Time for a Break

We find ourselves at the end of 2012, and once again it has been an interesting year. This marks the end of the first full calendar year for the Financial Aid Corner. Thanks to all the readers for your continued interest! Financial Aid isn't always the easiest information to explain, but I hope that you have learned as well as been encouraged to give thought to things that you may not have considered before.

The campuses are taking a break from classes for two weeks and our Arnold campus is gearing up for their January start. As we take this time to visit with family, to enjoy traditions, and to take some time off, our hope is that you have a fun, safe holiday season.

The Financial Aid Corner will return with new information, rules, news, and many other elements of the FA world next month. See you then!

New Student Loan Repayment Rules for 2013

There is news in the world of federal student loans. There are changes to the income-based repayment (IBR) plan and the income-contingent repayment (ICR) plan. Some of the information is broad for right now, but it looks that for the IBR, there will be new rules in documenting income. For the ICR, new rules will ease the documentation requirements as well as better clarifying parts of the plan. These are to begin July 1, 2013.

Another big change in repayment is a new IBR option: the Pay As You Earn repayment plan. This plan will limit the student's payments to 10% of the difference between their adjusted gross income and 1.5 times the poverty level for the area the student resides. This plan will also reduce from 25 years to 20 years the amount of time a student must make payments under the plan before the remaining loan balances are forgiven.

This Pay As You Earn repayment plan has some conditions. First, the borrower's loans must be held under the Federal Direct Loan Program; second, the borrower must be a new borrower as defined on or after October 1, 2007; third, the borrower must also have received loan disbursements on a direct loan on or after October 1, 2011; and fourthly, the borrower cannot repay under this plan any parents PLUS loans or any consolidation loans that include a parents PLUS loan.

As I understand it, if a borrower's payments while in this Pay As You Earn plan in the first three years do not satisfy the accruing interest and as long as the borrower is repaying a subsidized loan, then the Department of Education will not charge interest above the amount of the borrower's payment on that loan. Naturally, the borrower will have to submit income information for this plan, and like the regular IBR plan, the borrower will have to resubmit most recent income information.

There is no concrete date set yet for the Pay As You Earn repayment plan because as soon as the guidance is published, then the Department of Education will implement it.

Can a Student Discharge a Loan through Bankruptcy?

Can a student discharge a loan through bankruptcy?

The answer is (like everything in financial aid) somewhat complicated. In 9 out of 10 cases, the answer is no. But there is still that 1 case when it's possible. How? There are many ways, and it really depends on the state, the individual court, and the individual judge. However, what's stated here is the most often scenario.

Firstly, you have to look at the wording. In 2005, the exception to discharge was extended to include all education loans (private and federal). A debtor in Chapter 7 or Chapter 13 cannot discharge 1.) an educational loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or 2.) an obligation to repay funds received as an educational benefit (grants, scholarships); or 3.) any other educational loan that is a "qualified education loan" UNLESS excepting such debt from discharge under the above would impose an "undue hardship" on the debtor and the debtor's dependents.

That's the key: they have to prove "undue hardship", and that's rather difficult. So, what's the process?

1. The debtor files a bankruptcy petition (either Chapter 7 or 13).

2. The creditor then has to establish the existence of the debt and that it falls into one of the nondischargeable categories.

3. The debtor files an adversary proceeding and how to show an "undue hardship".

How does one prove "undue hardship"? The most often used test is called the Brunner Test. The Brunner Test is a 3-part test where the debtor has to prove all three of the following:

1.) That the debtor cannot maintain, based on current income and expenses, a minimal standard of living for himself and his dependents if forced to pay.

2.) That additional circumstances exist indicating that the current state is likely to persist for a significant portion of the repayment period of the student's loans.

3.) That the debtor has made good faith efforts to repay the loan.

The first part of that test is highly subjective and will change from court to court. In some cases the debtor will say "cigarettes are too expensive" and the court will tell him to quit smoking. On the other hand, some allowed expenses could be internet and phone. In some cases, cable is out of the question, but in other cases cable is fine because it isn't satellite. The second part of the test has to show that whatever the issues are, they are out of the debtor's control. Things such as a person having diabetes and resulting blindness was enough, as was asperger's syndrome with osteoperosis. Switching to a lower paying job by choice won't work because they will say you aren't maximizing your potential. The third part of the test has to show the debtor tried to repay the loan but couldn't because of the issues in the other parts. Trying alternative payment plans looks good, as does attempts at legitimate income maximizing and minimizing expenses.

