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Bench & Bar of Minnesota is the official publication of the Minnesota State Bar Association.

Alt-Remedies to Paying Student Loans

In some cases, relief is available

Close to $1.5 trillion in loans have been issued to students; most of them are not dischargeable and accrue more interest than the average mortgage or car loan of the last decade. Student loan balances include few discharge options, and have effectively crippled a generation of young people trying to start their lives. There is research to show that student debt has prevented Millennials from getting married, buying homes, and having children.1 None of this is news to anyone who has been paying attention.

The current student loan default rate is between 7 and 11 percent, depending on the loan program and school type, a substantial decrease from the 7 to 25 percent default rate at its peak during the Great Recession.2 It is a testament to the student loan system that 89-93 percent of borrowers repay their loans, considering the exponential increases in the price of obtaining a degree and the relatively slow wage growth of the last 40 years. If you or your client are struggling to repay a student loan, there are a few options, if certain criteria are met.

Defense to repayment

“Borrower’s defense to repayment” is the loan relief when your school deceived you to your detriment, and that deception is related to your student loans or the education services received from the school. For example, the U.S. Department of Education (DOE) found that the Everest Institute in Minnesota had deceived students through placement rates used in marketing materials, and impacted students were eligible for loan discharge.3

A documentable school deception allows an affected student to petition the DOE for forgiveness of all the federal loans the student used for the impacted education services. If a borrower is in the unfortunate circumstances of qualifying for this relief, don’t expect the process to be a quick one or to offer clear guidelines. Under Secretary Betsy DeVos’s leadership, the processing of these applications has been slow. As of June 30, 2018, the Department of Education reported that it had received around 166,000 discharge applications, and only about 48,000 of those had been reviewed and approved.4 Around 9,000 claims have been denied.

The lack of clarity on this discharge and the delay in processing claims may be the result of DeVos’s move to roll back Obama-era rules promulgated in 2016,5 which were to take effect on July 1, 2017. Among their provisions, the rules would have: revised the procedures for a student to make a claim; given a student reliance-based standard to school misconduct; and shifted the burden of repayment from students to the bad-acting schools. DeVos delayed the implementation of those rules until July 1, 2018, then again until July 1, 2019.6 Students and 18 state attorneys general sued and prevailed, obtaining a decision from federal district court that put those rules into effect in October.7 While implementing the 2016 rules, the DOE is initiating a new rulemaking process that may make it more difficult for borrowers to file and receive a defense to repayment discharge. For example, proposed changes may require a borrower to default on a loan prior to making a discharge claim and to narrow the definition of school misconduct to only instances where the school’s intent to mislead the student can be established.8

Unfortunately, the borrower’s defense doesn’t apply to private loans. There is potential that the Holder Rule9 may apply for private loans, but the Holder Rule is a legal defense in a collection action and is more fact-specific in its application. If you have private loans—even if you’ve been deceived by your school—there is little recourse for discharge at this time.

Discharge in bankruptcy or death

Generally speaking, student loans are not dischargeable in bankruptcy. Lenders are not required to take action in a bankruptcy, as student loans are classified as non-dischargeable debt. If a student loan borrower is suffering an undue hardship, and cannot pay their student loans after bankruptcy, the student must bring an adversary action separate from the initial bankruptcy. After the adversary action, the bankruptcy court may find that the student loans should be discharged. In the 8th Circuit, a bankruptcy court uses a “totality of the circumstances” test to determine whether a student has an undue hardship.10

After little court action in undue hardship discharges, the Dodd-Frank rollbacks signed into law early 2018 provide new protections to student loan borrowers and cosigners.11 For example, when a borrower files bankruptcy, lenders are now prevented from triggering the loan into default status. Additionally, when a student borrower dies, a cosigner to a loan is automatically discharged. This is a bittersweet change for many borrowers after the newsworthy cases of lenders taking collection actions against cosigners who have suffered the loss of a family member. New Jersey’s student loan program, for example, received bad press after collecting from cosigners of deceased students. While New Jersey changed state law to prevent future collection actions, there is now a federal law to protect families impacted by the death of a student borrower.

Public service loan forgiveness

The most commonly cited loan discharge program is Public Service Loan Forgiveness (PSLF). PSLF is available to students who make 10 years of qualifying payments while employed through a qualifying employer. Obtaining this relief has been problematic, though: Only 1 percent of students who have applied for the discharge have had it granted. 

To qualify for PSLF, you must have 1) a direct loan, 2) qualifying employment, 3) a qualifying repayment plan, and 4) make qualifying payments.12 #1, #3, and #4 can be reviewed through looking at the borrower’s student loan history or servicer statement. The loan needs to be a Direct Loan, including federal consolidation loans. Any payments made to other loan types (FFEL, Perkins, etc.) will not count toward forgiveness, though there is a Temporary Expanded PSLF for those whose application was denied due to some or all payments being made on a non-qualifying plan.13 A qualifying repayment plan must be in one of the four income-driven repayment programs offered by the Department of Education. Income-driven repayment plans lower the monthly payment based on a percentage of the borrower’s federal taxable income, and the plans are further defined by the number of a borrower’s dependents and a spouse’s federal student loan balance. A qualifying payment is the full payment of the invoiced amount under that plan, made no later than 15 days after the due date.

