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Friday, January 6th, 2012

Without Bankruptcy Option, Are Student Loans Predatory?

A recent article on Forbes.com lashes out against the state of student lending and student debt in the United States. The author makes several salient points regarding the problems surrounding student debt, which cripples many graduates largely because it is very difficult to discharge in bankruptcy.

But what makes a loan “predatory?” The nation conspicuously lacks a legal or official definition for “predatory lending,” but the Forbes article cites many attributes of student loans that suggest they might fall into this category. These include:

  • Student loans do not come with “free-market consumer protections.” Student loans cannot easily be discharged in bankruptcy (compared to other unsecured loans); borrowers do not have the option to restructure their student loans; and these loans come with no real statute of limitations in most cases. Lacking these protections, borrowers are more or less bound for life to repay any money they borrow for their education.
  • The organizations that are meant to oversee student lenders (called “guarantors”) make roughly 60 percent of their revenue from fees and penalties associated with loans that have gone into default. In other words, the groups intended to protect borrowers from lender abuse actually have a financial interest in borrowers not being able to repay their loans as outlined in their loan terms.
  • Student lenders have broader debt collection rights than other types of lenders. This means that they have a better chance of collecting some or all of the money owed to them (including money owed as part of penalties and fees).

Comparing Other Types of Predatory Loans to Student Loans

To refresh your memory about problematic predatory lending that has made headlines in recent months and years in the U.S., here’s a quick outline of how two different types of predatory loans were outed and then blasted by pretty much every consumer advocate in the country.

  • Subprime mortgages: These fueled the housing bubble (and bust), and essentially amounted to lending money to people who had no real chance of repaying it. One of the hallmarks of many subprime mortgages issued was that those in the lending, loan servicing, and investment fields had financial incentives for the loans to fail. In other words, these people stood to make money when borrowers defaulted on their loans, because of late fees and other penalties (sound familiar?).
  • Payday loans: The target of several pieces of legislation in recent years, payday loans are profitable to the lenders exactly because borrowers are not expected to be able to repay them as originally agreed. Payday loans become most lucrative when borrowers must pay late fees and penalties—meaning, of course, that they were designed to extend money to those who did not have a good chance of repaying it.

Congress has made some noise about reforming the student loan industry, but as of now, no real, meaningful changes have been implemented.

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Posted in Predatory Lending | 2 Comments »

Thursday, November 3rd, 2011

White House Offers Mortgage, Student Loan Relief Programs

The Obama White House has announced two new plans to help struggling Americans better manage their debt burdens. Both measures are targeted at debts that even filing personal bankruptcy cannot always eliminate, student loans and mortgages. Here’s a look at what the debt relief programs are designed to do and how they might help you.

Mortgage Relief: The New HARP

On the mortgage side of things, the Obama Administration recently rolled out revisions to its Home Affordable Refinance Program (HARP). At present, the program provides a pathway to mortgage refinancing for those who are underwater on their mortgage loans and have loans backed by Fannie Mae or Freddie Mac.

The changes will:

  • Add protections for lenders who agree to refinance. At present, the main problem with implementing HARP has apparently been getting lenders to agree to refinance mortgages. The new version will add more protections for these lenders so they’re more likely to actually offer modified mortgage loan terms to needy borrowers.
  • Expand those eligible to participate. When the new changes go into effect, any homeowner who is underwater on a federally backed loan, is current on payments, and has no late payments in the recent past will be eligible for HARP help.
  • NOT help those who are delinquent on their mortgages. While mortgage delinquency numbers have been reportedly creeping downward in recent months, fully 3.9 percent of borrowers are currently 90 days or more late on their mortgage payments, and another two million are in some stage of the foreclosure process. The HARP revisions will not help these groups.
  • NOT help those with private mortgages. Homeowners whose mortgages are backed by an institution other than Fannie Mae or Freddie Mac are also ineligible for the HARP protections.

Student Loan Relief: Pay as You Earn

On the student loan side of things, the White House has offered an updated alternative to the current Income Based Repayment (IBR) option. When the new rules take effect, students with educational debt enrolled in Pay as You Earn will be required to pay no more than 10 percent of their monthly income in student loans.

Further, the new program will forgive federal student loans after 10 years of working in the public sector and after 20 years in certain other jobs. Certain student borrowers who are unemployed may be excused from making payments until they find work.

The Pay as You Earn program will not offer relief to:

  • Those with privately funded student loans. Only federally backed loans qualify for this particular program.
  • Those who are currently late on loan payments. As with IBR, Pay as You Go requires loan holders to be current on payments in order to enroll.

The number of graduates defaulting on their loans within a year of earning their degree rose from seven percent between 2008 to 2009 to 8.8 percent between 2009 to 2010.

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Posted in Home Foreclosure, Your Credit Score | 1 Comment »

Friday, September 18th, 2009

Education Loan Reform may ease Debt-Burdened Students

Thursday's news of the House of Representatives' decision to back President Obama's plan to end the Federal Family Education Loan Program (FFELP) has brought considerable tones to both sides of the political plate.

Democrats are in praise of the House bill, saying it represents a victory for students over the banks. Not surprisingly, most Republicans criticize the bill as a government takeover of an industry that has served students well.

But how will the passage of this bill and the resulting of the FFEL program dissolving affect those in the burdens and confines of bankruptcy?

The FFELP is the private sector student loan program that makes higher education affordable and accessible for millions of students and their families.

In today’s cumbersome financial climate more students than ever before are dependent on student loans to finance their education. According to SallieMae, roughly 78% of all student loans (were) provided under the FFELP, representing an estimated $64 billion in FY2009.

The Cost of Higher Education

What about those families who are struggling with bankruptcy and the financial burden of financing a college education? Will this place an even heavier burden on them?

There aren’t any benchmarks at this point to know, especially since this hasn’t been placed into a bill as it still sits within the Senate for approval. There is thought though that for those who are in the throes of bankruptcy this might offer a glimmer of hope to keep the two acts separate- bankruptcy and tuition.

Outlining this is the mere fact that by shifting towards a more universal financial aid lender, based in the federal government, then there will be less restrictive requirements for obtaining a loan.

If this were to happen then eligibility would be based more on the worthiness of the applicant as whole rather than of a credit score and history. In this it would also then put the responsibility of divvying up the offering to students by colleges a more balanced act.

Bankruptcy and Student Loans

Overall, there are two major points to consider if this bill passes the Senate. First being that filers for bankruptcy who are themselves applying for financial aid will not be able to discharge their student loans in the petition- unless they bring an action known as an Adversary Proceeding to the Bankruptcy Court. This would prove to the court that repaying the loans will create an undue hardship on themselves and their dependents.

Second and equally important is that one has nothing to do with the other; they are in fact mutually exclusive. The act of filing bankruptcy is one that is done in the spirit of reinvention, to give the petitioner a fresh start.

Adding to the mix the possibility that this person is either a college student needing financial aid or has a dependent who needs it has no bearing in the court process.

By taking the financial aid award out of the hands of our nation’s banking institutions and placing into the arms of our government- where many, many students already receive their loans ( via Perkins loans and others) - they are simply asserting a strategy to try and save close to $80 billion for our nation.

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Posted in Bankruptcy News and Events | No Comments »