Apparently 5 of 10 cases the debtor is denied discharge. 3-4 of 10 are close but don't quite have what it takes. And then there's maybe 1 legitimate case. It is very difficult to prove all three prongs of the Brunner Test, which is why they usually don't succeed. There have been attempts to change this setup, but it's unlikely it will change for awhile.

In the end, it's much easier and better for the student credit-wise to just work with their student loan servicer.

A Great Budget Calculator

One of the things that has been mentioned several times on this blog, and will continue to be mentioned is the need for students to use budgets to assist them in their daily lives. What better way to know how much one can spend and live within their means than a budget? But how do they look? And aren't they hard?

No they aren't. Here is a link to an interactive budget calculator tool. It is available from the Mapping Your Future website which is very good for helping students form an objective manner on everything from repayment to financial literacy. In this case, they are assisting with living within your means.

If you don't already have a budget or understand how it works, use this tool and do some reading into how it works. Faculty at your campus will also be willing to assist you with understanding budgets. In the meantime, use this tool to figure out your budget.

Remember: the main reason why a budget is especially necessary for a student is so that you know how you can afford your student loan payments.

What to Expect in FA for the Next Term

Now that the elections are over, what does the future hold for our sector of higher education? 

The results of the Presidential election are well-known, but what happened with the Senate and House? In the Senate, 6 Democrats, 3 Republicans, and 1 Independent retired. There were 7 Democrats and 3 Republicans elected, so that brings the total count to 53 Democrats, 45 Republicans, and 2 Independents (both of which will caucus with the Democrats). In the House, 14 Democrats retired and 11 Republicans retired. New members elected were 43 Democrats and 36 Republicans, which brings the count (as of last week) to 195 Democrats, 233 Republicans, and 7 undecided.

In the Senate Committee on Health, Education, Labor, and Pensions, Democrat Tom Harkin (who's a huge supporter of Gainful Employment and the destruction of our sector) remains the chairman of the committee. The ranking Republican member is Lamar Alexander, who's a big supporter of lessening regulations (such as Gainful Employment), so there may be some clashes in this committee in the next couple of years.

In the House Committee on Education and the Workforce, Republican John Kline remains chairman. Also on the committee is Republican Virginia Foxx. Both Kline and Foxx have voted repeatedly against anything relating to Gainful Employment, including a bill that was to de-fund the Department of Education from enforcing GE. Unfortunately, that bill died when it hit the Senate.

What's the President's agenda in education for the next four years? 1.) wants to cut the rate of tuition increases by half. This seems to be more of an issue for (believe it or not) public schools. 2.) pell grant support is going to continue. Some want to eliminate the pell or at least reduce it, but he wants to keep it at nearly all costs. 3.) continue to support community and public colleges as being the places for students to attend, so he's willing to dump more money in their systems to assist with that, as well as reward non-profit organizations for assisting in that goal.

What's the Department of Education's agenda for the next four years? 1.) Secretary Duncan wants to stay on. He does not support our sector and hasn't tried to hide his dislike of us (just like Sen. Harkin). 2.) continued pursuit of Gainful Employment. Just because they were shut down once doesn't mean they aren't going to try again. The stalling of the Department on the court ruling was to push it passed the election to see how to continue. Now that they know, they will continue it. 3.) continued enforcement actions with assistance from other agencies such as Department of Justice and Consumer Financial Protection Bureau. 3.) begin looking at the "value" of the education that the student is receiving. There is no word yet as to how that will be defined, but there will be pressure on all schools as to making sure the students receive a "valuable" education. 4.) more rules in the areas of fraud, teacher preparatory programs, academic progress, and accounting for federal funds. 

What education legislation is on the agenda? 1.) Elementary and Secondary Education Act due for reauthorization. 2.) Individuals with Disabilities Education Act due for reauthorization. 3.) Workforce Investment Act due for reauthorization. 4.) and most importantly the Higher Education Act due for reauthorization. 

