad idea because a borrower will lose the flexibility of federally mandated IDRPs if some life catastrophe befalls them, making the payments untenable. One lawyer I know consolidated his federal loan into a private loan to get a lower interest rate, but it was only for $12,000, an amount he knew he could pay off quickly. Much larger loan balances requiring much longer repayment periods are a gamble that one could regret. Some private student lenders mimic IDRPs, but most do not offer anything but temporary fixes before reverting to the contractually due amount.
Private Student Loan Defaults, Bankruptcy and Disabled Borrowers
Many go to college with stars in their eyes, expecting to qualify for a job that will justify the cost and hard work necessary. Private student loan defaults often end up on the backs of family members who cosigned the loans when a graduate does not obtain the type of employment necessary to pay the loans off. There was a bill submitted to the Senate in 2021 that would forgive student loans in bankruptcy after 10 years. It actually had bipartisanship support, but for whatever reason, it has languished in committee, and there’s nothing to indicate it is on anybody’s priority list. With $1.7 trillion in student loans hamstringing many borrowers from participating in the economy because none of the traditional safety nets are available to them, something has to give.
Borrowers can sometimes consider filing bankruptcy to tee up an undue hardship complaint, although sometimes the best candidates are often least able to afford the process. Lenders in undue hardship litigation recognize this fact as much as anyone and often initially fight an undue hardship complaint if only to test a debtor’s staying power. There are rumblings that USDOE is in the process of making itself over to become a kinder and gentler collector, but that remains to be seen. Disabled borrowers can discharge their federal student loans by submitting the SSDI certification or a physician’s certificate. I have noticed that USDOE will agree to discharge federal student loans in an undue hardship complaint even when a borrower is only partially disabled. One client with MS was able to discharge $300,000 of federal and private student loan debt even though she was able to work full time.
What You Should Know About Student Loan Lawsuits
The narrative preceding a student loan lawsuit is usually the same. It almost always involves a private student lender insisting on an amount a borrower cannot afford and an unwillingness to offer any other long-term options. I had one borrower tell me he took home $1300 per month and was being told the only acceptable payment was still $1500. Some of the saddest situations I see are when a parent has cosigned a private student loan, and it has gone into default. Sometimes the parties are still speaking to each other, but often they are not. Some of these borrowers consider a strategic default recognizing that a periodic payment order in a lawsuit might at least arrive at a reasonable payment amount. It is not unusual for private student lenders to sell large portions of their loan portfolios off years after the loans have gone into default. There are some ways to push back in a student loan lawsuit in this situation. Private student loans are subject to a statute of limitation. New Hampshire’s three-year statute of limitation will govern no matter what the choice of law clause in the note says. Keeton v. Hustler Magazine, 132 NH 6 (1988) found that the price a plaintiff pays for availing itself of New Hampshire courts is that it is bound by its statutes of limitation. New Hampshire also has favorable standing case law with respect to a jurisdiction that will put the burden of proof on a private student lender who claims to have acquired a student loan in a securitized transaction to prove that it actually owns the loan. Ossipee Auto Parts v. Ossipee Planning Board, 134 NH 401 (1991).
I’ve dismissed a number of cases filed by National Collegiate Student Loan Trust due to its inability to prove its standing to file a lawsuit. Another possible consideration in defending private student loans is using the doctrine of recoupment to file counterclaims based on the deficiency of the TILA notices produced at the inception of the loans. While federal student loans are not bound by the Truth in Lending Act, private student lenders are required to show, for example, that it clearly and conspicuously disclosed the clause in the note providing for capitalized interest.
A Problem That Is Not Just Going Away
The refusal to adjust payments for borrowers in financial straits is, in my opinion, one of the reasons private student loan debt is the worst debt in America. I don’t say that lightly. Any bankruptcy attorney knows it is far easier to get rid of IRS debt in bankruptcy than to discharge a student loan in an undue hardship complaint. The absence of a meaningful safety net has left many borrowers unable to participate in the economy. According to a February 2021 Forbes article, New Hampshire had the highest average student loan debt in the United States at $39,410 per student. Some states provided relief to borrowers who did not qualify under the Cares Act; however, New Hampshire was not among them. New Hampshire also chose not to participate with the 39 other states who sued Navient so they will not be participating in the $1.7 billion settlement. On information and belief, the New Hampshire attorney general’s office is attempting to become an 11th hour participant in that settlement; however, it is unclear at this point whether that will succeed. With $1.7 trillion in student loans exceeding the total credit card debt in the United States, this isn’t a problem that is just going to go away.
Attorney Gaudreau is a solo practitioner in Salem, NH, representing clients in NH and Mass. in the areas of student loans and bankruptcy.