Dear Class of 2013, Your Loans Are Due

Dear law school friends from the class of 2013,

This is a short article that I think you should read.

Since the spring of 2013, the federal government added new income-based repayment plans to help new borrowers (like you) pay less per month on their student loans. These plans also allow borrowers to obtain loan forgiveness after 10, 20, or 25 years of payments (depending on the plan). These plans include the new Pay As You Earn (PAYE) repayment plan, Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR).

You should know that all borrowers are automatically enrolled in the Standard 10-year repayment plan when they leave school. They must take action to opt into and apply for any of the others, provided they meet the eligibility criteria. The borrower can do this by logging into their account at studentloan.gov and applying for income-based repayment. This can be done in a matter of minutes through the website's new electronic application system. Borrowers can opt into any plan for which they are eligible at any point during repayment and generally can change options during repayment.

As you will see below, in order to maximize student loan forgiveness you will generally want to enter into these plans as soon as possible. However, based on your income and the amount of your debt, you may decide that an income-based repayment plan is not a good idea (you will pay more interest compared to Standard repayment, for example). Thus, for small loans, you may prefer to stay with Standard repayment (but what kind of law student owes only $5,000 in student loans?). So before you start on Standard repayment and risk defaulting or losing precious months towards your forgiveness period during your first year of payments, consider the following payment plans.
 
Income-Based Repayment (IBR) and Pay As You Earn (PAYE) allows borrowers to make monthly payments based on their income if they meet a debt-to-income test. Borrowers may opt into IBR or PAYE if their payments under that plan would be lower than payments under the Standard (10-year) repayment plan. Let's be honest. Unless you are making a very substantial salary your first year out of law school or college, your IBR or PAYE payment is going to calculate to be lower than what you would normally pay under Standard repayment. This is because those payments only require that you pay 15% and 10% of your discretionary income per year towards the plan, respectively. Generally, your discretionary income is based on your most recent tax return.

New and recent student loan borrowers qualify for the coveted PAYE plan. For those who qualify, they need only pay 10% of their discretionary income after a base $17,235 exemption. Also, borrowers who make 20 years of qualifying payments receive a complete forgiveness of their federal student loans.  It is an amazing plan. 

Who qualifies? To qualify, the borrower must have been a new borrower as of October 1, 2007 and must have received a disbursement of a Direct Loan on or after October 1, 2011. What does that mean? It means that, for example, if you were like me and started undergrad in 2006 and took out a student loan for that year, you do not qualify for PAYE. However, for those who began on or after the 2007-2008 school year with no prior federal loans, you will qualify for PAYE. Congratulations.

For those who do not qualify, you may still apply for IBR. Under IBR, you will pay 15% of your discretionary income per year. Also, borrowers who make at least 25 years of qualifying payments will receive complete forgiveness of their federal student loans. As you can see, for long-term borrowers, IBR is not as favorable as PAYE. However, it is still preferable to Standard repayment if it helps the borrower avoid a default and be able to pay their monthly bills.

Income-Contingent Repayment: Not everyone qualifies for IBR or PAYE. If your income is too high to qualify for either of these programs, you may qualify for Income-Contingent Repayment (ICR). Under ICR, you will pay the lesser of the amount you would pay if you repaid your entire loan in 12 years multiplied by an income percentage factor that changes with your annual income or 20% of your monthly discretionary income.

For non-profit and public employees: If you work for a non-profit or work in a public job for an average of 30 hours or more per week, you may qualify for 10-year student loan forgiveness. How do you take advantage of the 10-year forgiveness? Apply for IBR or PAYE as soon as possible and being making your 120 qualifying payments. While IBR and PAYE may not be good idea for everyone, it is nearly always a good idea for non-profit and public employees to enroll if they have a substantial amount of student loan debt.

In short, consider your options. If you owe a large amount of student loans and you want to enter into income-based repayment, you should act as soon as possible before your first loan payment is due. If you would like more information about student loan repayment plans, go to http://studentaid.ed.gov/repay-loans/understand/plans.

Sincerely,

Austin Houvener

The New California Fair Debt Buying Practices Act

Senate Bill 233, the Fair Debt Buying Practices Act, passed the California legislature and was signed into law in the summer of 2013.  The Act, which will apply to debt sold or resold on or after January 1, 2014, regulates entities buying consumer debt for collection purposes by imposing strict documentation requirements. A failure to follow the act results in liability to the debtor and possible dismissal of the debt buyer's lawsuit.

The new act requires that third-party debt buyers actually possess certain information before sending consumers collection letters and statements. This information includes: (1) proof that the debt buyer is the sole owner of the debt, (2) the balance of the debt when it was charged-off by the original creditor, (3) an explanation of any post-charge-off fees and interest, (4) the date of default or last payment, (5) the name and address of the creditor that charged-off the account associated with the debt and (6) the last known name and address of the debt as it appeared on the records of the original creditor. The act also requires that debt buyers have access to the original credit contract between the consumer and the original creditor, if available. 

Further, debt buyers may not sue or obtain default judgments (judgments obtained because the consumer does not come to court) unless specific information is alleged and included in the debt buyer's complaint. A failure to include the required information results in a violation of the act and possible dismissal of the debt buyer's complaint.

Consumers may sue debt buyers for actual damages suffered along with statutory damages of no less than $100 and no more than $1,000. Successful plaintiffs are entitled to costs and reasonable attorney's fees. The act specifically allows for class action lawsuits, with additional damages of up to $500,000 or 1 percent of the net worth of the debt buyer if the court finds a pattern and practice of violations of the act. See the bill PDF here.