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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 »

Wednesday, September 21st, 2011

Falling SAT Scores & The Future of the Economy

The College Board announced this week that SAT scores among U.S. high school students dropped from last year. While the decrease may not seem significant (the average reading score fell three points, writing fell two points, and math dropped by one), analysts are worried that the dip could be part of a larger trend.

Unfortunately, that trend could have significant long-term impact on the future of the U.S. economy and jobs market.

The Test Score-Employment Link

Here’s a look at why faltering SAT scores are raising some concern among those worried about the long-term recovery of the U.S. economy.

  • SAT Benchmark: The College Board, which administers the SAT, has determined that a score of 1550 out of 2400 indicates that a student has a 65 percent chance of earning at least B-minus grades in college and thus of earning a degree.
  • Less than half of seniors meeting the benchmark: In 2011, only 43 percent of seniors planning to attend college achieved the benchmark score. This suggests that the majority of those entering college this fall have a less than 65 percent chance of completing school (according to the College Board’s research).
  • Unemployment by degree earned: The failure to complete college is troubling considered in the context of current unemployment rates. While the national average hovers around nine percent, that number varies significantly when total education is considered. In 2010, the Bureau of Labor Statistics released numbers indicating that, when the nation’s unemployment rate was at 8.2 percent, the rate for those with a doctoral degree was a mere 1.9 percent; professional degree earners had a 2.4 percent rate; those with masters degrees, 4.0 percent; those with bachelor’s degrees, 5.4 percent; associate degrees, 7.0 percent; some college, 9.2 percent; high school diploma, 10.3 percent; and no high school, 14.9 percent.
  • The future of U.S. jobs: Those numbers reflect a trend in the U.S. that involves available jobs becoming more and more skilled. The Secretary of Education has gone on the record saying that most jobs available in the U.S. in the future will be skilled and that education and training are becoming more and more essential to obtaining and keeping employment.

Those who start college and don’t finish may still have to contend with student loans, which are not dischargeable in bankruptcy. Student debt can be especially difficult without the increased earning potential that typically accompanies a completed degree.

Economic Recovery and Employment

Naturally, nobody will insist that the economy has recovered until the unemployment rate has fallen closer to normal levels. Though many analysts say that recovery must start in the housing market, most citizens and politicians pay more attention to employment numbers, because these have a more observably direct impact on citizens.

Part of the worry that the College Board’s numbers spurred comes from overseas: students in China and elsewhere are improving on standardized tests as U.S. students fall behind. This has led some people to worry that, if American workers, students, and schools don’t improve, the country might have to start outsourcing jobs for the highly trained.

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Posted in Economic News: How Are We Doing?, Unemployment | No Comments »

Monday, August 15th, 2011

How the Debt Deal Might Affect Student Loans

Media attention to the fallout from the Congress’s last-minute decision to raise the debt ceiling has mostly gone to the downgrade in America's debt rating by credit rating agency Standard & Poor’s. But another potential side effect may have a more direct impact on some American consumers.

As part of the debt compromise, Congress agreed to cut nearly a trillion dollars in spending – and one casualty was federal subsidies for student loans. That means that people interested in borrowing money for higher education may see a higher price tag for that privilege in the near future.

Student Debt & Bankruptcy

So why is an increase in the cost of student loans a big deal? For a few reasons:

  • Student debt in the United States has already topped $800 billion and analysts estimate that it will reach $1 trillion by the end of 2011. That’s more than our credit card debt, which was estimated at $793 billion in May 2011.
  • The job market has been slow to recover since the recession hit, especially for younger job seekers. Nationally, unemployment is hovering at about 9.1 percent, meaning that finding a job after graduating is tougher than it once was. And the average college graduate hits the job market with about $24,000 in student debt.
  • Student loans are not dischargeable in bankruptcy. That means that borrowers are legally obligated to repay their student loans no matter what (though some rare exceptions exist).
  • For-profit universities have recently faced new sanctions that require them to meet certain requirements in order for their students to receive federally subsidized student loans. The measure was put in place because of evidence that showed students were borrowing money to pay for these schools that they were unlikely to earn back based on income projections upon graduation.

In other words, educational debt in the U.S. has already proven cause for concern from many consumer advocates. An increase in interest rates will mean an increase in the amount of that debt.

Change to Student Loan Rates

As of now, federally subsidized Stafford loans come with an interest rate of 3.4 percent. What’s more, under the current system, the government covers interest that builds up while a student is actively pursuing her education.

When the debt ceiling-related changes go into effect next year, though, that interest rate will double to 6.8 percent and the interest waiver for active students will disappear. Further, the new law removes certain rate reductions that are currently used to incentivize on-time payment.

