Student Loan Collection Abuses and the FDCPA

There is one main point that I will make in this post: The Fair Debt Collection Practices Act ("FDCPA") applies to debt collectors seeking to collect defaulted student loans.

It is the practice almost all student loan lenders, including the federal government, to hire third-party debt collectors to collect defaulted student loans.  Just like with other collectors of consumer debts, the conduct of these student loan debt collectors is governed by the FDCPA.  Consequently, these are some examples of things that a debt collector attempting to collect a student loan cannot lawfully do.

1. The debt collector cannot makes threats that are unlawful, untrue, or that it doesn't intend.  For example, a private student loan cannot administratively garnish wages and must go to court to get a garnishment order like any other creditor. (A Department of Education loan can garnish wages without a court order).  So, if wage garnishment is threatened without a judgment, it will likely be a false threat under the FDCPA.
2. A debt collector can't lie about your rights and remedies.  For example, a debt collector pay say that a certain payment is required by the law, but if this is untrue (which it often is), this will be a FDCPA violation.
3. A debt collector collecting a student loan is subject to the same notice and verification requirements as anyone else subject to the FDCPA.  You can read about those here.

This is just a smattering of potential FDCPA violations in the student loan context.  You can read the entire FDCPA here (opens PDF).  There is a great deal of illegality in student loan collections and, if nothing else, a good FDCPA case can be valuable leverage to remove a loan from default status and to enter into a reasonable repayment agreement.

Student Loans: The Next Shoe to Drop

Current laws do a really bad job addressing the growing student loan crisis in the U.S. New laws will someday be necessary. Here's a Salon article about growing student loan troubles:

http://www.salon.com/2011/10/20/student_loan_debts_crush_an_entire_generation/?source=newsletter

Will student loans crush a generation?

The Boomerang Generation's Student Loans

Have you ever heard of the boomerang generation? It refers to people in their 20s who have moved back in with their parents after leaving home for college and sometimes grad school. There are usually liable for a significant amount of student loan debt, so moving back home is a way to cope. I caught an interesting program today on NPR about this called The Financial Lives of the Boomerang Generation, which led me to write this article.

Although some will disagree, I don't think it makes any sense to blame the students or the parents. If one has parents willing to subsidize a roof over your head, I say great. Low overhead can be just the thing to help a person to save a bit of money to make a move. However, the boomerang phenomenon is indelibly connected to debt and a disappointing job market. So, maybe there's someone else to blame after all.

I think it's hard to ignore the massive misalignment between education and jobs. We've witnessed a lot of debt crisis lately: the mortgage meltdown, government bailouts, rising credit card defaults, and skyrocketing medical debt are a few examples. I am convinced that student loans are the next shoe to drop. Let's look back a bit. Five years ago it was clear that there was something systemically wrong with the mortgage market. Mortgage salespeople had the incentive to make any loans, including bad loans, because they could earn a fee and turn around and sell those loans off to a hungry market. A gullible, and perhaps greedy, investor market provided the cash with no risk to the originators. There's nothing wrong with a market being greedy--they're markets after all--but the incentives and risks misaligned. So, what's happening today?

Post-secondary schools are proliferating. Many of these new schools are non-traditional, for-profit institutions with abysmal graduation rates. Frontline produced an interesting program about this recently called College, Inc. These schools make money by enrolling students. The cash comes from student loans. Since education is the purported way to get ahead in America, it's an easy sell especially to people in their late teens and early 20s who don't realize because of life-long brainwashing that caveat emptor applies to education too. Moreover, it's not just for-profit colleges with unchecked incentives. Traditional colleges and universities have enrollment, budgetary, and endowment goals that they struggle to meet. These institutions are also funded in substantial part by cash from student loans.

So, what's the problem? Just like the mortgage orginators who had incentives to make loans whether or not they performed as it should, educators have incentives to provide educations that don't necessarily function as they should. I'm a lawyer, so here's an example in the law. There are nine law schools in Massachusetts and a legion of unemployed new lawyers with massive student loan debts. Many are boomerang generation members living at home and puzzling over how they will ever pay off their debts. They went to school thinking it would be a sure thing, but many are facing a life of held hostage to student loan debt.

Student loans and mortgages differ in a key way. Instead of an investor market, the money for student loans comes in large part from U.S. taxpayers who subsidize and guarantee most student loan debt. Thankfully, the government is fighting back and seeking to correct some of the misalignments mentioned here. However, these attempts, no matter how successful, will only help at the margins. Fundamentally, there is nothing that prevents educational institutions from flooding the market with graduates in fields with too few jobs. You cannot count on market forces to correct this. Market forces do not lead to a parity between graduates and jobs because education is built on dreams.

