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l 1 l EFFECT OF DEFAULTED STUDENT LOANS ON RETURN TO WORK EFFORTS rg rg . g oin.oor . g oin.oor ati t on da i n idat t o lida sololida on s nsoolid s - n ns-c co -coon loaans ans s-c -loloa n We g ge- -Incentive Support l orke lo Center lelgee- g .col le ww.col ol e w.c ol w www www.c ww Policy and Practice Brief: orgg n r ioin. .o Effect of Defaulted orgg n r ioin. .o at t o idat t o ida da Student nsLoans on on ns-c co loaan s- sololida sololid onns ns-c co loaan s- ge- -lo ge- -lo ww.Rleturn to Work Effortsc.col Work le g e le g e .colo le c . ol le ww w www w www Prepared by .orgg r Ronald M. Hager, an attorneyorgg Neighborhood Legal . with r tioinn.o a at o tioinn.o aa New Services (NLS) of Buffalo, t o York, and Ray Cebula, a id ida d sololid Training and Organizational Development Specialist with onns sololid onns ns-c co s- Cornell University’s Program on Employment and Disability loaan ns-c co loaans- and ge-attorney with the Disability Law Center (DLC) in llege- -lo an o elege-l e l olol o leg w w.c.Boston Massachusetts. c w.c.col w wwww wwww 7 EFFECT OF DEFAULTED STUDENT LOANS ON RETURN TO WORK EFFORTS l 2 l rg rg . g oin.oor . g oin.oor ati t on da i n idat t o lida sololida n ns nsoolid s -coo -coon This is one of a series of-looa n c ans s-written for benefits specialists employed by Benefits s s-c an n Planning, Assistanceegge e articles -l -loloa lelgee- l land Outreach projects and attorneys and advocatescemployed by g Protection wwww.c andw .colo le ol e w. ol Advocacy for Beneficiaries of Social Security programs. wwww.c contained Materials w w within this policy brief have been reviewed for accuracy by the Social Security Administration (SSA), Office of Employment Support Programs. However, the thoughts and opinions expressed in these materials are those of the authors and do not necessarily reflect the viewpoints or official policy positions of the SSA. The information, materials and technical assistance are intended solely as information guidance and are neither a determination of legal rights or responsibilities, nor binding on any agency with implementation and/or administrative responsibilities. orgg orgg at t on r ioin. .o n r ioin. .o da Table of Contents idat t o sololida ida sololid onns conns ns-c co s o Introduction ...............................................................................................3 ans- -c loaan s- lo an ege- -lo e ge- -lo le g e Typescoll lleg .col le . of Student Loans ............................................................................... 3 w ww.co w ww.col www www Effects of a Defaulted Student Loan ............................................................4 Introduction ......................................................................................4 Steps to take prior to going into default ........................................... 4 Repayment Plans ........................................................................4 Deferments .................................................................................4 Forbearances .............................................................................. 5 Effect of Defaulted Student Loans on VR Agency Funding for College ........................................................................5 Increased Federal Efforts to Collect Defaulted Student Loans ................... 6 Elimination of Statute of Limitations ............................................... 6 Tax Intercept Program .................................................................... 6 .orgg r n or rg g Social Security Offset Program ......................................................... 6 tioinn.o a at o .oio n i l at io ida d Outolodidat Remedies to Take a Loanns s of Default .................................................... 7 sololid Bankruptcyns- -co co n conns ....................................................................................... 7 ans- -co s s -loaan Disability lDischarge ..........................................................................8loa o -lo n elgee- l g elgee- l g .colol e ww.Debt Cancellation Through Discharge Procedures ..........................8 c .col e ww.col w www w Closed School Discharge ..............................................................9 www False Certification Discharge ...................................................... 9 Unpaid Refund Discharge ...........................................................9 Repayment of Defaulted Student Loans .......................................... 