In October 2017 the Consumer Financial Protection Bureau (CFPB) published a 50 State Snapshot of Student Debt. Since its formation, the CFPB has handled tens of thousands of complaints related to student loan lenders, servicers, and debt collectors. Student loan debt in DC, Virginia, and Maryland is truly enormous. Total outstanding student loan debt in DC is $6.76 billion. Student loan borrowers in Virginia owe a total of $36.57 billion, and Maryland student borrowers owe $30.33 billion. Smart debt is big business in DC.

Student loan debt in DC, Virginia, and Maryland

These graphs illustrate the location, number, and type of complaints handled by the CFPB from July 21, 2011 to September 30, 2017. Student loan borrowers in the United States collectively owe $1.45 trillion in student loan debt. Just imagine how many student borrowers do not complain to the CFPB about their student loan problems.Since 2012, the CFPB has provided $750 million in relief for student loan borrowers through enforcement actions and market reforms. But there is a lot of work left to do. Millions of borrowers cannot afford to make their monthly student loan payments. If you are experiencing problems with student loan debt in DC, Virginia, or Maryland, call Lee Legal for a free financial analysis.

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A Report on the Economic Well-Being of U.S. Households (May 2017) by the Federal Reserve offers some key insights into the economic status of American consumers. The report makes several striking findings about student loans and financial well-being.

College graduates are struggling financially

The report found that, in large numbers, young graduates struggle to pay their loans and maintain basic living standards. Student loan borrowers are twice as likely to hold multiple jobs than those without student loans. And 73 percent of young college grads with student loans are struggling financially, compared with 45 percent of college graduates who graduate without loans.

Almost 40 percent of adults under the age of 30 have student loans. And 38 percent of Americans with outstanding student loan debt are still in deferment. They’re not even yet making payments on their loans.

Young grads are not the only ones burdened by student loan payments. Roughly 20 percent of adults between 30 and 40 also have student loans. And between 2003 and 2015, student loan debt held by senior citizens more than doubled.

College is more expensive for those who can least afford it

For-profit institutions target prospective students from lower socioeconomic backgrounds, those least likely to attend college. Graduates from for-profit institutions are much less likely to feel that their education was worth the financial costs.

Nearly half of adults who attended a for-profit institution say that they would attend a different school if they could make their educational decisions again.

Report on the Economic Well-Being,
Federal Reserve Board of Governors

Default rates for graduates of for-profit institutions are also higher (22 percent) versus public (6 percent) or nonprofit (8 percent) colleges and universities.

Student loans and financial well-being of borrowers

Is the debt worth the education? Only 51 percent of student loan borrowers aged 25 to 39 say that the lifetime financial benefits of their degree outweigh the costs. That’s no better than a coin toss.

Washington, D.C. and Maryland are the top two states with the highest outstanding student loan debt. The average debt per student loan borrowers in Virginia is $28,751. If you are experiencing difficulty keeping up payments on your student loans, call us to discuss your options.

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On Friday, the Internal Revenue Service (IRS) sent a gentle reminder to the nearly 40 million taxpayers who have yet to file their tax returns: do it now. Many people consider their tax refunds to be a sort of annual bonus. Here are the top 6 reasons why the IRS may keep your tax refund.

You owe taxes from previous years

If you owe taxes for previous years, the IRS will automatically apply your refund against the taxes you owe. You will receive a notice of intent to levy in the mail. If your refund is larger than your total tax liability, then you will receive a refund for the amount of the difference.

You haven’t filed all of your returns

If you haven’t filed returns for a previous year, the IRS may keep your tax refund until you file those returns. You may not owe anything once you file any missing returns, in which case you will get your refund once the returns are processed. But if you do owe taxes for the unfiled years, see above: the IRS will automatically apply your refund against your outstanding liability.

You are delinquent on student loans

The U.S. student loan situation is a big hot mess. The current student loan delinquency rate is 11.2 percent. The Treasury Offset Program will seize your tax refund to pay down your student loans if you are in serious default. If you want to keep your tax refund, consider entering into an income-based repayment program prior to filing your return.

You owe back child support

The Treasury Offset Program can also seize your tax refund to pay off back child support. If you are seriously delinquent, the IRS may keep your tax refund to offset the delinquency. If your refund is larger than the back child support, then you are entitled to the difference. But you may need to contact child support services to obtain the balance of your refund. Do this as soon as you receive the notice of intent to offset.

