Anyone who saw the news this weekend saw the incredible act of generosity by billionaire philanthropist Robert F. Smith, the commencement speaker at Morehouse College, in Atlanta. Mr. Smith paid the student loan debt of the 2019 graduating class- a total grant of about $40 million dollars. For most graduates, however, student loans will follow them long after the diploma is received.

Many students are on the “Student Deferment” program for their loans, but after graduation, payments begin in six months. What do they do next?First and foremost, students must have a plan. They must have a budget. Then three steps: 1. get to paying as soon as possible on a repayment plan, 2. get out of the student deferment before it statutorily ends and, 3. stay out of forbearance in the future. Going into and out of forbearance is the fastest way to grow a student loan balance. Why? Because the interest capitalizes every time the loans go into and out of forbearance, and when students change payment plans. Capitalization means that the outstanding interest becomes a part of the principal balance, and you then pay interest on the new principal. This is a reason that student loan balances balloon.

The first issue, that few borrowers truly understand, is that during student deferment unsubsidized student loan interest already capitalizes quarterly for the length of the deferment. Four years of loans every semester, unsubsidized interest amounts capitalizing every quarter. This is why students graduate with thousands of dollars of student loan debt amounts over what they actually borrowed. So, during school, these loans are growing. After graduation, many students are faced with large payments they cannot afford on the “Standard Repayment Plan” over ten years, so they immediately put the loans into “forbearance” and a payment is no longer due. But once again that unpaid interest will capitalize every time the loan goes into and out of forbearance.

So, what to do? Here are a few first steps.

1. Have a budget and include in the budget the biggest student loan payment you can afford. Things may be “tight” again for a little while but getting right into payments and staying out of forbearance will make loan payoffs faster and less expensive.

2. Download the Student Loan Guide, “Do You Have the Right Student Loan Payment” from my website and follow the steps to retrieve your total federal student loan data from the National Student Loan Database (NSLDS). From there, check your loans CARFEULLY, to make sure they are, in fact, yours. Look at the disbursement dates, and make sure you were attending. Mistakes sometimes happen.

3. Use the Debt Snowball for the individual loans. If you can avoid consolidation, you can stack your loans from lowest total amount to highest, and attack the debt using a “debt snowball.” As each loan is paid, you will have a huge sense of accomplishment, and the motivation to keep going.

4. Avoid Forbearance. If you cannot make any payment at all AFTER your student deferment period ends- call your servicer and get into a payment plan, do NOT go into forbearance. If you graduate this month, you have a few months before the first payment is due. Get moving on these, but if there is an unavoidable reason you just cannot make the payment, get into Income Driven Repayment, or some other plan, and make sure you absolutely re-certify every year. When you go into and come out of IDR, guess what? Your interest capitalizes.

In my humble opinion, it is this interest capitalization that is making student loans hard to pay off. And when people enter into forbearance, it is because there is a short-term issue causing a hardship or some other issue. The servicers will happily put you into forbearance, “so you don’t have a payment due for six months” but in the long run, it actually hurts the borrower financially. We need stronger disclosures.

Best of luck to the class of 2019! May you find your joy and excitement felt during “Pomp and Circumstance” lasts for years as you leave college and embark on the rest of your journey!


image credit: gocollege.com

 

Lots of news floating around about how a new legislative proposal where the federal government would take 10% of a student’s wages as an automatic payment for student loans, basically a garnishment, and this may affect many of the current 44 Million borrowers. This suggestion has drawn fire from many consumer law advocates, like myself, who feel that this plan would allow the government to prioritize student loan debt above necessary living expenses; food, utilities, shelter, and transportation. But this proposal also has me thinking about the state of current student loan garnishment structure.

Garnishment is simply a “forced” withholding of part of a consumer’s income in response to a debt. Federal Student Loans are subject to “administrative wage garnishment” and will not need a court order if the borrower is in default. The current percentage of wages which is subject to administrative wage garnishment is 15% of a borrower’s “disposable income”, defined as the net check, or income after withholding taxes and other deductions. But this 15% is after mandatory minimum amounts that are protected from any garnishment. I will cover both consumers earning regular wages, and then consumers on fixed Social Security income.

