How Some States Are Fighting to Protect Student Loan Borrowers

Some states are looking to add Bill of Rights laws to help keep student loan borrowers from drowning in debt.

The student loan crisis is starting to feel a lot like the housing crisis of the last decade, warns Illinois State Attorney General Lisa Madigan — a swelling economic disaster with millions of fragile borrowers unable to get timely help or good advice. If that seems like an overstatement of the situation to you, consider this: A stunning 1-in-3 student loan borrowers are late on loan payments, and several studies show struggling borrowers often don’t know about programs designed to lower their monthly payments.

Unwilling to wait for reforms from Washington, D.C., Illinois and other states are taking matters into their own hands by passing new consumer protection laws called the Student Loan Borrower Bill of Rights.

“There’s been almost no oversight of the student loan industry,” says Madigan, adding that student borrower complaints to her office have skyrocketed right along with the total outstanding student loan burden, which now sits at $1.4 trillion, owed by 44 million Americans.

Madigan helped craft her state’s legislation, which was inspired in part by a recent lawsuit filed by Illinois against Navient, the nation’s largest servicer. The measure recently advanced out of a Senate committee there.

Another Looming Financial Crisis?

“This is work we really didn’t think would ever come our way. But it resembles the mortgage foreclosure crisis. There are many of the same problems, like poor customer service, lost paperwork,” she said. “It’s very clear there is a need for enhanced consumer protections and clear servicing standards.”

The Illinois lawsuit accuses Navient of steering struggling borrowers into forbearance rather than providing them with adequate information about cheaper repayment plans. (Navient says the allegations are “unfounded.”)  But other research shows borrowers clearly aren’t getting the message about available options. In 2015, a study by the GAO found that 51% of people making their student loan payments would have qualified for lower payments, but only 13% of the borrowers knew to ask for the lower payments.

Since good advice can be hard to get, borrowers are “increasingly turning elsewhere for help, including to scam artists who exploit desperate borrowers, much like they did during the mortgage crisis,” Madigan’s office said in announcing its legislative victory.

Need Help With Your Student Loans?

If you’re falling behind on your student loans and aren’t sure what options are available to you, you can check out whether you’re eligible for a student loan forgiveness program or repayment plan. You may also be considering deferment or forbearance of your student loans until you can get your finances in order. Just keep in mind as you sort through the potential options that your student loans have an impact on your credit scores, which can affect your financial goals in both the short and long term, so make sure you keep up with payments as best you can and communicate with your loan servicer to see what options might be available to you.

Enter the Student Loan Bill of Rights Laws

Were the Illinois law to pass, the state would join Connecticut and Washington, D.C., which recently enacted Student Loan Bill of Rights laws. Several other states are weighing similar legislation.

The new laws generally require loan servicers to obtain a license in each state, which gives state watchdogs additional oversight capabilities. The laws also create an ombudsman who can receive and act on complaints from residents, and critically, states set requirements that good advice be shared with borrowers.

States are jumping in because prospects for a national student loan bill of rights, introduced by Sens. Dick Durbin and Elizabeth Warren in the last Congress, are unlikely with the current leadership in Washington.

Obama-Era Protections Killed

Also adding urgency are criticisms that Betsy DeVos, the new head of the Department of Education, has rescinded Obama-era rules that opponents say would have helped protect borrowers. On May 8, 21 state attorneys general sent an open letter to DeVos criticizing her rollback of the new rules.

“DeVos has removed those protections and prioritized the profits of servicers over helping struggling student loan borrowers,” Madigan said. “The need for Illinois to put in place a Bill of Rights is because there won’t necessarily be protections at the federal level.”

The Department of Education didn’t immediately respond to a request for comment.

Should Illinois and other states succeed in passing such laws, they would all be in the odd position of trying to regulate federal student loans and firms working under contracts with the federal Department of Education.

It’s an open question, however, if states can really regulate federal loan programs. Supporters of the bills say states have the right to protect their residents from fraud and abuse, but it’s possible that loan servicers could ultimately challenge their authority in court.

Navient directed questions for this story to the Student Loan Servicing Alliance, which criticized what it said could become a patchwork of laws.

“Servicers help student loan borrowers repay their education loans, and avoid the negative consequences of serious delinquency and default,” said Winfield P Crigler, executive director. “This work is best achieved in a clear regulatory environment. The U.S. Department of Education, which is the lender for more than 90% of new student loans, already uses its regulatory and procurement powers to supervise federal student loan servicers. We believe state regulation of student loan servicing will conflict with federal policies and requirements, and will be a detriment to the very borrowers we intend to help.”

