Student lenders have collection powers denied most creditors. Credit card companies can’t garnish your wages without a court order. A federal student loan collector can garnish your wages just by sending a notice in the mail to your employer. Credit card companies can’t sue you after the statute of limitation has expired. Even IRS debt has a ten year time limit on collection and can often be discharged in bankruptcy. Student loans used to have a five year statute of limitation, then seven years, before Congress eliminated it altogether. Common criminals like burglars and arsonists are protected from prosecution by a statute of limitations. Murderers, kidnappers, federal student loan borrowers and the like — you know, society’s worst offenders — have no statute of limitation. They can be taken to court until the day they die.
With all of the special protections afforded federal loans under the law, it’s not surprising a study by the National Consumer Law Center (“NCLC”) found the Department of Education (“ED”) to be abysmal at resolving consumer complaints. NCLC found the culprit to be ED’s penchant for abdicating its responsibility for student loans to private debt collectors. The Department of Education awarded almost $1 billion in commissions in 2011. Collectors insisted on stiff payments, ignoring rules that made borrowers eligible for leniency. One collector working for Educational Credit Management Corporation received $454,000 in commissions in one year. This is more than double the yearly salary of the commissioner of the Department of Education. The CEO of Sallie Mae, a private student loan collector, has found the student loan business so profitable he owns his own golf course. Unencumbered by the fiduciary duties expected of a government agency towards its citizens, private debt collectors are free to ignore complaints as costly distractions. Indeed, a Department of Education audit found exactly that. ED found collectors ignored verbal complaints, never passing them on to the Department of Education for appropriate action. This level of disorganization has left borrowers dazed and confused.
AshleyJane Kneeland knows this better than most. The onslaught of illnesses she’s endured in the past few years is mind-boggling. As an independent, high achiever, she graduated from high school early to attend George Washington University only to be diagnosed with rheumatoid arthritis in her senior year at the tender age of 21. Her pain medication caused internal bleeding which resulted in anemia, leading to several hospitalizations. When she did not improve, doctors upped their diagnosis to an undifferentiated connective tissue disease. Undaunted, AshleyJane did not give up. After receiving a Masters from the University of New Hampshire, she found full-time employment as an Activities Director of an elder care facility. Working became a challenge. Her doctors realized she had lupus. This is an incurable disease that can cause kidney failure, a possibility her doctors have already warned her about. Fatigue was a constant companion, and stress caused her symptoms to worsen. The more stress she endured, the faster her condition deteriorated, a vexing problem for someone used to pushing herself to perform well under pressure. To add insult to injury, she contracted shingles, a painful disease, suffered through 16 open skin ulcers, and continues to endure muscle spasms. Working full-time became impossible. Even a part-time job at the Concord Boys & Girls Club proved to be too much.
With the help of family she managed to make her student loan payments. She had to move back home to live with her parents to do it but honoring her debts was important to her. This wasn’t the life an independent young woman envisioned for herself when she went off to college to pursue her dreams. She would give anything to have that life back. As lupus forced on her an increasing dependency, she applied for Social Security Disability Income (“SSDI”). The Social Security Administration did not hesitate in finding her permanently and totally disabled. She receives $832 per month. She managed to survive only through the help of family. As her parents near retirement and entering an over-55 housing project, AshleyJane knows she won’t qualify to live there. Paying back $60,000 while trying to live independently on $832 per month is simply impossible. Something has to give.
When she was found to be disabled, she naively assumed Sallie Mae would work with her on a forgiveness program or at least a deferment of payments. Sallie Mae informed her that “your disability doesn’t change anything. Even if you lose a limb, you still have to repay these student loans.” Out of options, she filed bankruptcy and has requested the bankruptcy court to forgive her loans as an ‘undue hardship.’ AshleyJane Kneeland v. Sallie Mae and Affiliated Computer Services, Inc., AP# 13-1016-JMD (Bank. D. N.H. filed 2/21/13). Sallie Mae has opposed that request. It knows full well that the burden of proof required to discharge student loans in bankruptcy court is almost impossible to meet. One study found that only 1 out of 1000 filers with student loans even attempt this feat. Far fewer than that actually succeed. Expense is a big reason. It is difficult to compete with the litigation budget of a national student loan servicer. Outspending an impoverished litigant is a familiar tactic.