Please note that PRIVATE student loans require a court order and a judgement against the borrower before the lender can garnish. Also note that the total amount of garnishment for debt allowed by law is 25% of the debtor’s wages… meaning, I am going to talk at the 15% rate in this article, but if the consumer already has a garnishment from somewhere else, the total garnishment cannot exceed 25%, so the federal student loan garnishment may be less than the full 15%.

For Consumers Earning Wages

The rule is 15% of wages after deductions, but what exactly does that mean? First of all, there are minimum amounts that are “exempt from levy” meaning, that amount cannot be touched for any reason by federal student loan garnishment. The current amount, as of this article, is 30 times the minimum wage after deductions. This means, at the current minimum wage, which is at $7.25 an hour (15 USC §1673), the consumer “keeps” the first $217.50 per week. That is the amount “exempted” from any garnishment calculation. The government can then take the LESSER of either the amount that is left after the $217.50, OR 15% of the consumer’s total income. It can be confusing, so a few examples are in order.

A. Consumer’s net income is $300.00 per week. After the exempted $217.50, the consumer has $82.50 left over. 15% of the $300.00 is $45.00. The government can take the LESSER amount, or $45.00 per week. In perspective, out of $1200.00 net income per month, the government can take $180.00. (This is why us student loan/ consumer law types want to do everything possible within the law to prevent garnishment for student loan delinquency.)

B. Consumer’s net income is $500.00 per week. After the exempted $217.50, the consumer has $282.50. But, 15% of $500 is $75.00, so the LESSER is $75.00 a week, or $300.00 per month. Another ouch. This is one reason that over a certain threshold, the calculation is almost always just 15% of disposable income.

One more thing, both Federal Pension and Private Retirement payments that are exempted from garnishment for debts in most states, is also subject to garnishment for delinquent student loans.

For Consumers on Social Security Retirement and Social Security Disability

Unfortunately, most of the time when I run into the “offset” (garnishment) of social security payments, it is because the consumer co-signed someone else’s student loan. If the borrower becomes permanently disabled, there are administrative actions that can be taken towards forgiveness of the federal loan debt. This is true for federal loans where the student passes away as well. But there are many cases where the Department of Education is offsetting Social Security Retirement Income (SSRI) and Social Security Disability Income (SSDI) payments. SSI, the program for the indigent, is exempted from “offset”.

Social Security Retirement and Disability are subject to an “offset” to recover federal debts since 2001 under the “Debt Collection Improvement Act of 1996.” The Department of Education can offset up to 15% (31 USC §3716). The amount offset is the LESSER of 1. The total amount of the debt 2. The amount that exceeds $750.00 per month, OR 3. 15% of the total benefit amount.
Here are the actual examples from the legislation:

Example 1:
A debtor receives a monthly benefit payment of $850. The amount that is offset is the lesser of $127.50 (15% of 850) or $100 (the amount by which $850 exceeds $750). In this example, $100 would be offset.
Example 2:
A debtor receives a monthly benefit of $1250. The amount that is offset is the lesser of $187.50 (15% of 1250) or $500 (the amount by which 1250 exceeds 750). In this example, the offset amount is $187.50 (assuming the debt is $187.50 or more).
If the recipient receives $750 or less, nothing will be offset.

(from: 31 C.F.R. § 285.4(e)(3)(i), 31 C.F.R. § 285.4(e)(3)(ii), & 31 C.F.R. § 285.4(e)(3)(iii))

Alternatives to Default, Garnishment or Offset

I have covered in previous articles how dangerous it is to a consumer’s financial future if they default on student loans. There are currently nine, that is right, NINE repayment options available through the Department of Education for student loans, and while nobody qualifies for all of them, many qualify for more than two. So PLEASE readers, know your options. Please do not let your student loans go 269 days past due. Call your servicer or a student loan attorney if you need help. If you have private student loans, the payment options may be limited. But contact the lender if there is a problem making your payment. As for the topic that inspired this article, legislation proposing the 10% monthly payment option. You can see how it would begin to prevent defaults, and the amount proposed is less than the current garnishment scheme. But then again, I believe consumers should control their income and not have to choose between food and federal debts. A garnishment is imposed because federal student loan notices were ignored, or nine total monthly payments were missed in a row.

