New Executive Order Will Expand Student Loan Relief

Starting December 2015 the new Pay As You Earn (PAYE) program is planned to be extended to all federal direct student loans. http://www.washingtonpost.com/blogs/post-politics/wp/2014/06/09/obama-to-sign-executive-order-capping-student-loan-payments/. PAYE is a special payment plan that is currently only available for student loan borrowers who took a federal loan out no earlier than Fall 2007 and also took a new loan out in Fall 2011. The program has thus been inaccessible to the majority of borrowers. 

PAYE caps student loan payments at 10 percent of their “discretionary income.” The next-best program, which the majority of low-income borrowers use, is the Income-Based Repayment Plan (IBR), which caps payments at 15 percent of discretionary income. This results in higher required payments under IBR as compared to PAYE.

Other benefits of PAYE include forgiveness after 20 years of qualifying payments (as compared to 25 for IBR), interest payment benefits, and a limitation on the capitalization of interest. https://studentaid.ed.gov/repay-loans/understand/plans/pay-as-you-earn

Private Student Loans Going Into Default When Co-Signer Dies or Files Bankruptcy

The New York Times reports that many private student loans contain provisions that allow the lender to declare the entire balance due and payable after a co-signer dies or files bankruptcy, even when the borrower is current on loan payments.

The Consumer Financial Protection Bureau (CFPB) published an advisory regarding this practice on April 22, 2014. The government agency has received an increasing amount of consumer complaints regarding the practice. While the CFPB does not state that the practice is illegal, it sternly warns private student loan borrowers about the real consequences when a co-signer dies or files bankruptcy.

The CFPB recommends that borrowers contact their private student loan servicer and request a "co-signer release", which can help both the borrower and the co-signer. Often, the lender will require a credit check and a history of timely payments before awarding a co-signer release. Sample request letters can be found on the CFPB's Website.

Sources

Perez-Pena, Richard, Student Loans Can Suddenly Come Due When Co-Signers Die, A Report Finds, The New York Times, April 22, 2014. http://www.nytimes.com/2014/04/22/us/student-loans-can-suddenly-come-due-when-co-signers-die-a-report-finds.html?_r=0.

Chopra, Rohit, Consumer advisory: Co-signers can cause surprise defaults on your private student loans, Consumer Financial Protection Bureau, April 22, 2014, http://www.consumerfinance.gov/blog/consumer-advisory-co-signers-can-cause-surprise-defaults-on-your-private-student-loans/.

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

Is the new student loan bill a good deal?

In August, President Obama signed into law a bipartisan student loan bill. Without congressional action, interest rates on loans to college students were increasing from 3.4 percent to 6.8 percent. However, under the law signed by Obama, the interest rate for undergraduate loans will fall back to 3.86 percent. Graduate unsubsidized Stafford loans will be 5.41 percent  and Grad PLUS loans will be 6.41 percent. The bill ties interest rates on Stafford loans, as well as graduate and Parent Direct PLUS loans, to that of the 10-year Treasury note, which reflects the federal government's cost to borrow. The rates are determined as of June 1 each year and locked in for the life of the loan.

While the new bill reversed an interest rate hike on subsidized loans, experts are concerned about the long-term effect of the legislation.

On one hand, the new bill provides some stability in interest rates for subsidized loans. "Interest rates on subsidized federal loans for college won't double from last year and a long-term fix will be in place to avoid these annual political chess matches over the loan program", stated Peter McPherson, president of the Association of Public Land-grant Universities.

On the other hand, as the economy improves, the interest rates will rise. This is because market-based interest rates are not static. The bill passed in August caps how high the rates can go: 8.25 percent and 9.5 percent for subsidized and unsubsidized Stafford loans, respectively, and 10.5 percent for all PLUS loans. Those caps are higher than where rates were in July 2013. Students could face those high rates in just a few years.

In the grand scheme, however, interest rates are not a factor in student's decision to borrow. Rather, their eligibility for the loans themselves is what factors into their decision. The ultimate effect of the current legislation does not address over-borrowing and the ominous student debt crisis.

Source: Kelsey Sheehy, New Student Loan Deal Good, and Bad, for Borrowers, U.S. NEWS (August 5, 2013) http://www.usnews.com/education/best-colleges/paying-for-college/articles/2013/08/05/new-student-loan-deal-good-and-bad-for-borrowers.

The New College Exit Exam, "CLA+"

Many college seniors returning to class around the U.S. will be required to take a new standardized test, the Collegiate Learning Assessment Plus (CLA+). The goal of the test is to help compare the intellectual achievements of undergraduates from different schools.

Approximately 200 colleges and universities have signed up to give the CLA+ tests at the end of the current academic year. The test will measure analysis, problem solving, writing, quantitative reasoning and reading according to the Council for Aid to Education.

The student has the option of placing his or her corresponding score on their resume, which may demonstrate the ultimate value of their college education.

Douglas Bennett, a Council for Aid board member, said that the test showed promise.

Source: Daniel Lovering, Not enough to graduate college: Now there's an exit exam, NBC NEWS (August 26, 2013) http://www.nbcnews.com/business/not-enough-graduate-college-now-theres-exit-exam-8C11006596.

Tax Consequences of Loan Repayment Programs

Normally, the cancellation of debt is considered income for tax purposes. However, certain types of debt discharge is excludable for tax purposes. Student loan debt forgiven through the Public Service Loan Forgiveness program is considered excludable and participants do not face federal tax liability when a student loan is forgiven under this program. Publication 970, § 5, Internal Revenue Service (2012).

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CFPB "Public Service & Student Debt" Benefits Report

CFPB estimates that over 25% of the workforce is engaged in "public service" and eligible for a federal loan forgiveness program.

Check out the report here:  http://files.consumerfinance.gov/f/201308_cfpb_public-service-and-student-debt.pdf