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					                                               Dealing with the Burden
                                               of Student Loans in Your
                                                  First Years of Practice
                                                                                            by Sandra L. Seamans

         F      or most of us who practice law, the
         education required to enter the profes-
                                                       and newly proposed regulations published by DE this summer.
                                                           There are several key players in the FFELP program. The original
         sion would not have been possible with-       lender is the party named on the promissory note. Student loan notes,
         out the aid of federally insured or -origi-   however, are frequently sold in the secondary market. Both the seller
         nated student loans. Such loans have          and the purchaser are required to notify the borrower of the change of
         been made available through non-profit,       ownership. A guaranty agency acts as the middleman between the lender
         for-profit and government agency lend-        and DE. It enters into a contract with the lender, promising to purchase
         ers for nearly 35 years based upon the        the loan under certain circumstances, such as the borrower failing to
         promise of the federal government to          repay the debt. The guarantor also enters into a “reinsurance” agreement
         repay the debt if the student borrower        with DE under which it can submit the defaulted loan to DE for pay-
         fails to do so. As a business proposition     ment after it has exhausted required collection attempts. Unless and
         it is difficult to imagine any other cir-     until the borrower becomes more than 60 days delinquent in repaying
         cumstance under which a lender would          the debt, he or she will not interface with the guaranty agency at all.
         make an unsecured loan to an unem-            Many lenders do not service the loans they hold. Thus another party
         ployed student who generally has no           involved in the process may be a loan servicer. A few of the largest stu-
         credit history, and will relocate numer-      dent loan servicers in the nation are SallieMae, Unipac, InTuition, Inc.,
         ous times prior to and during loan repay-     AFSA Data Corporation and USA Group Loan Services, Inc. In the FDLP,
         ment. Since 1993 the federal govern-          DE is the lender. Although the 1998 amendments to the Act allow DE to
         ment has offered to make such loans di-       sell student loan assets in the secondary market, no such sales have oc-
         rectly to students attending certain par-     curred to date. In this program there is no guaranty agency involved, but
         ticipating institutions. This article will    loans are placed with independent contractors for servicing.
         lay out for you the basics of the feder-
         ally guaranteed student loan program                  Three-Step Approach to Managing
         (FFELP) and the direct loan program of-                    Your Student Loan Debt
         fered by the U.S. Department of Educa-
         tion (FDLP); who the players are; a three-    Step One: Create an Inventory of Student Loan Debt
         step approach to managing your student           There are several types of student loans that you may have obtained.
         loan debt load; and, finally, a brief but     The most common which are available under either FFELP or FDLP are
         important discussion about the conse-         Stafford (subsidized and unsubsidized), PLUS (parent loan) and con-
         quences of defaulting on your student         solidation loans. Perkins loans are available directly from the school.
         loan debt.                                    Subsidized Stafford and Perkins loans are based upon need, PLUS loans
             The FFELP and FDLP are authorized         are available to parents without a negative credit history, and
         by the Higher Education Act of 1965, as       unsubsidized Stafford and consolidation loans are available without re-
         amended (the “Act”), Title IV, Parts B (20    gard to need or credit. The terms of each loan type vary. The interest
         U.S.C 1071 et seq.) and D (20 U.S.C. 1087     rate on Stafford and PLUS loans obtained after October 1, 1992 varies
         et seq.), respectively. The U.S. Depart-      each 12-month period based upon the 91-day Treasury bill. Older loans
         ment of Education (DE) is the agency          have a maximum rate of 9 percent and 10 percent, respectively; newer
         charged with promulgating regulations         loans have a maximum rate of 8.25 percent and 9 percent, respectively.
         under the Act. Both the Act and the regu-     Perkins loans bear interest at 5 percent. It is important to note that these
         lations have been extensively amended         loans are simple interest-bearing instruments. Interest accrues and is
         in recent years, including the reauthori-     generally billed to the borrower monthly along with an amortized
         zation of the Act by Congress in 1998         amount of principal due. If you obtained an unsubsidized Stafford loan