But supporters point out that state-level consumer protection laws can be more effective.

State-Level Consumer Protections Could Help

“Consumer protection at the state level fills critical gaps when the Feds are asleep at the switch. Many states are frustrated that the Education Department has been too cozy with the student loan industry, so they’re looking to protect borrowers in their state,” said Rohit Chopra, senior fellow at the Consumer Federation of America.

States are taking other steps, too. California is considering a law that would cap private student loan debt garnishment at 15% of wages, for example. Several other states have enacted programs making it easier for student loan holders to refinance.

Chris Lindstrom of the Public Interest Research Group welcomes the flurry of state-level activity. Federally, the job falls to the Consumer Financial Protection Bureau, which she fears may lose its authority or influence soon.

“It’s onerous (regulating) the student loan space, especially when looking at the scope of the problem. It’s good to have more eyeballs on what’s going on,” she said. “Then there’s also the whole hedging bets situation, since nobody knows what the next Congress will mean for the CFPB.”

Lindstrom said the state-level ombudsman would be the most tangible and helpful change for borrowers.

“Having a place where you can go to complain and having that complaint count,” she said.

State-level laws would apply only to state residents: An Ohio resident who studied at the University of Chicago would get no relief from the Illinois bill, for example. On the other hand, an Ohio State graduate living in Illinois would be protected.

Ultimately, however if a critical mass of states pass and enforce new rules, the impact could ultimately be nationwide.

“If a slew of large states enact similar legislation, this could be the medicine the industry needs to treat borrowers fairly nationwide,” Chopra said. “We saw a similar approach a decade ago with toxic mortgage lending, where states looked to protect homeowners through new state laws.”

Image: RichLegg

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Help! My Tax Refund Was Taken to Pay My Student Loan Debt

Help! My Tax Refund Was Taken to Pay My Old Student Loan Debt

Every year, many people file their taxes expecting a refund … only to discover the money’s been taken to pay off their student loan debt. The bad news: The government can take that money if your federal student loans are in default. The better news: You can contest the seizure. And, if it was taken in error, you should be able to get your refund back. If it wasn’t an error, well, it can be very, very difficult to get those dollars released. However, we have heard anecdotally from readers who contacted the Education Department, demonstrated hardship and had at least part of their refund returned. The process appears to take awhile — and, again, there’s no guarantee Uncle Sam will comply — but it is an option someone can pursue if money is particularly tight.

Now, let’s delve a little deeper into why refunds get withheld — and what you can do if yours was one of them. (Psst: We’ll also provide some tips of what to do about those delinquent student loans.)

Why Was My Tax Refund Taken?

If you are in default on your federal student loans (which by definition means you are behind by 270 days or more), the Education Department can take your tax refund using the Treasury Offset Program. This program authorizes federal payments such as tax refunds or Social Security income to be intercepted in whole or in part to pay debts owed to other federal agencies. There are some limited consumer protections, but debtors aren’t always aware of them.

What Can You Do if Your Refund Was Seized?

We spoke with Jay Fleischman, a student loan and bankruptcy attorney, about what people can do. First, he said that by federal law, people who have student loans in default get a notice that they are at risk of having any potential tax refund seized for student loan repayment. That notice contains instructions for a review of your loan information and how to avoid the offset —so, in other words, if your student loans are in default and tax season is coming up, be sure to watch your mail.

If your refund is taken and you don’t believe it should have been, you can contest the offset by contacting the Education Department. If it was taken in error, the money will be refunded. However, be aware that an error does not generally include not getting a notice; it typically would require that you be able to prove your student loan was not in default.

As we mentioned earlier, if you were in default, you probably can’t get your refund back. The one case in which you are likely to be able to recover the money is if you filed jointly with a spouse, and it was his or her student loan that was in default.

“You may be able to make an injured spouse claim,” said Fleischman.

How Can I Keep a Tax Refund From Being Taken for Student Loan Debt?

Fleischman said it’s a good idea to adjust your withholdings whether you’re subject to a tax refund offset of not. A large tax refund means you overpaid your taxes during the year, he notes. If you are in default on your federal student loans you probably need that money. But at this point, there is nothing you can do to change the over-withholding from last year. Still, revisiting how much you’re having withheld for taxes is a smart move for anyone who got a large refund.

