Student Loan Blog : bankruptcy

Student Loan Default Rate On the Rise

Student Loan Girl — Mon, 20 Apr 2009 23:02:00 GMT

Weighed down by job losses, limited job availability, and lower salary wages, college graduates — who leave school owing an average of $22,500 in student loans — are defaulting on their federal student loans at the highest rate since 1998 (“In Grim Job Market, Student Loans Are a Costly Burden,” The New York Times, April 18, 2009).

“When it comes down to making your student loan payment or buying gas to go to work, it isn’t a difficult decision to make sometimes,” said David Clark of College Assist, a national guarantee agency that helps its borrowers stay current on their college loans (“Student-Loan Debtors Get Breaks,” The Denver Post, April 12, 2009).

Student loan borrowers who fail to pay on their federal student loans could have 15 percent of their wages garnished, could lose their state and federal tax refunds, and could lose a portion of their Social Security benefits. And many borrowers have learned that, unlike other types of unsecured loans, student loans typically cannot be discharged in a bankruptcy filing.

But borrowers may be able to avoid taking the drastic step of filing for bankruptcy or avoid having the government seize their money by working out a repayment resolution with their lenders, Clark said.

“Once we can get someone on the phone, we have a 90 percent rate of curing an account and keeping it out of default,” he said.

Federal Student Loan Repayment Options

Deferment or Forbearance. Borrowers can postpone their student loan payments for three years if they become unemployed or if they provide proof of economic hardship. In deferment the government pays the interest on borrowers’ subsidized federal loans, but in forbearance borrowers are responsible for any interest that accrues on all of their federal student loans.

“Students may not fully appreciate just how much [deferment or forbearance] increases the size of the loans,” said Mark Kantrowitz, publisher of the financial aid website FinAid.org. “That’s why deferments and forbearances should mainly be used as a method to solve a temporary problem.”

Extend the terms. Graduates can extend the terms of their loans, thereby lowering their monthly payments, although in doing so they could ultimately pay double the interest what they would have originally paid. Graduates can switch back to their original loan terms at any time.

Income-based repayment. Beginning this July, eligible federal student loan borrowers can enroll in an income-based repayment plan that will limit their monthly loan payments to 15 percent of their discretionary income — income that is above 150 percent of the poverty line — and that will forgive borrowers’ remaining loan balances after 25 years of repayment.

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MyRichUncle Stops Making Student Loans, Files for Bankruptcy

Student Loan Girl — Thu, 19 Feb 2009 00:06:00 GMT

MyRichUncle, the student loan company that “caustically ridiculed the financial ties between colleges and student loan companies” has filed for Chapter 7 bankruptcy, The Chronicle of Higher Education reports (“Student-Loan Industry’s Caustic Rebel Now Cries Uncle,” Feb. 9, 2009).

Unable to secure funding to issue new student loans and unable pay its creditors, the student loan lender, with assets of $11 million and liabilities of $45 million, said it “has suspended all business operations.” But the bankruptcy filing could threaten the financial health of MyRichUncle’s subsidiary Embark, an online college planning company that MyRichUncle purchased from The Princeton Review in 2007.

Despite receiving increased financing from MyRichUncle to launch a new website this year, Embark, which sells online admissions software to hundred of colleges, has laid off 22 employees and has struggled to sell its wares to admissions offices “given MyRichUncle’s widespread alienation of financial aid officers,” Inside Higher Ed reports (“Collateral Damage in Lender’s Demise,” Feb. 18, 2009). Some of Embark’s competitors have even been murmuring to the company’s customers that Embark’s financial future is in danger.

MyRichUncle helped spark the widely-publicized probes of the student loan industry by New York Attorney General Andrew Cuomo that investigated the business relationships between private third-party lenders and colleges and universities.

The investigations revealed that colleges and financial aid officers received both payments and perks from lenders in exchange for placement on schools’ preferred lender lists, and that student loan lenders engaged in deceptive marketing practices, and resulted in the creation of a lender code of conduct that prohibits such practices.

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All Dried Up: Student Loan Provider Files for Bankruptcy

Student Loan Girl — Thu, 18 Dec 2008 22:11:00 GMT

Education Finance Partners, a San Francisco-based student loan company, has filed for Chapter 7 bankruptcy protection, saying it has less than $1 million in assets and between $10 million and $50 million in liabilities (“Student Loan Company Files for Bankruptcy in Austin,” The Austin American-Statesman, Dec. 18, 2008).

According to the bankruptcy filing, the student loan company owed the New York attorney general’s office $2.5 million, an amount Education Finance Partners had agreed to pay in order to resolve an investigation that accused the lender of offering more than 60 schools monetary compensation in return for placing the lender on preferred lender lists.

Education Finance Partners also owed $1.2 million to the Brazos Higher Education Service Corp., a nonprofit student loan services provider, for pending arbitration in a lawsuit filed in California as well as $750,000 to both Morgan Stanley and NBF International Holdings Inc.

The ailing student loan lender has been crippled by the credit crisis for months. Unable to secure new financing, the lender was forced to shut down its main office in San Francisco as well as a second office in Austin, Texas in September, a month after it announced that it would stop making student loans and that it would have to lay off 113 employees.