Student lending is an interesting sector of the U.S. economy: unlike most other loan products, student loans are offered freely, without much regard for a person’s credit history. Because of this, it’s far too easy for young adults to take on more debt than they realize – and entirely possible that they’ll get in over their heads.

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Posted in Bankruptcy News and Events, Economic News: How Are We Doing? | 1 Comment »

Wednesday, March 23rd, 2011

The Latest on Student Debt and Underwater Homes

New reports highlight some interesting information about two topics near and dear to those who have filed or are considering filing for bankruptcy: underwater mortgages and student loan debt. Here’s a look at what kind of picture the latest numbers paint.

Students Don’t Need to Default to Be Behind on Loans

The Institute for Higher Education Policy released a report last week showing that two-fifths of those who borrowed money for educational purposes fell behind on their payments at some point in their first five years of repayment. So what does this mean?

  • Widespread repayment difficulties: These numbers may not even reflect the current rates of repayment difficulty, given that graduates in the last few years have faced a much tougher job market than those who graduated five years ago.
  • Old measures may be inadequate: Traditionally, studies on student debt have focused on the rate of default rather than delinquency. Looking at delinquent loans offers a clearer picture of how many people are struggling to repay their loans, even if they manage to get back on track at some point.
  • Bankruptcy not an option: Student loans are typically not dischargeable in bankruptcy court, which means that those with unmanageable student debt have few options for easing their debt burden. This is scary, considering that some estimates put the country’s total student debt at $896 billion, which is greater than our national credit card debt total.

Reports note that these numbers may affect the current debate in Congress over whether for-profit colleges and universities should be eligible for federally backed financial aid.

More Underwater Homes

Recent numbers released by a company called CoreLogic show that the number of underwater homes in the U.S. (that is, homes with a current value less than the amount of the mortgage on the house) has climbed since last quarter. Here’s a look at the numbers.

  • A reported 11.1 million U.S. homes were underwater in 2011’s first quarter, a jump from 10.8 million in the last quarter of 2010.
  • Nevada has a 65 percent rate of underwater mortgages, and is apparently the only state in which the average homeowner is underwater.
  • Besides the more than 11 million underwater homeowners in the U.S., 2.4 million Americans have less than five percent equity in their houses, according to sources.
  • Collectively, we reportedly owe about $751 billion more on mortgages than our homes are worth.
  • Analysts predict that home prices could fall by another five to 10 percent in 2011, meaning that those with little equity could soon find themselves underwater.

Unfortunately, mortgage loans for primary residences cannot be modified in bankruptcy court, but in some cases homeowners may find a Chapter 13 or Chapter 7 filing useful for eliminating other debts to help improve their odds of staying on track with their mortgages.

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Posted in Economic News: How Are We Doing?, Home Foreclosure | No Comments »

Wednesday, January 19th, 2011

Better Consumer Protections for Mortgage Borrowers on the Horizon?

A recent report from CreditBloggers indicates that the Consumer Financial Protection Bureau (CFPB), the new government body created by the Obama administration to improve consumer protections in the United States, plans to create an easy-to-understand tool that will allow potential homeowners to compare the terms of various mortgage loans with greater ease.

Here’s a look at some of the details.

Easier-to-Understand Mortgage Documents and More

  • More transparency in lending: According to a press release from the CFPB, the organization plans to join forces with state enforcers and banks to improve transparency in lending tools such as mortgage documents, student loans and payday loans. The goal of this partnership is to better equip consumers with the tools needed to understand loans before they take on such burdens.
  • Clarification of mortgage options: One of the CFPB’s specific goals is to provide consumers with an easy-to-understand comparison sheet for mortgage loans. The current forms, apparently, include too much legal and technical jargon and provide little illumination for the average consumer.

So what might this mean for consumers, once the CFPB produces documents to facilitate various borrowing experiences?

Improved Understanding of Consumer Risk

The goal, it seems, is to put consumers in a position of power when they’re making decisions about their finances. Ultimately, services from the CFPB might include:

  • Better disclosures on student lending forms: Most student loans are not dischargeable in bankruptcy, but students continue to regularly take on tens and even hundreds of thousands of dollars in debt in order to get a bachelor’s degree. Improved disclosures, explanations and estimates post-graduation earnings could help young students make more reasonable borrowing decisions.
  • Tighter restrictions (or clearer terms) at payday loan stores: While some state laws have banned or greatly restricted the practice of payday lending, in much of the country payday lenders still thrive. The CFPB has announced that it plans to play a role in changing the face of payday lending so that it is less alluring and expensive for already struggling consumers.
  • Clearer comparisons of mortgage offers: As stated above, more direct methods of explaining and comparing mortgages could potentially save consumers from taking on toxic debt.

