Articles Posted in Student loans

We’ve just learned that the U.S. Supreme court denied the 10k-20k forgiveness of federal student debt that was pending.  We were expecting that.  Unfortunately, most of our clients owe so much more anyway, and the other programs out there are doing so much more to get rid of this debt.

There are some things that will be coming out due to this decision that everyone should be aware of:

• Servicers are being instructed to provide borrowers a 3-month “grace” or “safety net” period during which borrowers will not be treated as delinquent if they miss payments (though interest will continue to accrue). That 3-month period may be extended.

We’ve seen some confusion out there about whether those with disability discharges for federal student loans are required to provide income information going forward.  This is because the new rule hasn’t yet gone into effect.  But it will before the repayment pause ends so no worries.

https://www.ed.gov/news/press-releases/education-department-releases-final-regulations-expand-and-improve-targeted-debt-relief-programs

The rule eliminates the three-year income monitoring requirement that too often caused borrowers to lose their discharges solely because they failed to respond to paperwork requests.

One of the early and frequent arguments made by opposing counsel in our private student loan discharge adversaries in bankruptcy is that the student loans were made for an educational benefit and thus are excluded from discharge.  Specifically, Section 523(a)(A)(ii) exempts from discharge “an obligation to repay funds received as an educational benefit, scholarship, or stipend.”  The creditors’ attorneys’ argue that there is ample case law to support that assertion.

The “ample” case law referenced by opposing counsel is an older view replaced by the current view clearly supported now by three circuits.  In other words, appellate law from these three circuits have more precedential value than trial level opinions often cited by defense counsel.  Bottom line, this is the typical initial creditor response that no longer has any merit.  It’s meant to test your knowledge in my opinion.  Many who are bringing these cases for the first time would fold because a student loan certainly appears to have an educational benefit at first blush.

The Second, Fifth and Tenth Circuit have recently affirmed that private student loans are not “obligation[s] to repay funds received as an educational benefit, scholarship, or stipend” – and thus not covered under 523(a)(8)(A)(ii).  See Homaidan v. Sallie Mae, Inc.

Some of you may have heard that the May 1 deadline to consolidate older FFEL federal student loans to the newer Direct student loans for the one time account adjustment has just been extended until the end of the year.  While that initially seems like great news, why is it NOT a good idea to wait?

The health emergency ends May 11.  Once the Department of Education presents the IDR Waiver in a few days, this will give plenty of ammo for commercially held FFEL loans to sue to cancel what will likely be $200 billion of student debt to avoid forbearance months from counting and other methods of counting payments that don’t exist outside of the IDR Waiver program.  $200 billion reasons to appeal.  The appeal alone may stretch that out to the next administration.

Our advice is to consolidate before mid May to get it done, while it can be done.  Just in case.  $200 billion is a lot of money and there is growing support behind commercially held loans to not just wipe them out.

The deadline to consolidate FFEL loans to Direct loans under the IDR Waiver program requiring a one time account adjustment has been moved from May 1 to the end of the year.  This takes some pressure off for sure — but it’s still a good thing to do now rather than later.

I have some questions about how qualifying payment counts will be credited now that the IDR Account Adjustment period has been extended:

1. Under the Account Adjustment rules, if you consolidate loans with different payment histories, the longest history is applied to the entire consolidated balance.