9 Loan Consolidation .........................................................................10 Conclusion .............................................................................................10 l 3 l EFFECT OF DEFAULTED STUDENT LOANS ON RETURN TO WORK EFFORTS rg rg . g oin.oor . g oin.oor ati t on idat o i n lida da I. t sololida Introduction n ns nsoolid -coo -coon s Many individuals with disabilities mayns-c anshave attempted college either before or after ans s-c n e-loloa l lprior - they became disabled. lIfeggecollege attempts were unsuccessful, the student may -loloa lelgee- g .co le ol e have defaulted www.co loans. When the loans are secured by the federal on student w.c ol www.c www ww government, the individual will not be eligible for further financial assistance, including all federal grants and loans, for college until the prior loans are no longer in default. Many state vocational rehabilitation (VR) agencies may also be reluctant to provide VR funding for higher education in this event. Moreover, the Debt Collection Improve- ment Act of 1996 (Debt Collection Act),1 and other federal changes, allow for expanded collection of delinquent student loans. For individuals with disabilities who are attempting to go to work, the dual impact of not being eligible for additional federal aid to obtain higher education and the potential drain on income to repay the defaulted loans can be devastating. It is, therefore, very important for both Benefits Planning, Assistance and Outreach (BPA&O) counselors and Protection and Advocacy for Beneficiaries of Social Security (PABSS) advocates to orgg rg be aware of the effects of defaulted student loans, theon.oorg federal efforts to n r ioin. .o at t o i tincreased n. da i idt io collect on those loans, and some of the remediesdaa are available to debtors. This sololthat There is also an extremely well ida sololid in nns article will explore each of these issues cosome detail. onns written and well-documented-resource ns- -co from the National Consumer Law a n s available ns-c co loaan s- le Center for those who may g e loloa - gbeeinterested in a more in-depth treatment of this ge- -lo le g e subject. 2 .col le ww.col .col le ww.col www w wwww II. Types of Student Loans For anyone working with individuals with defaulted student loans, it is important to first determine the precise type of loan as well as the effective date of the loan. Over the years, the names of the different types of loans, as well as the rules applicable to 1 Pub.L.No. 104-34, 31 those loans, have changed a number of times. Currently, there are three basic types of U.S.C. § 3716. federally guaranteed student loans: Federal Family Education Loans (FFEL), which are 2 Loonin, Deanne, John Rao and Alan White, between the student and private financial institutions;3 Direct Loans, which are Student Loan Law, The between the federal government and the student;4 and Perkins Loans, which are Consumer Credit and between the school itself and the student.5 A good place to start to find the status of Sales Legal Practice Series, National Consumer a borrower’s student loans is www.studentclearinghouse.org. .orgg .orgg Law Center, Inc. r r tioinn.o a at o It can then get very confusing, because within olidda each tioinn.o o aof tthese three basic families of loan (Boston, MA 2001). Much of the basic ida d programs are specific types of loans. A conn i s solthe same name can be from two sololid information in this onns - loan with s- o nscancbe a Stafford Loan, subsidized or unsubsi- ns-c co article came from this s- different families. For example, oaan -l there -loaan resource. dized, under both the FFEL ore- lo elge Direct Loan programs. This article will not attempt to ollelgee-l 3 o Governing regulations o lol eg l l eg w.c basic .c o are found at 34 C.F.R. differentiate between.c www each of the specific types of loans, but will try to give the wwww.c w Part 682. ww w rules, with citations, which are applicable as broadly as possible. The reader interested 4 Id. Part 685. 