30 Arizona Attorney x November 1999
and elected not to pay the interest       payments rise and fall based upon          ment was more than 60 days late such
while in school, that amount of inter-    your yearly income. Borrowers under        delinquency would be reported to a
est is capitalized and added to the       the FDLP may choose income-contin-         national credit bureau and my credit
principal due on your loan.               gent rather than income-sensitive re-      history marred. “If only I had
   After you have identified which        payment. Both operate under the same       known”…that a student loan is not
loan types you have obtained, create      principle. A Perkins loan must be re-      dischargable in a bankruptcy proceed-
an inventory of the holder of each        paid in equal monthly installments.        ing absent dire financial circum-
loan, the interest rate it bears, and                                                stances. “If only I had known”…that
when it enters into repayment. Sev-       Step Three: Communicate                    failing to repay my student loan
eral large lenders including SallieMae,   With Lender During                         would make it difficult if not impos-
DE, Bank One, Wells Fargo Bank and        Repayment                                  sible to obtain a mortgage loan 10
Bank of America have created inter-          Several types of deferments and         years after the fact. “If only I had
active Web sites where you may ac-        forbearances are available under the       known”...that the Internal Revenue
cess your account information online      Act. For example, you can defer repay-     Service has the ability to intercept
to retrieve the answers to the ques-      ment of your federal loan if you are       any tax refunds that I would other-
tions posed above. If you have ob-        participating in a graduate fellowship     wise receive and apply the money
tained loans from several different       program, temporarily totally dis-          toward my defaulted student loan.
lenders during your college and law       abled, or conscientiously seeking but      The nation’s taxpayers ultimately
school years, and would prefer to con-    unable to find employment. A defer-        foot the bill when student borrowers
solidate all such loans with one lender   ment is also available if you are en-      fail to repay their debt. It is therefore
resulting in one monthly payment,         rolled in school at least half-time, and   not surprising that the federal gov-
consider a consolidation loan. You        you have obtained an additional loan       ernment has made default a painful
may approach any one of your lend-        during that period of enrollment. In       process with lasting side effects. If
ers to request such a loan. Currently,    addition to the deferments outlined        you are struggling to repay your debt,
the interest rate will be the weighted    above, your lender has the ability to      see Steps Two and Three above. If a
average of all loans consolidated         forbear repayment of your loan un-         different repayment plan or a tempo-
rounded up to the nearest 1/8 percent     der certain circumstances, such as         rary forbearance do not solve the
with a maximum rate of 8.25 percent.      poor health or other unforeseen per-       problem, consider a consolidation
                                          sonal problems. Your lender under-         loan. Since the repayment period is
Step Two: Consider All                    stands that repayment of your loan         based upon the total amount of the
Repayment Options                         may be very difficult at times, if not     loan, several 10-year Stafford loans in
   Stafford and Perkins loans have a      impossible. If the circumstances are       the aggregate may become one 20- to
six-month grace period following          temporary and you fully intend to get      30-year consolidation loan, thereby
completion of school before repay-        back on track as soon as possible, I       greatly reducing your monthly pay-
ment begins. PLUS and consolidation       assure you that your lender would          ment. The ultimate cost of your bor-
loans generally begin repayment           rather work with you than have you         rowing, however, will be greater due
within 60 days following receipt of       default on the loan. You should un-        to the extended payment of accrued
the loan funds. All but consolidation     derstand, however, that interest will      interest. Consolidation loans are also
loans must be repaid within 10 years;     continue to accrue during such period      available to pay off prior defaulted
however, several repayment options        (unless paid by the government on a        student loans and eliminate negative
are available.                            subsidized loan), and will be capital-     credit bureau information upon cer-
   You should choose the repayment        ized and added to the principal            tain conditions being met.
option that best suits your needs. In     amount of your loan at the end of such         For more detailed information
the FFELP you have three choices:         period. You are also responsible for       about FFELP and FDLP, I refer you to
level payments, graduated payments        letting your lender know when your         the following Web sites:
or income-sensitive payments. Level       address or telephone number change.  
payments are just that—equal                                                   
monthly payments representing ac-         The Consequences of                  
crued interest and principal calcu-       Failing to Repay Your                      StudentGuide/1999-0/index.html
lated to repay the loan in 10 years. If    Student Loan Debt                   
your debt burden is high and your            As an attorney who has repre-
starting income relatively low, gradu-    sented a student loan lender for the       Sandra L. Seamans is Vice President
ated or income-sensitive payments         better part of seven years, I have heard   and General Counsel of Southwest Stu-
may better suit your needs. Graduated     the phrase “[I]f only I had known”         dent Services Corporation. She can be
payments will be lower at first and       countless times. “If only I had            reached at or by call-
increase over time; income-sensitive      known”…that if my monthly pay-             ing (480) 461-6501.

                                                                                              November 1999 x Arizona Attorney   31