Seeking a discharge of student loans in bankruptcy entails significant risk. If AshleyJane loses, not only will she owe $60,000 plus interest, but all the attorney’s fees expended will be added to her loan balance, essentially burying her in debt forever. That filing bankruptcy can actually make student loan debt worse is not an isolated problem. Chapter 13, a type of bankruptcy often used by homeowners to save their home from foreclosure, lasts from 3 to 5 years. During that time, most bankruptcy courts don’t allow student loan payments to continue, leaving borrowers deeper in the hole when the bankruptcy is over. Solving a mortgage problem only to have higher student loan debt waiting is a Pyrrhic victory at best. It’s like the proverbial Three Stooges bureau where one drawer closes, only to have another one open. Or to use another analogy, the light at the end of the chapter 13 tunnel has become an approaching freight train. The ‘fresh start’ guaranteed by the U.S. Bankruptcy Codes can become an empty promise for student loan borrowers.
With the more than one trillion in student loan debt now exceeding the amount of credit card debt, this isn’t a problem that’s just going to go away. Student loan debt is being bundled together and sold to investors, much like mortgage backed securities, the same investment model which contributed to the economic collapse in 2008. The student loan debt crisis has become a drag on the economy. There has been some discussion in Congress about changing the Bankruptcy Code to give more relief to borrowers in financial distress. Congress of course is not known for taking preemptive action against the interests of big business. There are no heroes or headlines in averting a disaster. The student lending industry has little incentive to be proactive, knowing a bailout saved them from ill-advised business decisions the last time around. With the special protections bestowed on them by Congress, student loan collection can be a merciless process. There’s no bailout for the ‘little guy.’
TIPS FOR STUDENT LOAN BORROWERS
(1) Exhaust federal loan options before considering any private student loan. You have far more rights. If you can’t afford your payment, federal loans are eligible for payment plans like Income Based Repayment (“IBR”) that may lower your payment. Educate yourself on the options available to you before you get too far behind. Once you go into default, you no longer qualify for IBR and other programs. It is common for 15% to 25% to be added to your loans as a collection cost. You may want to consider working with a student loan lawyer to help get out of default before a wage garnishment, tax intercept, or lawsuit occurs.
(2) The first thing a student loan lawyer will ask you is what type of student loan debt you have — federal, private, or state. Just knowing your loans are with Sallie Mae won’t answer this question. Sallie Mae services both federal and private loans. Start by checking the National Student Loan Data System. This will list the type of loan, loan balance, and servicer for each loan. If you don’t see your loans there, you most likely have private or state loans. Checking your credit report may help nail down this answer. Asking your student loan servicer is another possibility since it’s illegal for them to provide you with false information.
(3) There are no mandated payment programs available for private student loans. Like a credit card, once you default, a private student lender can accelerate the entire loan balance, and sue you in court. Your inability to repay this amount won’t stop the collection process. One of the few advantages of private student loans is that they are subject to a statute of limitation. Once the statute has run, further collection becomes illegal. Answering this question can be complicated. Judgments are good in most states for 20 years. Having a copy of the promissory note and your payment history will help a lawyer to assess your situation. Collecting on student loan debt beyond the statute of limitation may be a violation of the Federal Fair Debt Collection Practices Act or your state’s fair debt collection law.
Courtesy of NACBA. This article was written by Richard Gaudreau who is a lawyer admitted to practice in New Hampshire (NH) and Massachusetts (Ma) with a specialty in bankruptcy and student loans. He has litigated student loan issues in the U.S. Bankruptcy Court, First Circuit Bankruptcy Appellate Panel, and Federal First Circuit Court of Appeals. He may be reached through his website at attorneygaudreau.com, by email at Richard@attorneygaudreau.com, or by calling 603-893-4300.
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