5 Id. Part 674. in more specific information is referred to Student Loan Law by the National 6 See note 2, above. Consumer Law Center.6 EFFECT OF DEFAULTED STUDENT LOANS ON RETURN TO WORK EFFORTS l 4 l rg rg . g oin.oor . g oin.oor ati t on da i n idat t o lida III. sololi a Effects of a Defaulted StudentdLoan n ns nsoolid s -coo -coon ans s-c -loloa n ans s-c -loloa n lelgee- A. olIntroduction g lelgee- g w.c ol e .colol e www.c a loan will be “in default” if there have been no paymentsww.c days wwCurrently, ww 270 ww for (about nine months) and there is a reasonable finding that the borrower no longer intends to repay.7 Defaulting on a federally-guaranteed student loan has serious consequences. The loan will most likely be given to a collection agency, which will add collection fees onto the outstanding principle, interest will continue to accrue on the loan, the borrower’s credit rating will be affected and wages can be garnished. Addi- tionally, new offset provisions, which will be discussed below, allow the federal govern- ment to seize tax returns and, for Social Security Disability Insurance (SSDI) beneficia- ries, a portion of the SSDI check to repay the loan. Therefore, it is extremely impor- tant to avoid going into default in the first place. B. Steps to take prior to going into default orgg .orgg at t on r ioin. .o 1. Repayment Plans tionn.o a tio r da id sololida ida sololid n s For low-income s-coon there are repayment options in addition to the onns olaanns-cplans. FFELs have income-sensitive repayment plans (ISRP) ns-c co borrowers, traditional-lrepayment loaan s- geeborrower’s payments are adjusted each year based on theirlege- -lo le g -o e where the .col le leg ol expected w ww.col gross income. However, monthly payment must be large w.col to at monthly w w.c enough www least cover accruing interest.8 Direct Loans have Income Contingent Repayment www Plans (ICRP), which allow payments to be reduced for low income borrowers as well. Payments under an ICRP need not cover accruing interest and can even be zero for borrowers below the poverty level.9 Under Perkins Loans, schools may extend the repayment period for low-income borrowers for up to an additional ten years. But, as with the repayment plans under the other programs, interest continues to accrue.10 2. Deferments Another option for borrowers finding it difficult to make payments, prior to default, is to seek a deferment. A deferment allows the borrower to postpone paying the loan back and, during that period, interest does not continue to accrue. .orgg r The rules for obtaining a defermentn.orgg for any loan issued after July 1, 1993. changed or tioinn.o a at o atioion at . idiunder the FFEL and Direct Loan programs for: ida d Deferments are nowonsool d l available sololid s onns - n ns-c co students in at leastshalf-time study, graduate fellowships, or rehabilitation programs; s-c co nns- -lola with unemployment,an the loan deferment for no more than three years; economic a e- o -loa o 7 34 C.F.R. §§ o l elgedetermined one year at a time for no more than three years;lland ee-l lol eg hardship, o elgg e Peace 682.200(b)(FFEL) and w.c www.c service.11 Corps w.c ol www.c 685.102(b) (Direct). ww ww 8 Id. § 682.209(a)(7)(iv). 9 Id. § 685.208(f). For Perkins Loans, the following deferments are now available: student; unable to 10 Id. § 674.33(c)(3). find full-time employment, for no more than three years; economic hardship, for 11 Id. § 682.210(s) (FFEL) and 685.204(b) no more than three years. In addition, in certain specified circumstances, these (Direct). deferments are also available: full-time teaching, full-time law enforcement, military 12 Id. § 674.34. service, and volunteer service, such as the Peace Corps.12 l 5 l EFFECT OF DEFAULTED STUDENT LOANS ON RETURN TO WORK EFFORTS rg rg . g oin.oor . g oin.oor ati t on da i n idat t o lida sololida n ns nsoolid s 3. Forbearancesloanns- s-cooc -coon ans s-c n - loa -loloa lelgee- ol e g lelgee- ol e g w.c ol A forbearance is .another option for borrowers who cannot make their loan ww.c col www c w Under the FFEL and Direct Loan programs, unlike a deferment, itwww payments. w is w. available both before and after a borrower goes into default. The forbearance will put a halt to collection actions.13 The forbearance allows a borrower to tempo- rarily stop making payments altogether, reduce the amount of the payments, or extend the length of time over which payments will be made.14 However, also unlike a deferment, interest will continue to accrue during the forbearance period, so it is actually likely that the amount owed on the loan will increase during this time.15 Forbearances are available for borrowers who cannot make loan payments be- cause they are in poor health or have other personal problems.16 Administrative forbearances are also available while applications are being processed for, among other things, changes in payments, requests for deferments, loan consolidation or orgg orgg at t on r ioin. .o discharge.17 t n r ion. .o da ida tio sololida are