What other hot topic items will we be dealing with? 1.) veterans education programs, 2.) FY 2014 pell grant shortfall, 3.) federal budget, 4.) students' levels of indebtedness, 5.) reasonable and affordable student loan payments, 6.) increased regulations and enforcement by new entities (such as the Consumer Financial Protection Bureau). 

So what should we expect? As SNL put it: "Four more years!... of gridlock!" The House is favorable to our sector, but the Senate, President, and Dep of Ed are not. The House will continue to try to assist, but will be vote down. The Senate will continue to hinder, but get vote down. The way around the Senate and House gridlock (which we've seen already, and should expect more of) are two ways: Presidential Executive Orders and Dep of Ed's regulations. Congress will continue to propose legislation, but they will be hindered by the lack of money. I've been told to expect the war between proposed legislation and the lack of funds to actually enable it, but that doesn't mean nothing will get through.

Only two more years until midterm elections! Who knows what'll change by then!

Return Pell Funds for 2012-13

Not too long ago, the Dept of Ed announced that students were able to return unnecessary portions of their Pell Grants for future use. The main reason for this is because of the Lifetime Eligibility reduction. The thought was because students can only use a certain amount of Pell in their lifetime (now 600% instead of the old 900%), they may want to return unused portions for future use. Of course, it's not as simple as it sounds.

1. They can only return funds that have been disbursed in the current award year, so nothing from previous award years. If the disbursement hasn't been made, they can decline a disbursement to be made.
2. They have to return it to the school, and then the school will refund the money.
3. The students has to submit signed statements to the school, saying that they understand that the money they are refunding (or declining) is going back to the government, and also acknowledging that the Pell Grant funds may not be available after the award year is over. They may not be available if their Pell Grant awards change. Since the Lifetime Limit is according to percentage rather than amount, if your full pell is $5550 as opposed to a full pell of $3000, a quarter disbursement would be $1850 and $1000 respectively, but they are both 33%.

The Dept of Ed has said that they won't question students who choose to do this, as long as the necessary paperwork has been submitted. This is effective for the 2012-13 award year, but there is no word as to if the 2013-14 award year will also fall under this.

We'll see how many people actually do this. If you think/know that you're going to receive a higher Pell Grant in the following year, and you don't want to burn your eligibility on a small Pell Grant, then that could be a strategy if you have something else to supplement the Pell you are declining. On the other hand, I don't know many people who will turn down grant money from the government. Just remember that it's an option.

When Returning from a Leave of Absence

The Leave of Absence (LOA) is simply a break in a student's enrollment. The FSA Handbook and CFR are vague on some aspects of the LOA, but are quite specific on other aspects. But what happens when you come back from the LOA?

Well, you should know certain things. You can't get charged while on the LOA. If you took the LOA at the beginning of your semester/quarter, then when you return you will just get charged for your next enrollment period. If you were in the middle of your semester/quarter, then when you return, interesting things can happen. You will not get charged for your next enrollment period until you complete it (since you started one but didn't complete it). Any FA that has already come in before the LOA began will not come in again until you complete the enrollment period, and any FA that hasn't come in yet can come in then. This is why if you have money coming to you, and you received it before the LOA, then there's a good chance you won't get more until you complete the enrollment period that you return for. Each situation is a little different, so you need to check with the FA office to see how it affects your situation.

The other issue is your academics. For term-based schools, you must be allowed to complete the coursework that you began before the LOA. Most people interpret this as you should be in the same classes as when you took the LOA. For nonterm-based programs and clock hour programs, you don't have to complete the same coursework you began before taking the LOA. In those programs, you aren't necessarily (depending on the school) in regular enrollment periods, so you are eligible for funds near the beginning and at the halfway point. When you hit the halfway point, then you are eligible for the next disbursement. Because of this, you take your hours or do your coursework remaining until you hit the halfway point.

The Leave of Absence is a strange and sometimes complicated situation and some schools won't do them for that reason. They are hard to explain, and they affect not only your FA, but your academics, your graduation date, and the possibility of your having to be dropped in some cases. In the end, if your school does offer LOAs, you should only consider it as a last resort, and even then make sure you understand the consequences of taking an LOA.