Federal Student Loan Laws and Regulations
Has investing in your future actually positioned a financial roadblock?
In the last decade, the average student loan debt of the college attendee has creeped its way to amounts upwards of $35,000, with total outstanding federal student loan debt doubling from $516 billion to $1.2 trillion between 2010 and 2015.
The 40 million people, and counting, in the American working class at the target of those loans are feeling their circulation-cutting pinch. Though the people who’ve obtained student loans tally across the diverse population of bright-eyed graduates, middle-aged white collar workers, college dropouts that left school for sheer impossibility of the sticker price, and more, the dark financial cloud poses each person the same question: How can I remove this burden from my life?
While the answer to that question can vary as greatly between the people asking it as the people themselves, the most effective student loan relief options, and the protections of your rights as a borrower, are available in a relatively straightforward, navigable spectrum. Understanding the accompanying laws, regulations, and scope of possibilities toward financial relief can help you achieve the stability that will support a happy, healthy, and fiscally durable livelihood for decades to come.
How do federal student loan laws benefit the borrower?
Fair lending practices and the regulations governing them are the backbone of a reasonable and realistic path toward loan relief. Though the costs of modern education might prime one to believe nothing in life can possibly be fair, a vast facet of federal loan law exists solely for the protection of student loan recipients and their fair treatment.
The protections that all student loan recipients enjoy are, thankfully, extensive, but a few of the most important rights ensure that students have access to all lenders of their choice, including those not found on schools; lenders are prohibited from marketing loans so as to imply institutional endorsement; and that students are provided with information on all federal student aid opportunities, through a “one-stop” link on the U.S. Department of Education’s website.
What are fair lending laws… and the common scams that break them?
Fair lending laws, which apply universally to all lending exchanges, specify a number of inalienable rights held by the loan recipient, as well as illegal practices on the part of lenders that address predatory lending practices. All of the tactics listed below are illegal under U.S. law; should any of them resemble parts of the loan agreement you undertook, contact the Federal Reserve Consumer Help (FRCH) immediately to report your suspicion.
- Collateral or equity “stripping”. The practice of making loans that rely on the liquidation value (gross value) of the borrower’s home or other collateral, such as valuable possessions, rather than the borrower’s ability to repay. This can entail encumbering a property with debt to such an extent that there is little or no equity for creditors to acquire; meaning that, even as the owner, you can’t retain control over the cash flows and use of your own assets.
- Inadequate disclosure. Otherwise known as the practice of failing to fully disclose or explain the true costs and risks of loan transactions. This occurs in student loan companies where, in the case of a recent scandal at the hands of one loan service, LendEDU, the company makes money when people use it to apply for financial products, or are approved for them, including refinancing their student loans.
- Inadequate disclosure … In this case, the company had a peripheral advantage to promote the idea that refinancing was the “best thing” for students… even for those that it wasn’t. The acts of this particular company are also known more specifically as flipping, or the practice of encouraging customers to frequently refinance loans solely for the purpose of earning loan-related fees.
- Risky loan terms and structures. The practice of making loans with terms or structures that make it more difficult or impossible for borrowers to reduce their indebtedness. As opposed to federal loan agencies (which we discuss in greater detail further down), private student loan agencies don’t have to offer the same borrower protections and repayment options as federal student loans, resulting in most of the risky student loan terms burdening students.
- Padding or packing. The practice of charging customers unearned, concealed, or unwarranted fees in the process of lending.
If you notice that any of these scams or malpractice tactics resemble your own loan, remember that complaints to FRCH are free to file at any time.
What are my student loan forgiveness options?
While the strain of student loans seem unforgiving at best, the loan forgiveness options available to students are surprisingly ample. They include the 13 most common paths of relief, some designed specifically to assist students in certain degree programs, such as relief for law or medical students, as well as military personnel relief programs. For the purposes of this article, however, we’ll only cover the loan forgiveness options that everyone is eligible for, which includes four main relief channels.
- Forgiveness with Income-Based Repayment (IBR).
This repayment system caters to students who’ve recently acquired any of the following loan types:
- Direct Subsidized and Unsubsidized Loans
- Direct Grad PLUS loans
- Subsidized and Unsubsidized FFEL Stafford Loans
- FFEL PLUS Loans made to grad students
- Federal Perkins Loans, if consolidated
Through IBR, your student loan payments are capped at 10% to 15% of your discretionary income, depending on the most that you can afford. After making consistent payments under IBR for 20 or 25 years, any remaining loan balances are forgiven.
- Forgiveness with Pay As You Earn (PAYE)
Similar to the IBR plan, PAYE program caps your monthly payment at 10% of your discretionary income and, after borrowers have made consistent payments for 20 years, any remaining balance becomes eligible for forgiveness.
- Forgiveness with Revised Pay As You Earn (REPAYE)
REPAYE, like PAYE, caps your monthly payment at 10% of your discretionary income. After undergraduate fee borrowers have made consistent payments for 20 years–graduate fee borrows for 25 years–any remaining balance becomes eligible for forgiveness. Anyone with qualifying federal student loans is eligible for REPAYE.
- Forgiveness with Income-Contingent Repayment (ICR)
ICR structures its repayment plan a little differently than the preceding options: through this method, you’ll either pay 20% of your discretionary income monthly, or alternatively, the amount that you’d pay on a fixed 12-year plan, whichever is less.
What about student loan bankruptcy?
Unfortunately, the legal world’s consensus around successfully filing for student loan bankruptcy is pretty bleak. Borrowers have to hire a bankruptcy lawyer, decide what type of bankruptcy proceeding to pursue, and–the real challenge–prove that they face “undue hardship” (a term with almost no fruitful precedence in U.S. courts since it has yet to be officially defined).
Without a standardized definition, the courts test the circumstances of each filer’s case against a spectrum of financial incapacitation, or threat due to their immense debt, using a series of questions known as the Brunner Test.
In the Brunner Test, courts look at three main factors to determine undue hardship:
- You cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to pay off student loans.
- You have made good-faith efforts to repay the loans.
- Additional circumstances (such as financially supporting a dependant, like a child or an elderly parent) suggest that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans.
While courts tend to adjudicate student loan bankruptcy cases with little lenience, don’t lose hope: having a knowledgeable, compassionate lawyer who can present your case with the detail best corresponding to what the court “wants to hear” makes anything possible. And, with American student debt piling in greater volumes every day, this area of law is primed for debtor-centric reform.
Need Help With Your Student Loans? Ask the Lawyers!
The loan and bankruptcy process can rack up extra time, incorrect or misdirected filings, even a lost case if attempted without the aid of someone versed in the vast field of financial relief. Having a qualified bankruptcy attorney at your side can assure that the remedies being applied, whether a bankruptcy claim, or initiation on the path toward loan restructuring, are done so in the most beneficial manner to your particular situation. That said, if you have questions about any of the scenarios raised throughout this article, don’t hesitate to ask the lawyers.