already paying the $30 ida sololid for nns Under the Perkins Loan program, -costudents who onns monthly minimum and stillloaan to o ns s-cmake payments because of hardship, the ns-c co s- unable ge- -lo -lolaan o school may further lreduce the minimum payments for up to a year.18 Additionally, llegee- e a borrower’s w.c c ooeleg ll for w.c oolleg w income period can be extended for up to ten more years wwww.c repayment . wwww up to 150 percent of poverty.19 families with w C. Effect of Defaulted Student Loans on VR Agency Funding for College What if the individual now seeks to return to college, with state VR agency support, and does not have the financial ability to get the loan out of default? Must the VR agency consider, as a comparable benefit, the value of any grants for which the indi- vidual would have been eligible, and reduce its support to the individual by that amount? VR agencies may fund higher education, if needed to meet an employment goal. How- 13 Student Loan Law, p. 12. ever, the VR agency cannot use federal VR funds “unless maximum efforts have been 14 34 C.F.R. §§ .orgg r rgg made . . . to secure grant assistance, in whole or in part,n.oor tioinn.o 682.211(a)(1)(FFEL) & a at o il a tioion. other sources to pay for from ida 685.205(a) (Direct). d olodidat that training.”20 The Rehabilitative Services Administration (RSA), which oversees the sreconcile the requirement to use “maxi- 15 sololid Student Loan Law, p. 12. con VR program, has issued a Policy Directive tons onns ns-c co 34 C.F.R. §§ s-co 16 mum efforts” to secure outsideoaan ns-assistance and the problem for individuals with s- -loaan 682.211(a)(2)(i) (FFEL) -l grant o o egee-l elgee-l & 685.205(a)(1) defaulted student loans, lwhere that assistance is unavailable.21 l eg lol eg l o l o (Direct). w.c ol www.c w.c www.c 17 Student Loan Law, p. 13. RSA’s Policy ww ww Directive provides that if an individual with the financial means to do so 18 34 C.F.R. § 674.33(b)(5). 19 Id. § 674.33(c)(2). fails to repay a loan, the VR agency may determine that the grant assistance for which 20 29 U.S.C. § 723(a)(5); the student is ineligible is, in any event, “available” to that person. Accordingly, the VR 34 C.F.R. § 361.48(f) agency would deduct from the amount of assistance it will provide the value of the (6)(emphasis added). 21 RSA Policy Directive, grants for which the student would have been eligible. On the other hand, when a RSA-PD-92-02 (11/21/ student with limited financial means cannot make repayment arrangements with the 91). EFFECT OF DEFAULTED STUDENT LOANS ON RETURN TO WORK EFFORTS l 6 l rg rg . g oin.oor . g oin.oor ati t on da i n idat t o lida sololida n ns nsoolid s -coo -coon lender, or otherwise s s-c loan out of default as discussed below, the VR agency oans s-c ann the -lo a take may n -l a concludeegee-lo would g lo l lthat “maximum efforts” have been made and full VR assistance ollelgee- g be ol le e appropriate. When confronted with this question, VR counselors mustc col individu- w.c o www.c w. make www. wwalized determinations, based on all of the circumstances involved.w w22 IV. Increased Federal Efforts to Collect Defaulted Student Loans A. Elimination of Statute of Limitations It is important to note that there is no longer a statute of limitations that applies to the collection of student loans.23 What this means is that no matter how old a loan is, all of the collection actions discussed in this article can be used to seek to recover on a defaulted student loan. For example, the authors have had clients with loans that were 20 years old that were now subject to collection actions. 24 orgg orgg at t on r ioin. .o Tax Intercept Programt t o n r ioin. .o da B. ida sololida ida sololid on s The tax intercept programon onns a ns-c c applies to a legally enforceable debt owed to the federal ans-c co s- s- government e-looan or administered by a third party on behalf of the government.25 ge-looan gge-l This -l oloele would, therefore, apply to defaulted student loans. It gives the governmentleeg ll e olothe author- w .c.c .c.c ll ww to wwity w26use any tax refunds owed to a borrower toward repayingwwww thew w defaulted student loan. As long as the loan continues to be in default, with an outstanding balance, any tax refunds owed will simply be used toward paying off the loan. It is called an inter- cept program because the refund never gets to the borrower. It goes directly from the Internal Revenue Service (IRS) to the Department of Education (DOE), the federal agency that is owed the debt. Prior to commencing