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Who is Helping Consumers With Defaulted Student Loans?

posted by David Lander

Clearly, the biggest surprise in consumer borrowing since the crash has been the explosive expansion of student loan debt. It has surpassed both auto lending and credit card lending. And, since it ties with Payday Lending and pre-crash sub-prime mortgage lending for the thinnest underwriting there are defaults aplenty. 

Consumer advocates are rightly urging the Department of Education to provide simpler and clearer paths forward for consumers with student loans in default but many people still need a helper.  As defaults in mortgage loans and on credit card loans have fallen, providers who live on the profits of counseling people who default on those loans have turned their attention and their advertising and marketing to consumers who are in trouble on their student

Since bankruptcy offers very little to this crowd, and sometimes their social security payments might be offset, and collectors can be very aggressive, people in trouble on their student loans can be desperate for help. Hopefully, a greater percentage will be able to fix their problems themselves with clearer Department of Education guidelines and procedures; still, the National Consumer Law Center issued a well-advised Caution a few years ago about the folks who were purporting to help. Similar to mortgage loans, the world of government student loan defaults is many times more complex than the world of credit card defaults. 

Even in that simpler world of credit card defaults an expert such as then Professor, now Senator Elizabeth Warren years ago warned consumers to stay far away from all consumer credit counseling agencies. here Now these counseling agencies have stepped in in a big way to purport to help those with student loan defaults. Several of the largest providers piloted an effort which now has expanded to the National Foundation of Credit Counselors.  here This effort is new so it is too soon to evaluate the results. Suffice to say the standards in the credit counseling world have not been high and there is a worry that this will be a back door approach to sell the student loan borrower a debt management plan, which remains a high profit item. 

All of this points out the larger problem. It is shocking and sad that there is not a college major in "helping people in financial trouble" (other than consumer bankruptcy lawyers); nor is there much of a professional job market for people who learn these skills and graduate. Forty years ago social work schools taught these subjects but that was largely abandoned. The good news is that the financial literacy education and the savings/i.d.a folks have made progress in both the college curriculum and the job market; that is great, but it does NOT provide a route for helpers of those who have already stumbled.  We have both an educational route and a career line for those who want to counsel people with problems related to child abuse, spouse abuse, domestic difficulties and alcohol and substance abuse, and many routes for those who want to provide financial counseling to consumers with money. The overwhelming number of consumers in financial trouble who do not choose bankruptcy seek help from the large phone bank providers who do not look or act at all like high quality human service providers. Although there are outstanding individual counselors, the pay and the various service restrictions and the methods of reimbursement and the people who run the large providers operate against traditional social service functions.  

It is a chicken and egg problem; it is hard to create experts if there are no jobs that pay for that expertise and provide a professional high quality social service setting; and it is hard to establish such a job line until there is a training ground. All of this requires an economic solution. F0r years the world of credit card counseling was well-funded by revenue from the debt management plan; the mortgage counseling world was government funded. Someone needs to step forward now and begin to build a network of helpers and raise standards and pay so that it becomes a high quality human service profession that can help. 


There are actually some recent developments with the Dept. of Ed that will increase the utility of bankruptcy.

First, through work in several of my cases in North Carolina and by NACBA more broadly, Ed. is going to allow Chapter 13 debtors to enroll in the various income driven repayment plans for the first time ever. This will allow bankrupt debtors to start down the path, still too long at 20-25 years for most, but 10 years for Public Service debtors, of cancellation or forgiveness. Previously, Ch. 13 debtors student loans were placed in limbo during the length of the plan with interest nonetheless compounding. There are still issues to resolve with CH. 13 Trustees regarding unfair discrimination against other creditors in paying student loans under an IDR, but this is a small hurdle.

Even more interesting is the possibility of using 11 USC 1322(a)(2) and (3) to first modify the rights of the student loan claim holders and then to waive any default on those loans. This would allow debtors to propose a Ch. 13 plan that waived the default on the student loans, both opening up the IDR options and avoiding the 18.5% collection costs assessed through a consolidation or rehabilitation. There is considerable push back from both Ed. and the bankruptcy court on whether a waiver of default can be proposed without the consent of the lender, but more will be coming on that.

Your point strikes home to me. I don't do student loans because I don't have the subject-matter expertise, but I do a ton of medical debt and credit card debt and post-foreclosure deficiencies and general consumer debt.

There are, of course, very few "good guy" nonprofit credit counselors out there; but I was shocked to learn that even the few that there are, do not take into account basic consumer law insights like the statute of limitations. I had a client come in who had previously gone to a non-profit debt counselor (a "good guy" one that we sometimes refer people to), who advised her to get on a payment plan for a medical debt that was clearly beyond the statute of limitations. I mean, WTF?!?!?

So my legal aid agency is starting to fundraise for a non-lawyer position to do general debt and credit counseling, but the person will be trained by me (a consumer lawyer) on consumer law issues: statutes of limitations; how to spot FDCPA, FCRA, TILA violations for litigation; etc.

Your example is a perfect one of the many ways in which most of the helpers are far from "zealous advocates" for their clients. At one time the industry was even more tilted toward the creditors but vestiges of that era remain and there is a fundamental miss in the relationship with the client that continues to exist with most providers. In a perfect world the counselors would be sensitive to various types of legal problems and refer the clients to qualified lawyers when appropriate.

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