A recent report by the federal Department of Education revealed that more than 600,000 federal student loan borrowers who started repaying their debts in 2010 had defaulted within two years. Nearly half of those had attended for-profit colleges, which had an average default rate of about 22 percent.
That’s about 7 percent higher than the overall national rate of 15 percent – which isn’t a whole lot better. There are approximately 40 million students with $1 trillion worth of debt, and about $67 billion of those loans are considered in default.
Students in default are hounded by debt collection agencies – paid $1 billion in 2011 alone – even in spite of numerous complaints stemming from illegal debt collection practices. These agencies, often work on commissions of up to 20 percent of recoveries, have a clear incentive to insist on high payments, even when a borrower’s income or circumstances may warrant leniency.
Our Miami consumer rights lawyers believe it’s important for former students to understand that in addition to consumer debt collection protections, additional measures passed late last year should make it easier for graduates who have defaulted to get back in the black.
Many debt collections firms will try to base repayments on a percentage of the borrower’s total debt, as opposed to a person’s income – i.e., what he or she can actually afford. Handling debts this way may increase the debt collector’s bottom line commissions, but it serves only to see the borrower slip deeper into debt. The Department of Education recently conceded that these debt-collectors were failing to appropriately counsel borrowers on how they could get out of default status.
In the final rules that the department issued late last year, students who default have to be extended a payment plan that will allow them to pay an amount similar to what they might be offered under a federal income-based repayment plan. Borrowers’ payments would be capped at 15 percent of their discretionary income, which is income that exceeds 150 percent of the federal poverty level for the family size of the borrower.
The rules also warn collectors against demanding minimum monthly payments without first disclosing that there may be more affordable alternatives.
There are also options for oral (as opposed to written) requests for forbearance, which is a time period during which interest continues to accrue, but borrowers don’t have to pay. This can be an especially useful option in cases of a lay-off or medical emergency.
All of these are important protections. However, they don’t officially go into effect until July 1, 2014. Some lenders may carry them out right away, but we don’t expect many will be in any great hurry, as these measures are likely to negatively impact their bottom line.
Debt collection agency employees still work for firms that offer thousands of dollars in monthly bonuses, restaurant gift cards and foreign resort trips as incentive to lean on distressed student borrowers to pay back as much as possible.
In 2012, debt collection agencies in general were the subject of 181,000 complaints to the Federal Trade Commission. Over the past two years, at least three companies contracted with the Department of Education settled state and/or federal allegations of abusive debt practices.
Former students who are concerned that they are not being offered a fair repayment plan should contact an experienced consumer attorney in Miami.
If you’re battling student loan debt in Miami or elsewhere in Florida, contact Jacobs Legal for a confidential appointment to discuss your rights. Call (305) 358-7991. Also, don’t miss Miami Foreclosure Attorney Bruce Jacobs on 880AM/the Biz, every Wednesday from 5 p.m. to 6 p.m. on “Mortgage Wars,” discussing foreclosure topics that matter to YOU.
Obama Relies on Debt Collectors Profiting From Student Loan Woe, March 26, 2012, By John Hechinger, Bloomberg Business
More Blog Entries:
Combating Abusive Debt Collection Practices a Top FTC Priority, July 31, 2013, Miami Student Debt Lawyer Blog