Let me preface this article by acknowledging that the student loan debt bubble looms large if tuition costs for American higher education continue to inflate, interest rates continue to rise, and nationwide unemployment remains high. However, in the here and now, there are many unacceptable cases where professional and graduate students are being stifled financially by a lack of necessary exemptions and a time consuming credit verification and appeals process. Specifically, due to limits on the maximum amount that can be borrowed per student per semester, and because of the required credit check approval process, many students now find themselves flipping over their couch cushions looking for spare change and begging their parents, friends, and relatives for money in order to survive during the gap periods and keep their credit scores from flat lining between the Spring & Summer and Fall & Spring semesters.
To illustrate, picture yourself in the following scenario faced by thousands of students for the past month and a half: You’re entering the summer before your third year of law school; you’re already $100,000 in debt (yes, that is around the typical cost of law school tuition and fees in 2012!) and you just accepted an unpaid internship with a government agency in order to gain practical experience and make connections. You’re taking classes at night to try and graduate on or ahead of time, and you depend on student loans to survive the day to day grind associated with gaining access to the legal profession. In early May you double checked your personal financial information and turned in your FAFSA application for your Direct Plus loan before the deadline (and had no issues arise during the previous aid periods).
As the end of May approaches, things have become increasingly tight financially. You receive word from school that your disbursement for the summer semester will not arrive until after the first of June, meaning that your rent and bills are going to be due despite not having enough money available from your previous loan to pay them (last year summer loans were disbursed just before the end of May). As the month draws to a close, you’re notified by e-mail that your application for a summer loan has been denied to due to a newly detected adverse credit issue. You immediately contact Equifax and discover that a billing company reported you to a collection agency because they failed to record a final payment for a phone bill you paid in 2010 (for which you have electronic record of), and in addition, Equifax discovers a bill for $65 that was never forwarded to your new address when you moved apartments last year (and that bill is now more than 90 days overdue and reported to a collection agency!).
You have Equifax run your credit again to verify the total amount you owe and are notified, after that you can cure the adverse credit issue through an appeals process if you can provide your school and Federal Student Aid (“FSA”) with written proof of your satisfaction of the debt owed. Unfortunately, not only are you already broke and not able to afford to cure your debt without your disbursement, but the credit appeals process takes another ten days due to unexplained delays on the part of the collection agency (a whole other important issue), meaning bigger late fees for rent and bills long with exponentially more borrowing needed for basic survival. There is just bad news all around (on top of interest rates rising to 7.9%), and it seems absurd that all this trouble is over a $65 dollar overdue bill that amounts to only 0.6% of the $10,000 that you’re scheduled to receive for the summer!
Under the current rules, an adverse credit report, no matter how insignificant the adverse debt when compared to the amount being borrowed, can prove disastrous to the life of an already broke and overworked graduate or professional student. This rough financial patch experienced by those without wealthy parents or relatives to bail them out as an endorser or “bank” is caused primarily by what I’m calling the “Limbo Period” for financial aid dependent students.
The Limbo Period begins just before final exams, in mid/late April to early May, and runs until loans for summer semester and/or loan qualified externships are disbursed. Because Spring loans are disbursed in mid to late January, and because the max amount has a limit that is designed to last into mid-May at the latest, it’s becoming extremely difficult to live a healthy life and have any money left over by the time final exams come around under the current system. There is no margin for error or accident, if you get sick or injured, then you are going into big time debt, and there is no chance of having money for rent if summer disbursements arrive after the first of June as they did this year.
What can be done to fix the current system? Consider the current language found on the FSA website, and then take a look at my proposed 10% exemption for students with adverse credit…
Current Language from the FSA website: “Credit check & endorser alternative… In some cases, you may also be able to obtain a Direct PLUS Loan if you document to our satisfaction that there are extenuating circumstances related to your adverse credit history.” (This is ambiguous language… what are extenuating circumstances and what does it mean to document something to the satisfaction of FSA?).
See full text: http://www2.ed.gov/offices/OSFAP/DirectLoan/applying.html
My Proposed Additions to the Current Language: For students who are notified by FSA that they have adverse credit but cannot attain an endorser, and do not have a written or electronically documented extenuating circumstance, funds shall still be disbursed as scheduled to each otherwise qualified student by their current institution subject to the “10% Rule Exemption for Students with Adverse Credit” as long as:
1) The total owed to the creditor or other agency by the student required to remedy the adverse credit is less than 10% of the amount sought from FSA for that student’s loan for the upcoming aid period;
Example: If a student is seeking to borrow $10,000 for the summer semester, then they will receive their disbursement on schedule if they owe less than $1,000 to the creditors whose reports triggered the adverse credit report.
2) The student provides evidence, in the form of a written or electronic document, of the amount owed to a creditor, and the evidence provided must demonstrate satisfaction of the 10% Rule; and
Example: Written or electronic proof of the amount owed being less than 10% of the amount to be borrowed by the student through FSA.
3) The student cures their adverse credit by the application deadline set by their institution for the subsequent financial aid period. Example: If the student in the earlier example is receiving summer Direct Loan money, and needs to pay off $850 in debt to a creditor in order to have their adverse credit status removed, then they have until the FAFSA deadline for the upcoming Fall Semester to cure their debt.
The purpose of this proposed change is to spark change so we can keep hard working graduate and professional students, who are most likely in unpaid intern or externships, from being evicted from their homes, swamped with giant late fees, and unable to afford groceries. These students should be focused on learning from their professors and serving their communities. The current adverse credit appeals process lacks any express language that addresses the month long Limbo Period. Therefore, it’s now up to FSA, with the assistance and persistence of the President and members of Congress, to act to implement a fix to this issue before it becomes a catalyst for a larger student loan crisis.
No comments:
Post a Comment