Finally, your servicer must determine that you have qualifying employment. While it sounds simple, you must work for 1) the government (at any level), 2) a 501(c)(3) non-profit, or 3) some other non-501(c)(3) non-profit, as long as the non-profit provides certain services. One of the challenges of PSLF is that it appears to be at the discretion of the servicer and whoever at that servicer is reviewing an employer for qualifying employment certification. For example, two student borrowers who had been told that their employment through the American Bar Association (ABA) qualified later lost their eligibility for PSLF. The ABA sued, and that case is ongoing at this time.14

The first day that any student borrower could qualify for PSLF was October 1, 2017. As of June 30, 2018, the DOE reported that of the 33,000 applications for PSLF from 28,000 distinct borrowers, 29,000 applications have been processed.15 This gives the appearance that the DOE has made great strides in processing this applications; however, more than 70 percent of those were denied because the applicant didn’t meet the criteria and 28 percent were denied for being incomplete. Only 300 of the applications (less than 1 percent) have been approved, forgiving the loans of 96 distinct borrowers.

In addition to an exceptionally low discharge rate, PSLF is at risk of being phased out. A Republican proposal in the U.S. House would discontinue PSLF.16 And while there is a Democratic proposal to expand PSLF in the now Democratically controlled chamber,17 we will have to wait to see what proposal will be included in any final reauthorization of the Higher Education Act.

Finally, PSLF only applies to federal loans, so private loans must be paid through traditional means. States are starting to create initiatives to reduce the burden of student loans to residents. For example, Maine has a program that subtracts the value of student loan payments from a borrower’s state tax burden.18 If a borrower pays $1,000 toward their student loan in a given year and has state tax liability of $1,500, the net tax liability would be $500. And under certain circumstances, Maine will refund amounts that exceed the tax burden to student borrowers. This is a model that the Minnesota Legislature could consider as a tax break for students affected by student loans.

Disability loan forgiveness

There are various types of loans that offer forgiveness if you have experienced a total and permanent disability, but each type of loan has different criteria to receive forgiveness.

Federal loans have a relatively low threshold for proving that you have a disability.19 If you are a veteran, you can show through documentation that the VA has determined you are not employable due to a service-related disability. Alternatively, you could submit proof that you receive SSDI or SSI from the Social Security Administration, or simply a letter from your doctor stating that you are totally and permanently disabled.

Private loans are dependent on the terms of the contract. For example, a Discover Bank promissory note states that “[i]n the event of Student’s total and permanent disability (as reasonably determined by us) or death, the loan evidenced by this Note may be eligible for cancellation in our sole discretion.”20 It is unclear what this threshold looks like and how many of Discover Bank’s loans are forgiven under the discretionary clause.

The SELF Loan, a state loan through the Minnesota Office of Higher Education (OHE), has requirements written into administrative rules that OHE will forgive the loan after it determines that the borrower has a total and permanent disability, and that the disability occurred after the final disbursement of the loan.21 This discharge standard is higher than the threshold of the federal loans and lower than the high bar set by some private banks.

Conclusion

The moral of the story is that if you, your client, or that family member at the cocktail party can’t repay a student loan, there may be some relief. You have to get into the details on what type of loan it is, and research the options available with that loan. There are alternatives to payment, if you meet the criteria.

ANDREW WOLD is a senior staff attorney at the Minnesota Office of Higher Education.  His primary practice is in the SELF Loan division, working with student loan borrowers to resolve their defaulted loans.  Andrew can be contacted for questions via email or at 651-355-0608.

 

Notes 

1 https://www.federalreserve.gov/publications/files/consumer-community-context-201901.pdf

2 https://trends.collegeboard.org/student-aid/figures-tables/federal-student-loan-default-rates-sector-over-time  

3 https://studentaid.ed.gov/sa/about/announcements/corinthian 

4 https://ifap.ed.gov/eannouncements/091918FSAPostsNewReportstoFSADataCenter.html 

5 https://www.ed.gov/news/press-releases/us-department-education-announces-final-regulations-protect-students-and-taxpayers-predatory-institutions 

6 https://www.insidehighered.com/quicktakes/2017/10/23/new-delay-borrower-defense-rule 

7 https://www.bloomberg.com/news/articles/2018-09-12/devos-loses-states-suit-over-borrower-defense-rule-delay 

8 https://www.natlawreview.com/article/revised-borrower-defense-to-repayment-regulations-proposed-us-department-education 

9 https://www.ag.state.mn.us/Consumer/Publications/HolderRule.asp 

10 All other circuits use a three-factor test to determine whether there is an undue hardship.

11 https://www.congress.gov/115/bills/s2155/BILLS-115s2155enr.xml 

12 https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service 

13 https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service/temporary-expanded-public-service-loan-forgiveness 

14 https://www.americanbar.org/content/dam/aba/images/abanews/PSLF_filing_122016.pdf 

15 https://ifap.ed.gov/eannouncements/091918FSAPostsNewReportstoFSADataCenter.html 

16 https://edworkforce.house.gov/prosper/ 

17 http://democrats-edworkforce.house.gov/aim-higher 

18 https://www.maine.gov/revenue/faq/eotc_faq.html 

19 https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/disability-discharge 

20 https://www.discover.com/student-loans/pdf/Standard_Prom_Note.pdf 

21 https://www.revisor.mn.gov/rules/4850.0020/

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