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Debt Collection Agency Adding Hundreds of Jobs

Student Loan Girl — Tue, 18 Nov 2008 17:21:00 GMT

Premiere Credit of North America, a debt collection agency based in Indianapolis, is a bit of an anomaly in today’s down economy — it is thriving at a time when many businesses are cutting back their workforces and many debt collection agencies are losing money to cash-strapped consumers who can’t pay up.

Premiere Credit, which specializes in collecting unpaid student loans and government debt, has been performing so well that it’s looking to add nearly 300 employees to its 250-person staff, reports Erika Smith of The Indianapolis Star (“Debt Collector Premiere Credit to Expand, Add 300 Jobs,” Nov. 13, 2008).

To accommodate its growing business, Premiere Credit is also preparing for a $4 million expansion of its headquarters and is planning to open a second operations center (“Indianapolis Debt Collection Firm to Expand,” Chicago Tribune, Nov. 12, 2008).

The company, which manages more than 700,000 accounts valued at more than $1 billion, is scheduled to receive about $2.5 million in performance-based tax credits from the state, as well as up to $200,000 in training grants.

Student Loans Make Up 40% of Company’s Debt-Collection Business

Premiere Credit CEO David Hoeft attributes the company’s growth to its four-year contract with the U.S. Department of Education, which currently accounts for 40 percent of its business. While the number of delinquent college loans isn’t growing — the student loan default rate has remained steady at 5 percent over the last few years — Premiere has snagged a greater proportion of collection work, Hoeft said, and, with the help of an expansion to its Education Department contract, Premiere’s student loan debt collection business is expected to grow even more.

Debt collectors have a much easier time collecting government-backed student loans than unsecured debts like credit cards, which are not tied to an asset. Federal student loans can forcibly be repaid in a number of different ways and debt collectors have more legal leeway to track down debtors.

“There’s no statute of limitations on collection efforts. [Federal student loans], more often than not, can’t be discharged in a bankruptcy,” Smith writes. “Collection agents can garnish wages, tax refunds and Social Security payments, and they can access a federal database of new hires that makes it easier to find employed people who can pay.”

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Student Loan Crunch Affected Some Private Schools, But Crisis Largely Avoided

Student Loan Girl — Tue, 28 Oct 2008 20:59:00 GMT

The student loan crunch that began this past spring failed to become the widespread crisis that experts predicted, according to the results of a survey by the National Association of Independent Colleges and Universities. Still, the NAICU reports, some of the private colleges surveyed have had to scramble to help their students get the loans they need to pay for school (“Student-Loan Crunch Sets Back Some Private Colleges, but Most Manage,” The Chronicle of Higher Education, Oct. 22, 2008).

More than 500 NAICU member institutions responded to the survey, including 450 private colleges and universities that participate in the Federal Family Education Loan Program, the federal student loan program that relies on private, third-party lenders to provide the majority of federally backed loans to students. Of those schools, 85 percent found that their students were dropped by at least one private lender, and 27 percent of the schools said that their students had struggled to find a replacement lender.

Schools reported that their students who weren’t able to get a private student loan often had to take time off from school, drop down to part-time status, work additional hours, or use a credit card to make up the difference in their college expenses.

Three-quarters of the colleges surveyed saw an increase in demand for student aid, but 67 percent reported no negative impact on their enrollment. This is “a good sign,” said David Warren, president of NAICU, even though he speculates that many families may had not yet felt the full impact of the downturn when they were surveyed on Sept. 10., only days prior to the Lehman Brothers bankruptcy filing.

“On the one hand, we avoided anything we’d call a crisis,” Warren said. On the other, we see some clear signals of what may be in store for families right on the edge.”

Only 18 percent of respondents said they had fewer returning students than anticipated, while 19 percent reported having a smaller freshmen class than expected, which came as a surprise to Sarah Flanagan, NAICU’s vice president for government relations and policy. “I thought our sector was going to be OK.”

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Bank of America Backs Out of Private Student Loan Business

Student Loan Girl — Sat, 19 Apr 2008 13:03:00 GMT

On April 17, Bank of America Corp. notified student-loan packager First Marblehead Corp. that it would no longer offer private student loans, focusing instead on providing federal student loans. Bank of America’s announcement comes amid increasing unsteadiness in the federal student loan market, where nearly 50 non-government lenders in the last six months have suspended their federal student loan programs.

Bank of America exercised its right to terminate its agreement with First Marblehead after The Education Resources Institute, the Boston-based nonprofit that guaranteed the loans packaged by First Marblehead, voluntarily filed for Chapter 11 bankruptcy protection on April 7, 2008.

Bank of America’s decision delivered yet another financial blow to First Marblehead, whose shares have already been on a downward spiral over the past few weeks, tumbling 37 percent on April 8 alone, the day after TERI filed its bankruptcy petition.

Shares in First Marblehead fell another 17 percent to $3.37 on the heels of Bank of America’s announcement, with the stock down nearly 91 percent over the past year. The loans originated by Bank of America accounted for about 15 percent of First Marblehead’s total revenue for the 2007 fiscal year, according to a Boston Business Journal article (“First Marblehead Loses Major Customer, Revenue Source,” April 18, 2008).

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