The bigger problem is how you are going to deal with the default on your student loans from now on. You’ll want to get out of default and stay that way. (Here’s an explainer on how to deal with student loan default.) In some cases, you may be able to get an income-based repayment plan in which your monthly payment can be set as low as $0. And “if your circumstances are dire and expected to remain so,” bankruptcy and the discharge of student loans might be options, Fleischman said. (Yes, that can be done.)

For most, what is done is done. The best thing you can do is to look ahead. And if you haven’t filed your tax return and expect a large refund, you may want to see what options you have to get out of default first. Being in default on a student loan can not only squeeze your budget, it can hurt your credit and cost you thousands of dollars in higher debt costs over a lifetime. You can get two of your credit scores for free on Credit.com to track your standing.

Got a question about your student loans? We want to help. Ask away in the comments section below and one of our experts will try to get back to you. In the meantime, visit our student loan learning center for more info.  

This article has been updated. It originally ran on March 9, 2015.

Image: iStock

 

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Why All Government Student Loans Are Not Created Equal

government-student-loans

The timing of an article in The New York Times couldn’t have been more ironic.

There we were, the day before we celebrate America’s Declaration of Independence, and the Times published an exposé on the hardball tactics that the State of New Jersey allegedly takes against student-loan borrowers who are unable to continue making their payments.

It seems that for those who fund their college education with state-sponsored money — which all 50 states and the District of Columbia offer — the word independence is actually two words: in and dependence.

How Student Loan Management Can Differ

I say that because, generally speaking, the principal difference between the loan programs run by the individual states and those run by the federal government is the government’s willingness to work with financially distressed borrowers so they can remain independent.

Something else that distinguishes federally backed higher education loans from those originated by all others — including the states and private-sector lenders — is the outsize influence the government wields on distressed-loan restructuring without regard for the ultimate disposition of the underlying contract.

In other words, even if a government-guaranteed student loan is sold to another entity — public or private, as has been the case with the discontinued Federal Family Education Loan (FFEL) program — the feds reserve the right to mandate a change in the contract’s repayment schedule, even though such a move would likely to have a deleterious aftermarket effect on noteholder rates of return (for example, when the repayment term is extended or a portion of the principal is forgiven).

This helps to explain why there has been so much foot-dragging on the part of loan administration companies that are subcontracted by noteholders to service FFEL contracts that have subsequently been securitized.

And then there is the matter of what constitutes a government loan.

Some time ago, a recent state-university graduate contacted me for advice on restructuring his education-related debts. He was the first in his family to go to college and, given his and his mom’s limited financial means, he funded his education by taking on a fair amount of debt — nearly three times his current annual salary.

We talked about the Department of Education’s various income-based repayment plans, and, armed with that knowledge, he contacted his loan administrator. Several days later, he wrote again to say that his debts were not eligible for relief. “How can that be?” I asked. “You told me these were government loans and the monthly payments consume roughly half your take-home pay. Clearly, you should qualify for IBR.”

As it turned out, the “government” loans he believed he’d taken out were from his state (he insists that his university’s financial aid office referred to these loans as “governmental”). A bit more digging on my part also revealed that program was, in effect, a public-private venture. Similar to the manner in which the now-discontinued FFEL program was structured, his state guaranteed against default loans that were originated, funded and later securitized by private-sector lenders. But unlike the federal government, his state seemed unwilling or unable at that point to mandate distressed-debt restructures after the fact.

Consequently, my young friend ended up like too many of his peers: living in his mother’s basement.

There are those who would say, “Yet another reason for the government to get the hell out of the education-lending business!” Certainly, the manner in which public-backed student loans are administered leaves much to be desired.

But that shortfall, as significant as it is, doesn’t outweigh the two key benefits of the Federal Direct loan program and its predecessor: lower interest rates and a panoply of relief options for when a borrower’s financial circumstances cause him to become unable to meet his payment obligations.

In fact, I would take this a step further by advocating for the federal program to accept for restructuring all types of higher-education loans, without regard for origination channel (state, private and peer-to-peer alike) or repayment status.

Think about it. Even if the base rate that the Federal Direct loan program currently charges is increased to compensate taxpayers for the added risk of guaranteeing these nongovernment loans against default, it would still yield a better social and economic outcome for the country, not least because most financially distressed borrowers are sincere in their desire to repay their debts.

The concept of independence is, after all, meaningless if the means for attaining it are nonexistent.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

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