Because the financial turmoil we’ve been dealing with for the last few years has had unarguably negative effects on the lives and livelihoods of millions of citizens, it’s refreshing to see the potential for some good (in the form of increased consumer protections) to come out of the bad.

The CFPB is still a fairly new organization; as it matures and extends its reach, it should be making important changes for consumers across the country.

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Posted in Finance 101: Secure Your Future, Predatory Lending | No Comments »

Tuesday, August 17th, 2010

Families Struggle with Skyrocketing College Costs

If you think college costs are on a rapid ascent, recent statistics released by Sallie Mae and Gallup support your belief. According to reports, the average cost of college attendance rose a staggering 17 percent in 2010.

Just how much are costs rising? Sources indicate that the average costs of college attendance increased roughly 30 percent for families making between $100,000 and $150,000. In addition, those in the $35,000 to $100,000 income bracket experienced a 20 percent jump in college costs.

In order to pay college tuitions, parents and students are borrowing an increasing amount of money, as well as using more of their personal income.

How are Students Paying for College?

The survey revealed some interesting figures on how Americans are paying for
college:

  • In order to pay for school, 73 percent of Americans say they have reduced other spending, 48 percent have increased their hours at work, and 43 percent of families say their student has lived at home in order to reduce housing costs.
  • According to the report, which polled more than 1,600 parents and students, parents paid for 37 percent of the total cost of college attendance. Of this total, 10 percent was through loans, and the rest was given from current income.
  • On the other side, loans secured by students covered 14 percent of the cost of college, and student income and savings accounted for 9 percent of spending.
  • The second largest source of college payment came from grants and scholarships, which accounted for 23 percent of overall college funding.

These numbers show that most families have to dip into numerous sources to cover the cost of higher education.

Consequences for Personal Finances

The statistics above show how college costs are apportioned among various parties. What they don’t reveal is the impact rising costs have had on the personal finances of both parents and students.

  • Last year, the average amount of money parents paid from their personal income and savings rose 26 percent to $8,752, up from the previous year’s total of $6,934.
  • Further, while the average amount parents took out in college loans this year rose 27 percent to $2,261, up from $1,775 in 2009.
  • The amount of income and savings students had to use for college costs jumped 16 percent to an average of $2,314.
  • Student loan borrowing jumped 25 percent to an average figure of $3,396.
    In order to secure financial aid, experts advise that all families should fill out a Free Application for Student Aid form each year. Surprisingly, 13 percent of families were not aware of this form, according to the survey.

If college costs have sunk your personal finances, filing bankruptcy may help you recover from collegiate sticker shock.

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Posted in Economic News: How Are We Doing? | No Comments »

Thursday, August 12th, 2010

The Truth about Bankruptcy and Student Loans

College students and recent graduates are facing a particularly difficult financial landscape as they attempt to move from the classroom to the workplace: college tuition is more expensive than ever, meaning that most students rely at least in part on loans to cover their fees.

But, with the economy still sluggish, finding a job (and particularly a job that will allow them to cover their loans) is often a difficult feat.

And the scary truth is that student loans are very difficult to discharge in a bankruptcy filing. Here’s a look at what you can expect if you’re struggling to repay educational debt—and what your options might be.

Student Loans in Bankruptcy

In most bankruptcy cases, student loans constitute non-dischargeable debt, meaning that the bankruptcy court cannot legally forgive any money you owe. The exception to this rule is that if a filer can prove “undue hardship,” she might have her loans forgiven.

In order to demonstrate that paying back your student loans would cause you “undue hardship,” you must address the following:

  • Standard of living: You need to show the bankruptcy court that, if you made payments on your student loans, you would be forced to live below a minimum standard of living. This may vary depending on where you live, so be sure to consult with a bankruptcy lawyer to determine whether you might meet this criterion.
  • Duration of situation: You also need to prove that your current living circumstances (such as expenses and income) are likely to continue throughout the duration of your loans’ repayment period. In other words, you need to show that you’re not only poor now, but you’re likely to remain so for as long as you’d be making student loan payments.
  • Effort of repayment: Finally, you have to demonstrate that you’ve honestly attempted to repay your loans but have found yourself unable to continue doing so while maintaining reasonable living standards.

Clearly, these criteria are not easy to meet—and it’s likely you might not even want to meet them. After all, none of us want to think we’ll be having the same difficulty finding work ten years from now that we’re currently having.

Dealing with Student Debt

If you don’t think you’re likely to have your student debts discharged by a bankruptcy court, you may want to consider these options for repayment.