When a debt is in default to a federal agency, notably student loans for many Americans, a debtor’s wages can be garnished without a lawsuit through a process known as “Administrative Wage Garnishment” (AWG). This process is different from garnishments based on having a judgment against someone after a lawsuit, because the Treasury does not need to obtain a court order to have an employer withhold up to15% of an employee’s “disposable income.”

Now, there are specific rules surrounding these processes to get you to pay back the debt. For example, an employee must be at the current job for at least 12 months, and the employee left the previous job involuntarily through something like a layoff. But generally, they can take your money, right out of your paycheck, without taking you to court. And it can be frustrating and scary because the agency is in control of the money, and you are short and have other bills to pay.

The Debt Management Service

The Debt Management Service and their Office of Debt Management (ODM) is basically the Treasury’s collection agency. In addition to AWG, there are other processes that can be used to collect on debts owed to the government, such as taking tax refunds to apply to debts, called an “offset.” If you are a Veteran receiving disability compensation, or a retiree, your money can be garnished to satisfy an ODM debt. In fact, your entire monthly disability compensation benefit can be taken. If you receive a Social Security check, and are, or your student borrower is, in default, they can garnish your social security check. Not kidding here.

This post is meant to be a strong reminder that nobody should ignore federal debts. Again, getting a letter from a government agency can be frightening. Period. The Internal Revenue Service (IRS) is the best known, and there are a ton of ads on tv for help with “tax debt.” But these other types of federal debt? Many people are surprised at the power these other agencies have. Not unlike the IRS.

If you are being garnished, and you do not owe a debt to the agency, my suggestion is to contact a lawyer immediately. You may be a victim of identity theft, or the treasury may have wrong information about the debtor, and you are unfortunately targeted. There are stories of two “John Smiths” with a single digit off on the Social Security or account number. Make sure you do not ignore the notices that you may think are just mistakes, you may end up with a paycheck surprise. Not in a good way.

Steps You Can (and should) Take

Student Loans- if you are more than a few months behind in payments, know that after 270 days they CAN intercept your tax return and garnish your wages. If you take steps, such as contacting the servicer, there are steps to take. If you are already in garnishment, get some legal or financial help to see what you need to do to “rehab” your account and stop the garnishment.

Other Federal Debts- similar advice, contact the Treasury Department in charge of collecting your debt, or get legal or financial help in dealing with the agency. For Veterans there may be an option for a waiver, or a payment plan so you receive a portion of your compensation while paying back principal debt.

Final tip. Remain calm and respectful. If you receive a letter, call the numbers on the letter. If not, here is the general contact site for the Treasury Collections Department. You can take back control of your money, even if you are being garnished by a government agency. Get a plan, get help if you need it, and you can get through it.

The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from The Law Office of Dawn K. Kennedy or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.

 

 

This post is primarily for rising seniors and their parents. First and foremost, congratulations, you are almost done! This is that big year with lots to do and lots to plan. This is THAT year of Senior Prom, Yearbook quote, and ditch day (but not by YOU of course.) You have worked hard, and graduation is right around the corner. With school starting again in a few, it’s getting real. This fall you will likely start the application process for your next step. But before you race off to the exotic out of state private school, I want to talk a moment about the one thing often overlooked at this time in your life: College is a business decision.

Every investment requires thoughtful consideration, and education is an investment. With the student loan debt in America approaching $1.5 Trillion, and graduates being saddled with college debts as long as 25 years, your selection should take some real cost-benefit examination. A quality education does not only come from the expensive private schools. I hear all about the “College Experience” students “should” have,however, student loan debt is currently being blamed for 1 in 8 divorces in the United States. Turns out high student loan debt gets in the way of buying cars, homes, and starting families.

Know the Cost of Attendance Vs the Cost of Tuition (per Credit Hour)

The high education figures we all see thrown around in the news are typically the amounts published in the estimated Cost of Attendance. Each school publishes the cost estimate per year for parents and students, but primarily because, “This estimation may also be used by financial aid offices and loan companies to evaluate how much money they should loan a prospective student based on how much money they will actually need to attend. Each year, the average cost of attendance typically increases.” The cost of attendance estimates room and board, fees, transportation, tuition, and books and materials.