You missed the filing deadline

If you don’t file a tax return for a year in which you’re due a refund, you can file the return within three years and still receive the refund. After that, you’re out of luck, because there’e a statute of limitations on tax refunds. In short, if you wait too long (three years) to file your return then you permanently lose your ability to claim a refund from that return year.

Your refund is going to the bankruptcy trustee

In a Chapter 7 bankruptcy, your attorney will in most cases be able to fully protect your tax refund. If you are in a Chapter 13 percentage repayment plan, however, you will likely have to cough up your refunds to the Chapter 13 trustee. That’s why it’s important to reduce your exemptions so that you’re not overpaying your taxes each year.

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Jerome Powell, the new Federal Reserve Chairman, believes that we should bring back the bankruptcy discharge for student loans. For years, Lee Legal has advocated for the bankruptcy discharge for student loans.

Before 1976, federal student loans could be discharged just like any other unsecured debts. And up until 2005, private student loans could be discharged, too. The new Fed chief doesn’t understand why student loans cannot be discharged in bankruptcy.

“I’d be at a loss to explain why that should be the case,” Powell said.

Powell also noted that the astonishing growth in student loan debt will suppress economic growth over time. Objective data bear out that observation.

Student loan debt: necessary evil

Education debt swelled to nearly $1.38 trillion by the end of 2017. The cost of education has skyrocketed over the past several decades. In fact, over just 15 years, between 1990 and 2005, college costs rose 50 percent. We need to address the impending student loan debt crisis.

Society places enormous pressure on young adults to incur huge debt for education. And for good reason. A recent Georgetown University study found that college graduates earn $1 million more in earnings over their lifetimes. But with learning comes crushing debt.

The young student population is the most hobbled by debt
than any other segment in our society.

Richard D. Wolff,
UMass Professor of Economics Emeritus

The average student loan debt for a 2017 graduate was $39,400. Americans owe over $1.48 trillion in student loan debt, spread out among about 44 million borrowers.

The impending student loan debt crisis

Student loans aren’t just a drag on student borrowers. They’re a drag on the entire economy.

Student loans hinder homeownership rates and delay marriage. Student loan borrowers in repayment struggle to save for retirement or build savings at all, for that matter. And one in five graduates in 2016 said that their student loans held them back from starting a business. 

According to the Brookings Institution, students will default at a rate of 40 percent by 2024.

Four out of every 10 student borrowers will default.
This long-term data upends any notion
that higher education degrees guarantee financial stability.

Robert Gebelhoff,
Washington Post

Americans now owe about $620 billion more in student loans than in credit card debt. And 45 percent of recent graduates said that college was not worth the price they paid in the form of student loan debt. That’s depressing.

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If you file Chapter 13 bankruptcy and choose not to repay your student loans, you could end up in a worse condition than before you filed. To be sure, you can defer repayment of your student loans during the entire duration of your bankruptcy case. But interest will continue to accrue on any unpaid balances, and you will wind up owing more when the case is over. That can seriously interfere with the core bankruptcy concept of a obtaining “fresh start.” To avoid this, you may want to repay your student loans in Chapter 13 bankruptcy.

Those sticky, sticky student loans

Just look at the graph below, which shows how “sticky” student loans are. The graph represents debt held by different age groups, and the orange bar represents student loans. On average, as you can see, student loans stay with us for much of our lives.

According to the National Association of Chapter 13 Trustees, between 1980 and 2010, the costs for college increased at a rate approximately five times the rate of inflation, and outstanding student loan debt now tops $1.5 trillion. Meanwhile, the default rates on student loans in the U.S. have nearly doubled since 2006. Many young people are filing Chapter 13 bankruptcy to escape the crushing burden of student loans.

Student loans are not dischargeable in Chapter 13

A Chapter 13 bankruptcy will not discharge your student loans. In many cases, you can repay only a percentage of your unsecured debts and discharge the rest of the balances. Unfortunately, however, you will still owe any unpaid student loan balances after you receive a Chapter 13 bankruptcy discharge. The Bankruptcy Code treats student loans differently than it does any other type of unsecured debt.