a tax refund intercept, the DOE must give the borrower written 22 Id. notice. The notice must inform them of the right to review the loan records, to obtain 23 20 U.S.C. § 1091a. 24 In a recent federal a review of the status of the loan, or to enter a repayment agreement.27 The bor- district court decision, rower may request a hearing from the DOE within 65 days of receipt of the notice (if however, the judge ruled the borrower does not first request to review the file).28 A timely request for a that the DOE could not hearing will stop the intercept until the review is complete.29 Even though the tax .orgg g seek to offset Social r collection under this intercept programn.or rg is administered by the IRS, any attempts at tioinn.o a at o Security benefits for resolution must be pursued withdaat tioion.o ida d loans where their right to pursue a claim is li the DOE. sooli d sololid more than 10 years old. -conns C. Socialloans s-c Offset Program Security o onns ns-c co s- This is a very important - oan -loaan o first step in limiting o elgee-l lol eg l o l elgee-l lol eg w.c w.c governmental actions on very old loans. Federal www from taking www.c law generally prohibits anyone, including the federal government,.c (SSI) wwSocial Security Disability Income (SSDI) or Supplemental Securityw w Income 25 31 U.S.C. § 3720A. 26 Id. § 3720A(c). benefits by legal means.30 This is referred to as the anti-assignment clause. However, 27 34 C.F.R. § 30.33(b). 28 Id. § 30.33(d). because this right was created by Congress, it can be modified by Congress. In certain 29 31 U.S.C. § 3720A(b). instances Congress has specifically allowed this protection to be pierced. The Debt 30 42 U.S.C. §§ 407 (SSDI) Collection Act31 is one such instance in which Congress specifically indicated its & 1383(d)(a)(SSI). 31 31 U.S.C. § 3716. intent to override the anti-assignment clause protection. The law specifically overrides l 7 l EFFECT OF DEFAULTED STUDENT LOANS ON RETURN TO WORK EFFORTS rg rg . g oin.oor . g oin.oor ati t on da i n idat t o lida sololida n ns nsoolid s -coo the anti-assignment clauses for oans s-c and SSI.32 However, the federal regulations -coon both n -l oa SSDI ans s-c -loloa n elgee-l implementing the Debt lCollection Act provide an exemption for SSI payments,33 and l e g lelgee- ol e g the Social Security .cool w Administration’s (SSA) Program Operations Manual System (POMS)c ol w. wwwww.c from the offset program.34 Therefore, this program willwww.c also exempts SSI benefits ww not apply to SSI recipients, but it will apply to SSDI recipients. Although the law was passed in 1996, it was not until 2001 that the government began to implement the program.35 The DOE initiates collection by providing notice of intent to collect past due student loans to the SSDI recipient.36 This notice of offset will provide hearing rights and limited remedy information. The recipient has the right to request a hearing37 to challenge the offset or to set up a repayment plan to avoid offset.38 Requests for hearings and arrangements for repayment plans must be made with the DOE. The SSA has no authority to modify or terminate DOE offsets.39 DOE must certify the debt to the Department of Treasury (Treasury). Once allg notice time periods have orgg n.or rg n r ioin. .o at t o run and hearings have occurred, Treasury will order SSA to.assign a portion of the io n o da o i l dt lodiaatio recipient’s monthly SSDI benefits to DOE. Notices from Treasury will come from the ida sololid Financial Management Service (FMS). cons s on onns ns- -c s ns-c co s- -loaan does -lo The Debt Collection Actegeeprovide some protections, however. The first $750 of loaan ge- -lo e l g .col le lleeg SSDI paid to a recipient cannot be taken. The total amount recouped from each w.cooll w ww.col .c ww ww payment must be the lesser of the amount the monthly benefit www monthly benefit w exceeds $750, if at all, or 15 percent of the total monthly benefit.40 The implementing 32 Id. § 3716(c)(3)(A)(i). regulations give the following examples to clarify how this would work: 33 31 C.F.R. § 285.4(a)(1). 34 POMS GN 02410.300 (i) A debtor receives monthly Social Security benefits of $850. The B.1.a. 35 Tarantino, Louise, “Social amount offset is the lesser of $127.50 (15% of $850) or $100 (the Security Benefits Subject amount by which $850 exceeds $750). In this example, the amount to Increased Debt offset is $100 (assuming the debt is $100 or more). Collection,” p. 16, Legal Services Journal (Greater Upstate Law Project, (ii) A debtor receives monthly Social Security benefits of $1250. The December 2001). amount offset is the lesser of $187.50 (15% of $1250) or $500 (the 36 31 C.F.R § 285.4(f). 