The actual cost of your education, the Cost of Tuition, can be determined by looking at the cost per credit hour, which is a very different number. Published in an article by Student Loan Hero last January, here are the current national averages of costs per credit hour:

• Four-year, public: $324.70
• Two-year, public: $135.09
• Less than two years, public: $281.17
• Four Year Private: $1039.00

Keep in mind, these are the national average, and your state or private school credit hour cost may be higher or lower. But let’s do a little math here. A four-year bachelor’s degree is around 120 hours or so. A four-year public school at $324.70 is about $38,964.00 for all four years. That’s under $10,000.00 per year. Compare that to the four-year private school average, the same 120 hours will run approximately $124,680.00. Before you buy a book, get a sandwich, or go to your science lab. In many parts of the country, that is the cost of a starter home. Still, $10,000 a year for a four-year public school is a lot of money.

Another option is to get your pre-requisites, such as English, Social Sciences, Western Civ and Math courses done at a two-year college. Let’s math again. If you complete 60 hours at Community college, you’ll pay an average of $135.09 a credit and $8,105.40 total. A little over $4,000.00 a year, and a savings of 60% off the four-year public university option. For many families, this is a wise decision.

Even more wise, is to “cash flow” or pay for tuition in cash each semester. With a full-load averaging 15-16 credits, each semester would cost about $2,161.44. Add books and fees, and you are still probably coming in at about $2,800.00 a semester or $5,600.00 a year. If you start working this fall, you need to save about $467.00 a month to fund your first full year at a two-year public school.

So, Why Cash?

Using Loans increases that cost per credit once interest is added! Looking again at the cost per credit hour, each credit costs more, when you take out a loan to pay for it. As of the article published in January 2018, the Department of Education has interest on federal Direct Loans at 3.76% APR. That is an effective rate of about 20 percent over 10 years. Adding that interest to each credit changes the cost:

• A two-year public-school credit at $135.09 would cost $162 over 10 years ($27 in interest)
• A four-year public-school credit at $324.70 would cost $390 over 10 years ($65 in interest)

Mathing again, the 60 hours at Community College can grow to $9,720.00. An increase of $1,614.60, then interest is also added on the books and fees if you have a loan for each semester to cover those as well! Think how great it would be to finish college without debt. To make that investment in yourself in cash, it takes planning. A combination of work and saving, living cheaply or at home, and getting any shortfall through scholarships (try My Scholly) should all be part of your smart education investment. Enjoy your senior year!

 

The federal government stopped mailing annual Social Security statements to everyone back in 2011. They are still available, but you have to use the internet.  I don’t mention this earnings statement because I believe the Social Security program is solvent, or have a prediction whether it will be fixed, or even necessarily believe any “projected benefits” will ever be received by the time I am ready to retire. What the statement will tell you is how much you have earned each year, as reported to the Social Security Administration, since you started working and reporting income to the SSA.

We can go back (waaaay back) to 1990 and look at the average net income earned by average Americans over the last 26 years. The SSA reports $20,172.11 in 1990 and $46,640.94 in 2016. Meaning that for average Americans, we take home more than double each year now than we did in 1990. On the bottom of the SSA statement there is a number- your total earnings to date. In other words what you have earned over your working life.

If you worked and earned an average income from 1990-1999 you would have brought home about $209,056.00. From 2000-2009 about $351,192.00. And from 2010-2016 about $304,037.00.  So, if we added the average net income earned and taken home by average Americans from 1990-2016, we get a mind blowing $864,289.00.  Well over three quarters of a million dollars. And many people earn well above that annual average.

So, what do we KEEP? According to the latest statistics? Not much. Some of us have a 401k with auto withdrawal and a match at work. But, around 20% of those with a 401k have loans against the accounts taken to cover financial emergencies!  Savings accounts are in bad shape as well, in 2017 about 57% of Americans have less than $1,000.00 in savings.

Where is it all going? To service debt. At various interest rates, for various reasons. Average Americans are paying their dollars to cars, homes, student loans, credit cards and personal loans. Excluding a mortgage payment, we send creditors a whopping $1181.00 per MONTH or $14,172.00 a year. Many Americans send much more than that to others.

It’s eye-opening, or at least it was for us. Debt is taking our income, payments that we can do other things with. Like save. Or pay cash for cool things. Or support organizations we feel strongly about. If you are ready to take back your income, you can start anytime. Even if you are still paying oodles of interest and have $1.87 in an IRA right now, its never too late to start. Its never too late to grab a hold of your hard-earned income with a plan to take back your earnings from the current situation.