In this last matter the mortgage and student loan markets have something in common. They both have as foundational myths something close to the heart of the American Dreams. However, as laudable as home ownership and education are as goals, they must tempered with some realism. Otherwise, there will be a price to pay for unchecked idealism.

The Income-Based Repayment Plan

The Income-Based Repayment Plan ("IBR") was created in 2009 as a (hopefully) more successful plan than the Income-Contingent Repayment Plan ("ICR") was. These plans are complicated, but I'm going to try to simplify the topic with some bullet point.

• The IBR applies to Direct Loans and government-guaranteed FFEL student loans, not private student loans, Perkins Loans or PLUS Loans.
• You cannot be in default and get the IBR. However, after you get out of student loan default, you can use the IBR.
• You must be eligible for the IBR. What is required is "Partial Financial Hardship." The formula for determining this is hard to follow, but it's this: You take 150 percent of the poverty guidelines for state and family size. You compare this with your adjusted gross income. You take the difference between the two. You take 15 percent of this difference. If your annual student payments under the standard 10-year loan repayment plan exceed that 15 percent difference, you can do the IBR. Wheww!
• Payment: The 15 percent difference is also the key for determining your payment under the IBR. You just divide it by 12 and that's your monthly payment.
• Debt Forgiveness: After 25 years in the IBR, your debt is forgiven. However, the amount forgiven is taxable to you in the year of the forgiveness. There are sometimes defenses to this, like the insolvency exception.

Discharging Student Loans in Bankruptcy

First, student loans are generally not dischargeable in bankruptcy. That goes for almost any kind of student loan in any kind of bankruptcy. However, if one can prove that re-paying a student loan is an "undue hardship," then the student loan will be discharged. This is really, really hard.

There are two tests that are used to determine whether a student loan presents an undue hardship under 523(a)(8) of the Bankruptcy Code. The Brunner test requires, as one Court put it:

That the debtor bears the burden of demonstrating by a preponderance of the evidence: "(1) that the debtor cannot maintain, based on current income and expenses, a `minimal' standard of living for [himself] and [his] dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.

The second test is the "totality of the circumstances" approach. As another Court put it:

The "totality of the circumstances" analysis requires a debtor to prove by a preponderance of evidence that (1) his past, present, and reasonably reliable future financial resources; (2) his and his dependents' reasonably necessary living expenses; and (3) other relevant facts or circumstances unique to the case, prevent him from paying the student loans in question while still maintaining a minimal standard of living, even when aided by a discharge of other pre-petition debts.

And in comparing the two tests:

The only significant difference between these is that under Brunner, the debtor must establish that she made a good faith effort to repay the educational loans at issue. When applying the totality of the circumstances test, the debtor's efforts to repay may be considered, but evidence of those efforts (or lack thereof) is not necessarily dispositive.

The Massachusetts bankruptcy courts tend to use the totality of the circumstances approach, but the Brunner test is quite popular around the country.

Crucial in these undue hardship cases are the future prospects of the debtor. That usually comes down to the nature of their disability or serious medical issue, and the credibility and nature of the expert testimony from the debtor's doctor(s). This is because undue hardship requires that the debtor to demonstrate that her disability will prevent her from working for the foreseeable future (case).

Also critical is the role of the several income-based repayment options available outside of bankruptcy. Courts who view these plans as a good alternative to an undue hardship discharge, ask whether the debtor has tried those. Other judges feel that these plans unfairly hold people hostage who are basically in hopeless situations already (age plays a big part in this). One of the big downsides to income-based repayment plans is that even though any student loan balance is discharged after 25 years, this is a taxable event outside of bankruptcy and can lead to a whole new set of problems.

If you are looking for a lawyer to take an undue hardship discharge case for a student loan, this is a good place to start. You may, of course, also contact us for a student loan meeting and evaluation (there is a fee for this service).

First Post

There is a startling lack of information on the web about student loan collections and how to get out of default. This blog will focus on that. What do you do when things go wrong and you cannot repay student loans according to the contract terms and available repayment options? What about public loans versus wild terrain of private student loans?

All of that is for a later date. Right now, welcome. As a Massachusetts attorney specializing in debt law and bankruptcy issues, I look forward to providing information that will be useful to the public.