STUDENT LOAN LAW: FORBEARANCE

Is “forbearance” a form of probation for Student Loan Borrowers, or a prison sentence?
Is it a boon or a bust for Student Loan Borrowers?

By Kunal Thakkar

University of South Florida Intern for Constance d’Angelis, Attorney-at-Law

Note by Constance d’Angelis: Intern, Kunal Thakkar expresses his viewpoint about the subject of forbearance.

This blog is written by Kunal Thakkar, a university student intern who has avoided borrowing money to attend college. Mr. Thakkar’s interest was sparked when considering an approach used to delay payments on existing student loans, which can be fraught with hidden traps for the unwary. The article on forbearance stems from his review of the lawsuit brought by by the CFPB (Consumer Finance Protection Bureau) against Navient Corporation, formerly Sallie Mae (student loan debt servicer), discussions with other students and communication with the financial aid department of the University.

_______________________

The CFPB alleges that Navient Corporation, the nation’s largest student loan servicer has been under intense scrutiny for their unethical approach to student debt collection. According to the allegations set forth in the lawsuit, instead of providing borrowers with sound financial guidance, Navient only focused on growing their bottom line at the expense of adequately advising their student loan borrowers of available options under the law.

Forbearance is a tactic used by servicers, other advisors, and collectors of student loan debt to provide temporary relief from student loan debt payments. Forbearance gives borrowers the option to temporarily suspend payments without facing the consequences of defaulting. The catch however, is interest continues to accrue on the principal debt amount, compounding the size of the original loan. The accruing interest is added to and becomes part of the principal, which then bears more interest on the greater principal amount. This is termed: Capitalization of Interest.  Interest is charged on interest. And, this activity, forbearance is far from being a criminal offense, it has been used by various servicing institutions to provide borrowers with an option to avoid defaulting. However, the issue with Navient is the method by which they provide relief including the information or lack thereof given to the student loan borrower.

For example, there is a payment plan know as an income based repayment plan, also known as IBR. This form of repayment was introduced by the Bush Administration and it allows student loan  borrowers to repay their debt based on a percentage of their “discretionary income.” Discretionary income is defined as the difference between the borrower’s income and 150% the poverty guidelines based on family size and state of residence (https://studentaid.ed.gov/sa/glossary#Discretionary_Income). This percentage was reduced by the Obama administration but is still in full effect today.

The grievance towards Navient by the Consumer Financial Protection Bureau (CFPB) is that the loan servicing company failed to inform student borrowers of their option to seek federal aid by means of IBR to assist in paying off their debt. Instead, the servicer quickly and easily granted the option of forbearance costing borrowers an additional $4 billion in interest charges from January 2010 to March 2015. Forbearance clearly being the more lucrative collection strategy because the servicer charges collection fees as a percentage based on the amount of the debt. Navient is also accused of failing to inform borrowers who were on an IBR plan of required renewal deadlines or dates. This failure caused monthly payments to shoot up hundreds and even thousands of dollars in some instances.

The problem isn’t forbearance, which is a perfectly legal servicing device. It is the act of either nonchalantly forgetting to remind borrowers of important renewal deadlines or intentionally avoiding giving borrowers the information.  And, in some cases never discussing the federal aid options available with borrowers, pushing forbearance on borrowers as the smart and simple course of action. This method of doing business allows Navient to keep stacking cash. Instead of pursuing a route of helping struggling borrowers, Navient just seems to be concerned with making more money, justifying the suit by the CFPB.

For attorneys and clients alike, a complaint can be sent directly to the CFPB. More information is available at http://www.consumerfinance.gov/students