37 31 U.S.C. § 3716(a). amount by which $1250 exceeds $750). In this example, the amount 38 34 C.F.R. § 30.22(b)(3) offset is $187.50 (assuming the debt is $187.50 or more). .orgg g (iii). r .or rg tioinn.o tioinn.oof $650. No 39 See POMS GN a at o (iii) A debtor receives monthly Social Securityiaat o lod payments il ida 02410.300 A.5. d solessd $750.41 on is amount will be offset because $650 ns than 40 sololid 31 C.F.R. § 285.4(e). onns ns-c co ns-c co 41 Id. § 285.4(e)(3). s- s- -lolaan -o -loaan o o elgeeV. Remedies to Take a Loan out of Defaultee-l lol eg l o l elgg lol e w.c www.c w.c www.c ww ww A. Bankruptcy While severe limitations have been placed on the discharge of student loans through bankruptcy, it is still possible to discharge a student loan based on “undue hardship.” EFFECT OF DEFAULTED STUDENT LOANS ON RETURN TO WORK EFFORTS l 8 l rg rg . g oin.oor . g oin.oor ati t on da i n idat t o lida sololida n ns nsoolid s -coo been a c There must have ans s-“good faith” effort to pay the debt in the past together withans s-c -coon lo a n lo a n no prospecte- -future income for a significant period of time.42 Although this e-a -lo lelggefor lo is lelgge ol e ol verychighl hardship standard, it may warrant exploration in appropriate .cases. e w. o www.c even if the hardship standard cannot be met, some bankruptcy.c w c ol For www courts have wwexample, ww discharged collection fees and interest for the student loan debt. In addition, a Chapter 13 bankruptcy plan will determine how much the borrower pays each month. In many instances, this could mean a significantly lower monthly payment on the outstanding loan. B. Disability Discharge Under the federal guaranteed student loan programs, there are provisions for dis- charging a student loan, if a person becomes “totally and permanently disabled.”43 To be considered “totally and permanently disabled,” the individual must be “unable to work and earn money or attend school because of an injury or illness that is expected orgg orgg at t on r ioin. .o n r ioin. . to continue indefinitely or result in death.”44o t o da ida t sololida ida sololid c cn s Beginning in July 2002,-a-oonprocess for disability discharges exists.45 The DOE will s-coon ns s new nns-c n s loa issue a “conditionalan -loaa of three years.46 During this ge- -lo discharge” for a periodwork (most likely by reviewingperiodethe lo e the borrower’s ability to - gincome DOE ollereview willlleg oSSAege loel ll w.c o www.c ww .c .c ww remains appropri- wwreports) in order to determine whether the “conditional discharge”ww ate. The borrower also has an affirmative duty to report to the DOE earnings that are more than the federal poverty level.47 During the three year period the borrower will be allowed earnings up to the poverty level. If earnings exceed the poverty level, the loan will again become due and owing. If earnings remain below poverty during the 42 Brunner v. New York State three year period, the loan will be permanently discharged. During the period of the Higher Ed. Services Corp., conditional discharge, the borrower is not required to make any loan payments, nor 831 F.2d 395 (2d Cir. 1987). does interest accrue.48 43 20 U.S.C. § 1087(a). 44 34 C.F.R. §§ 682.200(b) C. Debt Cancellation Through Discharge Procedures (FFEL) & 685.102(a)(3) (Direct). 45 65 Fed. Reg. 65, 687-79. First, there is a discharge of the loan based on the death of the borrower. 49 Addition- 46 34 C.F.R. §§ 674.61(b) ally, based upon “hardship,” debt cancellation, through a number of discharge options, .orgg Perkins, 682.402(c)(1) r g which will be discussed below, is one ofn.ormost effective ways for a borrower to the org tioinn.o a at o (FFEL) and 685.213(a)(i) n. tioiefforts. While there is no time limit associated obtain relief from the DOE’s collection o d Direct) 411.530. loda t sotheida il ida sololid 47 Id. §§ 674.61(b)(7)(iv) onn with filing a discharge request,s student loan in question must have been made in -conns (Perkins), 682.402(c) ns-c will olaan s- o 1986, or later. Discharge c result in the complete elimination of the student loanoans s-c n o (14)(iv) (FFEL) and -l o debt andegereimbursement of all monies paid out by the borrower, including tax -lo -l a 685.213(d)(4) (Direct). o l leg - l l eee lolthe eby the IRS and payments made by the borrower. The DOE loelgalso be g w.c refunds seized .co will www.c to assist in “cleaning up” the credit report of the borrowerww.cdischarge. 