Tag: settlement

NJ Class Loans- Is Settlement an Option?

Recently, I posted a blog on a new law that allows for income based repayment plans for certain NJ Class loans under certain conditions. A step in the right direction but not a giant step.

At the same time, the Legislature passed another bill (S3149) which is entitled “An Act concerning the default and rehabilitation of NJ Class Loans…” Once again, less than the eye meets.

The Act defines what constitutes a default-failure to make an installment payment for at least 180 days if the loan is payable monthly or 240 days if loan is paid less frequently than monthly. That is an improvement. On the bulk of the loans, you have to miss at least 6 payments before HESAA (Higher Education Student Assistance Authority) can come after you.

The Act also states that a party in default can enter into a settlement agreement either pre or post judgment based (1) on the terms of the loan and (2) the borrower’s ability to pay. The request must be in writing. HESAA shall acknowledge receipt of the request within 15 days. Within 30 days of the parties coming to oral argument as to the settlement, HESSA will provide a written settlement agreement to be signed by the parties. I am skeptical about the ability of the borrower to actually negotiate terms with HESAA counsel. I would think that you submit your income and expenses to HESAA and they offer you a “take it or leave it” deal. However, if HESAA is operating in good faith, it should be better than the payment you could not afford Now, here is the key-if the loan is financed by the issuance of bonds, the settlement agreement cannot violate the terms of the trust indenture.

If the borrower makes 9 on time payments out of 10, the loan shall be considered rehabilitated and HESAA will report to the credit agencies that the loan is no longer in default. Note, if after rehabilitation, the borrower misses 6 payments, then the borrower is in default again. At that point, the borrower cannot rehabilitate again.

Historically, NJ Class Loans have been a difficult problem for borrowers. There was no right to an income driven repayment plan. More importantly, you could not consolidate or rehabilitate out of default as with federal loans. Finally, the attorneys representing HESAA were generally inflexible and aggressive. Why? I could think of a few reasons but I will focus on the fact that NJ Class loans are funded by bonds. And the bondholders need to get paid as per the indenture and not one penny less.

Think of that for a second. If HESAA allows income based repayment and many students with lower incomes take advantage of that program, then the chances are higher that at any given time there is going to be less money in the fund than is needed to pay the bondholders. Then, HESAA would be in default unless the Legislature bailed it out with general tax funds. It does not appear that the Legislature wants to have the taxpayers bail out student loan borrowers.

Once again, I am forced to the conclusion that S3149 is helpful but no panacea. That does not mean, however, that if you are in default, you should not at least take advantage of the offer for settlememt

Corinthian Colleges/Aequitas Capital Management, Inc.

In the late 1970’s and thereafter, the Higher Education Act (“HEA”) was amended to allow greater access to Title IV federal student loans for students attending “for profit” schools.  Most of these for profit schools provide vocational type courses and cater to lower income individuals who may or may not have graduated high school.  NCLC’s Student Loan Law refers to a statement to a Senate committee from a recruiter for a truck driving school in which he said the the only qualifications for getting enrolled with a student loan are that the applicant is breathing, over 18 years old, and has a driver’s license.

Now, not all non profit schools take advantage of the system and their students.  However, as the number of  for profit schools has grown over the last 35 years, the number of abuses in both the granting and collection of student loans has proliferated.  Given the fact that there is no statute of limitations on federal student loans, many unsuspecting young people, who were only trying to learn a trade, find themselves in a tough predicament.

In an attempt to curtail improper action, DOE instituted the 90/10 rule which requires for profit schools to demonstrate that at least 10% of the income comes from sources other than federal student loans.  That would include tuition payments and private loans among other sources.

Corinthian Colleges was a for profit school which was forced into bankruptcy in May, 2014 after DOE cut if off from federal loans because of a myriad of violations.  The Consumer Financial Protection Bureau (“CFPB”)  brought suit against Corinthian for deceptive loans and predatory collection practices involving a scheme between Corinthian and Aequitas Capital Management, Inc.  The scheme was an attempt to circumvent the 90/10 rule.  Corinthian jacked up tuition costs beyond the amounts that students could obtain from federal loans.  Corinthian then made a deal with Aequitas whereby Aequitas would fund private loans peddled by Corinthian to its students under the Genesis Loan program.  These loans had interest rates up to 15% according to an article published in the Washington Post.  https://www.washingtonpost.com/news/grade-point/wp/2015/10/28/government-watchdog-wins-530-million-lawsuit-against-for-profit-corinthian-colleges-too-bad-it-will-never-see-a-dime/  .  The loans were then sold back to Aequitas.  By adding these private loans, Corinthian (at least of paper) was able to comply with the 90/10 rule since private loans along with tuition count toward the 10% outside funding required by DOE for profit schools.

CFPB obtained a default judgment against Corinthian in the bankruptcy court.  In the meanwhile, the SEC placed Aequitas in receivership.  The CFPB sued Aequitas and recently announced a proposed settlement.  Under the terms of proposed settlement, approximately 41,000 students/borrowers may obtain up to $183.3 million in loan forgiveness.  The proposed settlement is subject to approval by the federal court in Oregon.

We will keep you up to date on this matter.  In the meanwhile, any ex-Corinthian students should actively pursue this matter to determine if their loans may be subject to forgiveness.