  • Filing for bankruptcy: No, that’s not a typo. If you’re stretched too thin by a variety of debts, filing for bankruptcy may allow you to discharge other debts (like those from credit cards) so you can funnel money to debts you have to repay.
  • Applying for forbearance: Most student lenders offer graduates periods of forbearance, in which they’re not required to make payments on their loans. If you expect to be employed (or be earning more money) in the near future, this option may give you some breathing room.
  • Negotiating: Finally, consider contacting your lender, explaining your situation and asking for altered loan terms that would allow you to make smaller monthly payments so you could stay on target.

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Posted in The Truth about Bankruptcy | No Comments »

Monday, August 9th, 2010

Save on Medical Bills (and Other Pesky Expenses)

Considering that a significant number of Americans who seek bankruptcy protection do so at least in part because of overwhelming medical bills, there's a little-known trick that could prove financially amazing for some individuals. A recent article from the New York Times suggests a very simple technique for saving money on doctor’s bills.

The Trick

Luckily, this “trick” for knocking as much as 25 percent off your medical bills isn’t complicated or difficult. Here’s what you have to do:

  • Call the hospital or doctor you visited when you have a copy of your bill.
  • Ask if you can have a 25 percent discount if you agree to pay in full over the phone (which usually means giving a credit or debit card number).
  • Wait for results.

The caveat here is that you actually have to have 75 percent of the bill available in cash; otherwise, the strategy won’t work. But, if you’ve developed a savings account for emergencies or even for routine medical costs, you’re probably in a good position to give this a whirl.

Why It Works

So why would hospitals and doctors agree to accept less than the amount they charged you, often without any sort of negotiation? Because, according to sources, many are accustomed to patients who cannot pay, refuse to pay, have their debts discharged in bankruptcy or otherwise avoid payment in full.

After all, medical debts are dischargeable in bankruptcy and emergency procedures can cost a pretty penny, especially if you’re not insured or insured well.

Where Else You Can (And Can’t) Try It

The good news (if you’re willing to start saving some money to try this trick elsewhere) is that the medical world isn’t the only one that might accept an offer for immediate, partial payment.

Consider trying it for one of your credit cards: if you have a significant balance on one card but have saved up a portion of what you owe, try calling your company and asking to make a lump payment for that portion, in exchange for their excusing the rest.

It’s a good idea to get such an agreement in writing, so if your issuer consents, be sure to include your agreement in writing when you send payment. Like medical bills, credit card debt can be discharged in bankruptcy, and many issuers will be happy to accept a guaranteed portion rather than risk losing all of it if you file.

The trick probably won’t work, though, for student loans. Because these are not usually dischargeable in bankruptcy court, student lenders have little incentive to settle for less than what you owe.

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Posted in Your Credit Score | No Comments »

Wednesday, July 7th, 2010

New Student Loan Laws Take Effect

For the millions of parents trying desperately to help their child pay for college (even though they may be facing bankruptcy, themselves)—an institution that is becoming increasingly difficult to afford—some hope may be insight. A new law that went into effect last week relegating private lenders to a smaller role in educational loans may make affordable federal loans easier to get, according to a recent article in the Wall Street Journal.

The new student loan legislation, which was signed this spring as an amendment to the health-care overhaul bill, cuts out the private-sector middlemen from offering federal loans as of July 1st, while increasing the federal grant programs.

As a result, borrowers should have a clearer distinction between federal and private loans, especially because many banks previously offered both.

The short term result of this change is more competition among private lenders, which could lead to better terms for borrowers. Wells Fargo demonstrated this when it recently dropped rates on two of its private student loans, including a new loan for parents launched in May.

One long term result may be a much needed break for students. The average debt among college students in 2008 is up to $23,200, nearly $5000 more than students graduating in 2004.

Some key tips to keep in mind if you or your children are planning on applying for students loans in the fall.

Maximize the federal loans first. Federal loans have fixed rates that won’t rise with interest. The fixed rates vary from 4.5% for students with a demonstrated academic need, to 6.8% for those who aren’t need based.

Also, federal loans offer a very flexible repayment plan, which can be important if you or your recent graduate are struggling to find a job that can pay the bills.

There are other kinds of federal student loans that can help save money, when compared with private loans, that you can look into to see if you qualify for.

The other key point to think about is finding the deals on private loans.

Credit unions are increasing their business in the field, with around 150 credit unions joining the Credit Union Student Choice program, a group that helps credit unions offer non-federal student loans with an average rate on existing loans of 6.25% with zero origination fees.

There are also more regulations on the radar for Congress. There is a financial-regulation bill in Congress that calls for the formation of a Consumer Financial Protection Bureau that would have oversight over private student loans and other financial products to give borrowers more protection.

Hopefully these trends continue and allow all the emerging college students to have some freedom and flexibility to merge into careers that they want to, instead of selling their soul to the first job that will pay off their debt and get them out of the house—assuming there are any jobs when they graduate.

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Posted in Bankruptcy News and Events | 1 Comment »

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