48 Id. §§ 674.61(b)(7)(i) (Perkins), wwrequired ww ww after 682.402(c)(14)(i) (FFEL) and 685.213(d)(1) Upon the denial of a discharge there exists an informal DOE review process, a second (Direct). discharge request can be submitted, or the borrower can seek review in federal court. 49 Id. § 374.61(a). 50 Id. See Student Loan Law, p. 113, n. 179, for a list of Many states have their own tuition recovery funds for students who have been available state programs. defrauded but do not qualify for one of the federal discharge options.50 l 9 l EFFECT OF DEFAULTED STUDENT LOANS ON RETURN TO WORK EFFORTS rg rg . g oin.oor . g oin.oor ati t on da i n idat t o lida sololida n ns nsoolid s 1. Closed Schooloans s-c -coo -coon Discharge -l loa n ans s-c -loloa n l lelgee- available for FFELs, Direct Loans and Perkins Loans collelgee- A closed schoolcool e is g e g w. discharge c w. ol www.in part, after January 1, 1986.51 The discharge is available if wwww.c received,wwleast at the w borrower was unable to complete the program because the school closed. The 52 student must have either been enrolled at the time of the school’s closure, or if the student withdrew, the withdrawal must have occurred within 90 days of the school’s closure.53 The DOE maintains a list of official school closing dates at www.ed.gov/offices/OSFAP/Students/closedschool/search.html. 2. False Certification Discharge A false certification discharge also applies to student loans received, at least in part, after January 1, 1986.54 Perkins Loans are not eligible for this type of discharge. The student must prove that the school falsely certified to the DOE his or her ability to benefit from the program. In most cases, students with high school orgg orgg n r diplomas or General Equivalency Diplomas at the time .of radmission will not be ioin. .o at t o ioin.minimum state employment eligible.55 However, if the student is unable itoat t o no da l d meet a ida sololid nns id requirements for the job for which the sool was being trained,56 or if the coo student onns school forged or altered the ans- -c or check endorsements,57 a false certifica- o loan note ns ns-c co loaan s- tion discharge still mayge-l-loa e be e available. ge- -lo e l g le g .col le ww.col .col le ww.col w 3. www Unpaid Refund Discharge w www An unpaid refund discharge also applies to loans obtained, at least in part, after It will allow a borrower to discharge any part of loan liability that is directly due to the school’s failure to pay tuition refunds to the student. They will be able to reduce their debt by the amount of the refund that was owed, as well as interest and related charges.58 51 34 C.F.R. §§ 682.402(d) D. Repayment of Defaulted Student Loans (1)(i) (FFEL), 685.214(c)(1)(ii) (Direct) & 674.22(g) (Perkins). If an individual with a disability is not eligible to have a student loan discharged, the law 52 20 U.S.C. § 1087(c)(1). makes it relatively easy to develop a repayment plan, which will take the loan out of 53 34 C.F.R. § 682.402(d) .orgg r default. Each guaranty agency under the federal student loan rg .orgprogram must establish a (1)(i) (FFEL) & 685.214 tioinn.o a at o program, which allows a borrower with defaulted loans o .o tioinnrenew eligibility for all idiaat to (c)(1)(ii) (Direct). ida d federal financial assistance. The borrower nns solomake six consecutive monthly pay- o must ld 54 34 C.F.R. § 682.402(e) (1)(i)(A). sololid onns ns-c co loaan - ments to bring the loan out of default.sThe guaranty agency cannot demand from a 55 ns-c co s- Id. § 682.402(e)(1)(i)(A). borrower a monthly payment -amount that is “more than is reasonable and affordable o -loaan o elgee-l elgee-l 56 Id. § 682.402(e)(13)(iii) o lol eg financial circumstances.”59 A borrower may only .colol eg l l (B). w.c c based upon the borrower’s total www.this provision once.60 ww .c 57 Id. § 682.402(e)(1)(i)(B), ww obtain the benefit of wwww (e)(1)(ii). 58 Student Loan Law, p. 58. 