Call is growing for bringing back the discharge for student loans in bankruptcy. On June 21, 2018, the non-profit, non-partisan National Bankruptcy Conference (NBC) released a position paper recommending reinstatement of the discharge of student loans. The paper notes that many student loans are for ineffective educational programs or programs that the debtor never completes. Astonishingly, almost half of all students who enter college do not graduate and receive a degree.

The editorial board at Bloomberg recently put it best: Let Student Borrowers Declare Bankruptcy, Already.

Repay your student loans in Chapter 13 bankruptcy

While student loans may not be discharged, you can repay your student loans in Chapter 13 bankruptcy. In bankruptcy, the “classification” of claims means grouping together creditors for similar repayment through the Chapter 13 Plan. Most courts have held that student loans are inherently different from other unsecured creditors due to their nondischargeability and are thus are subject to separate classification.

The usual purpose of separately classifying student loan debts is to pay the student loan creditor more than what is being paid to other unsecured creditors. Classifying student loans separately can be accomplished through 11 U.S.C. 523(a)(8), 1122 and 1322 of the Bankruptcy Code.

[I]t is often in the debtor’s interest to pay off
as much of the student loan debt
in the Chapter 13 plan as is permissible.
One way to pay more on the student loan
than on other unsecured debts
is to provide in the Plan that the debtor
will maintain direct ongoing monthly payments
to a student loan creditor . . .

National Bankruptcy Conference,
Student Loan Dischargeability (2018)

You may be able to reduce your payout to unsecured creditors by maintaining your monthly payments to student loans. At the confirmation stage, courts look to balance the financial needs of bankruptcy debtors with those of their creditors. For example, a Chapter 13 Plan may not provide for 100 percent repayment of student loans while the remaining unsecured creditors receive 0 percent. Such a Plan would not be fair to the non-student-loan unsecured creditors.

Talk to a bankruptcy attorney

Claim classification and Plan calculation are as much an art as a science. The bankruptcy trustee, United States Trustee, and bankruptcy judge will closely examine your income and expenses, calculation of disposable income, and claims register to determine whether your Chapter 13 Plan should be confirmed. If you want to repay your student loans in Chapter 13 bankruptcy, talk it over with an experienced bankruptcy attorney.

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People don’t declare bankruptcy for the fun of it. Bankruptcy results from a financial hardship from which a person cannot recover within a reasonable amount of time. Lots of circumstances can lead to personal bankruptcy. Here are the top 7 reasons people declare bankruptcy.

Job loss

Unemployment benefits simply do not cover living expenses. Losing a job can leave you unable to meet your ongoing monthly obligations, which can lead to bankruptcy. You may expect to find new employment quickly. But you should not deplete your savings paying off unsecured creditors if you will eventually discharge those debts in bankruptcy.

Foreclosure

Bankruptcy stops any scheduled foreclosure auction. If you have fallen behind on your mortgage but have regained the means to make your monthly payment, Chapter 13 allows you to propose a plan to repay the missed payments over five years. If you cannot afford the monthly payment, Chapter 7 allows you discharge the mortgage and move on with your life.

Drop in income

Perhaps your employer has reduced your hours, or reduced your hourly rate, or cut your annual salary. Maybe you have taken on a job that pays less. Or your income may decrease if you lose a tenant renting your property, or if a tenant decides to stop paying rent. A drop in income can lead to bankruptcy if your income does not allow you to pay your monthly bills. Living paycheck to paycheck doesn’t leave enough room for investment, savings, paying down debt — or for real emergencies.

Divorce

Divorce, too, can lead to a decrease in household income. The process of legally divorcing can itself also be very costly. And assets are not always equitably divided. Divorced couples may not produce income sufficient to support separate households. And child support and alimony (domestic support obligations) can further squeeze monthly budgets. While bankruptcy does not discharge child support or alimony, bankruptcy can reduce the debt burdens of divorcees by eliminating unsecured debts.

Medical emergency

More so than in any other developed nation, healthcare in the United States is very expensive. Suddenly facing a medical emergency for yourself or a family member can leave you strapped for cash. And facing health issues while attempting to make ends meet can be overwhelming. Insurance costs are steep, and insurance doesn’t cover every condition and circumstance. Cancer patients are twice as likely as non-cancer patients to declare bankruptcy. But bankruptcy tends to be multi-causal. And the decrease in income following an illness is much more likely to cause bankruptcy than the resulting medical bills.

