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Bryan P. Keenan

Debt relief of student loans in state of confusion

Over the last six months, the Department of Education and the Obama administration have attempted to create a web-based portal for those with student loan debt to help them better manage their loans and make complaints against servicers. But at this point the portal only gives general advice about managing your student loan debt. Due to the inadequacy of the portal, the Consumer Financial Protection Bureau has launched its own initiative.

The student loan industry is confusing even when loans are not delinquent.  Student loan servicers are not always the same company that loaned the money. Servicers manage accounts for the lenders and operate essentially as a collection agency for the lender. One of the major servicers is the Pennsylvania Higher Education Assistance Agency. Once the lender engages a servicer, the borrower is now one step removed from its original agreement with his or her lender.

The problem with the middle man is that the servicer may have different goals than either the lender or the borrower.  Most of these services are paid a flat monthly fee for each account they service. So there is no incentive for the servicer to spend the time with each individual borrower to actually help them achieve debt relief with repayment plans. In fact, the arrangement actually provides a disincentive: the more time a servicer spends with one borrower, the fewer borrowers they can speak with in a day. When they are paid by account rather than result, the goal is to contact as many as possible.

One of the biggest problems with student loan debt is that it is generally not dischargeable in bankruptcy. But the servicers' unwillingness to spend the time with a borrower to make a feasible payment arrangement may actually help force the borrower into bankruptcy as he or she has to continue to try to pay high student loan payments as their other debt accumulates.

Some are comparing the state of student loan debt to the recent mortgage and foreclosure crisis when homeowners tried to negotiate with their mortgage servicers, to no avail.  Student loan debt reportedly totals over $1.2 billion in the U.S., second only to mortgage debt.

When the servicers won’t help, a bankruptcy attorney may be able to provide advice on how to manage your student loan debt in the context of other dischargeable debt.

Source: Main Street, “Student Loan Servicers Should Show a Good Faith Effort Toward Better Outcomes, Says CFPB,” John Sandman, May 18, 2015

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Bryan P. Keenan & Associates, P.C.

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