59 20 U.S.C. § 107-6(b) The payments must be voluntary and on-time. “On-time” means payments are made (emphasis added). within 15 days of the scheduled due date. “Voluntary payments” “do not include 60 Id. payments obtained by income tax offset, garnishment, or income or asset execution.”61 61 34 C.F.R. § 685.102(b). EFFECT OF DEFAULTED STUDENT LOANS ON RETURN TO WORK EFFORTS l 10 l rg rg . g oin.oor . g oin.oor ati t on da i n idat t o lida sololida n ns nsoolid s -coo -coon -lo aans s-c n ans s-c -lo a n A borrower ee-lo cure a default by “rehabilitation.” To get rehabilitation,lthe ee-lo lelgg also can elggbor- ol e rower ol ol e w.c www.cmust make twelve timely monthly payments. Once a loan is ww.c w.c ol wrehabilitated, the wwborrower is eligible for new federal financial assistance. ww E. Loan Consolidation Loan consolidation may also be available and can be a great alternative. It is available both before and after a loan goes into default. One disadvantage of consolidating a loan after it has gone into default is that an 18.5 per cent collection fee is added to the amount due. Consolidation plans should be treated as a refinancing agreement and payment plans are set by the DOE. There is both a Direct Consolidation Loan and a FFEL Consolida- tion Loan. As long as a borrower has at least one outstanding Direct Loan or FFEL, the orgg org Loan and consolidate all outstanding borrower can apply for a Direct Consolidationg at t on r ioin. .o n r ioin. .o loans, including Perkins Loans. dat t o 62 da sololida i ida sololid onns onns Generally speaking,ns-c co fors- income borrowers, the Direct Consolidation Loan will be ns-c co low s- a n loa n preferable gealooa Consolidation Loan, because under the FFEL program, payments a to - -l eFFEL ge- -lo e e g le g must ollleast cover accruing interest.63 However, for a Direct ConsolidationllLoan, the .c c le .col e ww.atollevel of a borrower with income at, or below, poverty is www.co 64 The ww wwpayment $0 wwwper month. consolidation plan will remove any default that was outstanding prior to the adoption of the plan and a re-evaluation of the borrower’s financial situation will occur each year to adjust the payment level accordingly. After 25 years of compliance with the consolidation plan the entire loan is considered paid in full, even if the payments were zero each year, 65 and the borrower’s credit report must be corrected. Consolidation applications can be found on-line at www.ed.gov/directloan. An on-line calculator will allow the student to determine monthly repayment levels before completing the consolidation application. The calculator can be found at www.ed.gov/ DirectLoan/Repay/Calc/dlentry2.html. g VI. Conclusion .orgg n.or rg .o tioinn.o r atioion dat id aat o ida n sololid nsololid While defaulted student-oons be a huge barrier to financial independence, there s-coons ns-cloans canto the borrower. The borrower can either seek ltoanns-c of a n are a number -looptions c s available ee-loa - ooa eleg l elgdischarged completely or develop an affortable repayment planlltogee-the have a loan g l .col e ww.col .co take ww. ol loan out of default. This is an emerging area of law which the BPA&O andcPABSS w www w www projects need to be aware. 62 Student Loan Law, p. 84. 63 34 C.F.R. § 682.209(a) (7)(iv). 64 Id. § 685.209(a)(2). 65 Id. § 685.209(c)(4) (iv). l 11 l EFFECT OF DEFAULTED STUDENT LOANS ON RETURN TO WORK EFFORTS rg rg . g oin.oor . g oin.oor ati t on da i n idat t o lida sololida onns nsoolid s ns-c co -coon MY NOTES ON TRANSLATING loaans - THIS TO PRACTICE: ans s-c -loloa n ge- -lo le g e lelgee- g .col le ww.col ol e w.c ol w www www.c ww orgg orgg at t on r ioin. .o n r ioin. .o da idat t o sololida ida sololid onns onns ns-c co loaans- ns-c co loaan s- ge- -lo le g e ge- -lo le g e .col le ww.col .col le ww.col w www w www MY STATE CONTACTS: .orgg r .orgg r tioinn.o a at o tioinn.o aat o ida d olidid l sololid ons so s-c con onns anns- ns-c co s- e-loloa -loaan o legge - elgee-l lol eg l .c.ololle c w.c o ww wwww www.c ww EFFECT OF DEFAULTED STUDENT LOANS ON RETURN TO WORK EFFORTS l 12 l rg rg . g oin.oor . g oin.oor ati t on da i n idat t o lida sololida on s nsoolid s - n ns-c co -coon loaans ans s-c -loloa n ge- -lo le g e lelgee- g .col le ww.col ol e w.c ol w www www.c ww orgg orgg at t on r ioin. .o n r ioin. .o da idat t o sololida ida sololid onns onns ns-c co loaans- ns-c co loaan s- ge- -lo le g e ge- -lo le g e .col le ww.col Contact Information .col le ww.col w www w www Program on Employment and Disability School of Industrial and Labor Relations Cornell University 331 Ives Suite .orgg r .orgg r tioinn.o a at o Ithaca, New York 14853-3901 tioinn.o aat o ida d 607.255.7727 (voice) olidid l sololid ons so s-c con onns 607.255.2891 (TTY) anns- ns-c co s- 607.255.2763 (fax) e-loloa -loaan o legge firstname.lastname@example.org l(e-mail) - elgee-l lol eg l .c.oolle c w.c o w wwww www.ilr.cornell.edu/ped www.c ww w This publication is available in alternative formats. 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"Effect of Defaulted Student Loans on Return to Work Efforts"