Student loans

Many young people today are saddled with student loans. And in most cases, student loans cannot be discharged in Chapter 7 bankruptcy. But a Chapter 7 can make paying your student loans much easier if you have other kinds of debts crunching your budget. And you can propose a Chapter 13 repayment plan that pays more on your student loans than on other unsecured debts.

Credit cards

Credit card debt is one of the main reasons people declare bankruptcy. Making the minimum payments on credit cards just won’t cut it. If you’re carrying balances that you cannot pay off in a reasonable amount of time, then consider discharging those debts in bankruptcy. Chapter 7 allows you to quickly eliminate your liability on credit cards. And Chapter 13 repayment allows you to cut the interest rate down to zero and possibly even reduce the principal balances.

Bankruptcy isn’t for everyone

Even if you experience one or more of the circumstances above, you may be able to recover without declaring bankruptcy. In this article we’ve listed the major reasons people declare bankruptcy. But just because you’re experiencing one or more of these doesn’t automatically mean that you should file bankruptcy.

At Lee Legal, we try to keep our clients out of bankruptcy. Schedule a free personal financial analysis and we can help you determine whether bankruptcy is the best choice for you.

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Working with your student loan servicer becomes especially important if you experience difficulty in making your monthly payment.

If default is inevitable

With most student loan servicers, you have more options available to you if you contact them before you default. Temporary hardship forbearance can gain you as much as six months of nonpayment before you even default. You may even be able to renew the hardship, depending on your type of loan. You may also be able to change to a different type of repayment plan with a more affordable monthly payment.

If default is inevitable, talk with your servicer. Don’t simply stop paying and stop communicating with them. Instead, take a proactive approach, call them up, and explain your situation. If you default, your servicer may transfer your loan to a collection agent. At that point, your options become more limited.

If you have already defaulted

You must stay in touch with your student loan servicer even if you can’t make the payment. If you default on your student loans, you have options. But those options are only available to you if you work with your servicer. Forbearance, deferment, temporary suspension, and consolidation may be good options for you. Contact your student loan servicer and see which of these solutions are available.

If you defaulted on your loans due to loss of income but you can now afford a monthly payment, call your student loan servicer. Work out a repayment plan. Many loan servicers have different types of repayment plans based on disposable income.

Working with your student loan servicer

It can be frustrating dealing with a servicer whose sole task is to ensure that you make your monthly payments without fail. What can be even more frustrating is a servicer that insists upon payment in full when you can’t afford to make any payment at all.

Still, you must try to work with your lender. Student loan debt is nondischargeable in bankruptcy, and your loans won’t just disappear by ignoring your lender. Working with your servicer, while often unpleasant, is better than defaulting without a recovery plan in place. Keep your cool and work out a plan with your servicer if you can.

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Total student loan debt in the U.S. has reached $1.5 trillion, and the average student borrower graduates with nearly $40,000 in student loans. The number of college students taking out loans has tripled in just the last decade. Yet most students graduate either unemployed or underemployed, and repayment of these loans can be difficult, if not impossible. So will unpaid student loans affect your credit score?

Student lenders religiously report unpaid student loans to credit bureaus

Most student lenders report monthly — every month — to credit bureaus. Your personal payment history accounts for 35 percent of your credit score. Federal student lenders report payment history to credit bureaus monthly and without fail. Most private lenders also report to credit bureaus monthly, while others report every three or four months.

While on-time monthly payments to your student loans will improve your credit, missed or late payments will ding your credit. Student loan default invariably results in a lower credit score. In the eyes of the credit bureaus, unpaid student loans negatively reflect on your creditworthiness.

What if I can’t pay my student loans?

If you make income insufficient to pay your scheduled monthly student loan payments, you likely have options. Contact your lender and see what possible programs you may be qualified for, including deferment or forbearance.

Federal loans also have income-driven repayment programs available, including income-based repayment, PAYE, REPAYE, and income-contingent repayment.

Chapter 13 bankruptcy can help you get your student loans back on track

If no lender repayment program works for you, consider Chapter 13 bankruptcy to get your student loans back on track. You generally cannot discharge student loans in bankruptcy. You can, however, repay your student loans in Chapter 13 bankruptcy, often at a greater percentage than what other unsecured creditors receive.

Once you have a repayment plan in place, your creditors will be paid monthly and your balances will begin to decrease. Consequently, your credit score will improve. Addressing your debts, instead of ignoring them, will always have a more positive effect on your credit score.