If your income is flying away the moment after payday, it’s time to make it behave. Make a monthly budget and write down where each dollar goes. Give it a job. Be the smart boss over your hard-working money. Your money likes to have a job. “This month you little dollar, yes YOU, will pay the water bill! YAY!”. If you want an easy to use, free online budgeting tool, I recommend Every Dollar.  Money stress really begins when you run out of dollars before you run out of jobs for them to do. Run out of jobs and reassign your money where you want it to work!

graphic from www.indianapublicmedia.org

 

 

Ahhh, student loans. The loans for higher education that about 44 million borrowers owe at an outstanding balance totaling a staggering $1.48 trillion. That is higher than our total US Credit card debt! But national statistics aside, where student loan debt looms over the average family its personal and distressing. The average student loan debt in 2017: $37,172.00! I know, I know, loans have enabled many people to go to school who couldn’t afford it, but nobody foresaw this mess! College costs exceed the cost of inflation! Lots of people don’t finish…

Many students take the loans without really counting the future price of carrying this type of debt. And for those who do not graduate? Well, your loan for the entire semester was disbursed to the school- and you owe it. Student Loan debt is a huge stressor for new college grads, with the monthly payments making it hard to get a car or save for a home .

And there are pretty scary steps that servicers can take when you owe and don’t pay, including garnishing wages and social security checks without a lawsuit. And getting rid of these obligations is not as easy as some others because these loans are typically not dischargeable in an average bankruptcy (for now). Finally, while there are currently NINE different payment plans for federal student loans, some stretch out the terms of the debt for 25-30 years. That is a mortgage!

The only way to get rid of these loans is to have a plan and pay more than the monthly payments. These guys need to be attacked with a vengeance. I mean, who wants to have an education debt for 10-25 years? Or have a high debt to income ratio on their credit report? Yeah, credit reporting includes the total amount of the loans and any balance increases accruing monthly. There are real dangers in these high balances on reports for people who have security clearances or must have a background check for employment. But where to start?

These steps are for federal student loans. For private loans, contact your lender.

First, get your loan balance, monthly payment, status (for each if you have more than one), and type of loan from the National Student Loan Data System (NSLDS). https://www.nsldsfap.ed.gov/nslds_FAP/ Note that there are several types of loans. Federal Family Education Loan (FFEL) and Direct Loans are two common types taken by students, and Parent PLUS loans by parent borrowers. The type of loan is important because not every loan type is available for all payment plans. It’s complicated.

Second, if you have multiple loans over several years, listed as “Loan 1,” Loan 2,” etc. they will be listed by amounts and dates of disbursement. You may benefit from consolidation of the outstanding loans into one or two. Often Unsubsidized and Subsidized are consolidated separately. Subsidized means Congress pays the interest while you are in deferment or forbearance, so they accrue interest differently and have a different character than unsubsidized, where interest accrues immediately upon disbursement. There is a limit to the number of consolidations you can do, and the credit agencies will report it as a “new loan.” This will likely affect your credit score, if you are worried about your FICO.

Third, check out the federal loan “repayment estimator” to look at the payments that may be available. https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action.  CAUTION some plans are based on your loan balances, some are based on your current income and go up in payment every few years, and some require entrance into a program that you must requalify for each year or your loan converts to the “10 year standard plan” with the highest monthly payment. Also, for some programs, the interest will automatically “collateralize” or transform into “principal” added to the loan… and interest then grows on the new principal. READ THE FINE PRINT.

Again, the best way to get out of the student loan mess is to get serious about kicking student loan debt out of your life. Payments above and beyond the minimum are going to make a dent faster than just treading water with monthly payments. I firmly believe no one should be in debt for 25 years to earn a college degree. Seriously, read that again. In debt for 25 years to earn a college degree. But before you can start to make plan, you need to know your “enemy.

https://studentloanhero.com/student-loan-debt-statistics/

ii  https://www.debt.org/students

iii] https://www.cnbc.com/2017/10/17/student-loans-take-a-mental-toll-on-young-people.html

The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from The Law Office of Dawn K. Kennedy or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.