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When the Great Recession officially ended in June 2009, the total outstanding amount of student loan debt in the U.S. was $675 billion. Today, total U.S. student loan debt has more than doubled to $1.465 trillion. If allowed to do so, not every student will declare bankruptcy to discharge student loans. But for those who struggle for years without making a dent in their student loan debt, the Chapter 7 bankruptcy discharge of student loans would bring much needed relief. Moreover, the bankruptcy discharge of student loans would provide a big boost to the U.S. economy.

Student loan delinquency rates

This chart, produced by the Federal Reserve Bank of New York’s Center for Microeconomic Data as part of their Q4 2018 report on household debt and credit, spells big trouble for America’s economy. The chart shows the net increase in the aggregate of seriously delinquent balances for all credit types, expressed as a percent of the previous quarter’s balance that was not seriously delinquent.

As you can see, student loan delinquency rates far eclipse those for other credit categories. No less than 11.4 percent of student loans are either in default or 90+ days delinquent. And repayment cycle delinquency rates are probably about two times higher if you factor in student loans currently in deferment, grace periods, or forbearance.

The damage being done to our economy by student loans

Consumer spending drives the U.S. economy. Money spent toward repayment of student loans is money not being contributed to the economy overall. Student loans also suppress new business formation. And student loan debt prevents homeownership because student borrowers must delay homeownership while attempting to repay these steep loans. Finally, those with student loan delinquencies (and thus poor credit) could rejoin the economy with more productive types of credit.

The solution: Bankruptcy discharge of student loans

Bringing back the bankruptcy discharge of student loans would change all that and provide a big boost to the U.S. economy. Even Federal Reserve Chairman Jerome Powell believes that we should bring back the bankruptcy discharge for student loans. In fact, student loans are the only type of risk-free lending in the United States. Legislation amending the Bankruptcy Code to provide for the discharge of student loans could correct that imbalance.

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Produced by Dan Rather, the 2018 documentary Fail State takes a look at American higher education, student loans, and for-profit colleges. Here are some key takeaways from the film.

A bit of history

The Higher Education Act of 1965 created student loans backed by the federal government, work study, and access to student grants. As a result, state colleges popped up everywhere, as well as private, for-profit colleges. Tuition also began to rise dramatically.

Then the Higher Education Act of 1972 created direct student aid. Pell Grants allowed students to use the funds to attend any educational institution. This was considered a “market-based” approach to higher education.

Vocational schools, especially those specializing in computers and cosmetology, began directly receiving taxpayer money. The highest risk loans went to trade schools. But students never got jobs and couldn’t repay their loans. Defaults led to massive taxpayer losses.

You have this explosion

of new proprietary schools . . .

because they had access

to the U.S. Treasury with no risk.

Senator William Roth (R-Del.)

New regulations in 1992 finally cracked down on technical and correspondence schools, and many of them closed or went bankrupt.

The rise of DeVry, ITT, Strayer, Kaplan, and University of Phoenix

Higher education funding is the largest discretionary funding item in most states’ budgets, and so it’s often the first to face budget cuts. That’s why tuition has grown so dramatically. Students seeking a secondary education often turn to for-profit schools because they are often easier to finance in the short-term.

For-profit schools like Strayer and University of Phoenix are publicly-traded companies, and hedge funds on Wall Street have huge stakes in these companies. In 2010, when the rest of the economy tanked, ITT Tech actually produced a bigger profit margin than Apple. After the George W. Bush administration dismantled regulations against private colleges, marketing and recruiting for “online only” schools exploded. Subprime went to college.

For-profit colleges target low-income and minority students, charging them 17 and 18 percent interest on student loans. But these companies actually don’t care if their students never pay back their student loans. What’s important is that the college gets immediate access to federal grant money.

American higher education should actually offer an education

Students who attend for-profit collegese take on huge debt and too often get a terrible education in the process. Even those students who actually graduate find themselves woefully unprepared for the job market, and most do not find employment in their field of study.

Yet the fact is that most students do not drop out of college because of grades, but because of financial reasons. In 2018, 7 million low-income Americans attended college. Most of them won’t graduate. In fact, poor student have just a 9 percent chance of actually graduating from college. Their student loans, unfortunately, aren’t forgiven even if these students do not graduate.

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