Forbearance on student loans – interest continues to accrue but other collection stops. tax refund intercepts, collection calls/letters and garnishments cease during forbearance

Forbearance is not as helpful as deferment. During forbearance, interest will still accrue, but there is some benefit to forbearance on student loans because collection actions such as 1040 tax retur refund intercepts, garnishments and collection calls/letters will cease during a forbearance period.

On the issue of deferments, a distinction must be made. First, you must figure out what type of loan that you have, whether it is "subsidized" or "unsubsidized".

A "subsidized" loan, such as a Direct Student Loan, the government pays the interest during any deferal period, but in an "unsubsidized" loan such as some Federal Family Education Loans (FFEL), the loan always is accruing interest (thus no interest is paid by the Government on behalf of the student like in a subsidized loan during deferal) so any interest that accrues during the deferal of an unsubsidized loan is usually capitalized into the loan and added to the loan balance.

One important distinction is that even a loan in "default" may receive a forbearance, although it can take some arguing and pushing with the student loan agency to achieve the forbearance. Generally, though, once a loan is in "default" it is no longer eligible for "deferal", and "deferal" of a subsidized loan can be quite valuable. But just beause a loan is not eligible for deferal does not mean that it is likewise ineligible for forbearance.

FFEL loans have two types of forbearances, known as "mandatory" and "discretionary". The Direct Loan proram does not make this distinction.

The area of FFEL and Direct Loans forbearances is vast, and this post can only scratch the surface, however, note that both the FFEL and Direct Loan regulations provide for forbearances if borrowers are in poor health or have other ersonal problems that affect the ability o the borrower to make the scheduled payments. Forbearance for these reasons is discretionary under FFEL regulations. The forbearance is granted up to a year at a time under FFEL but there are no limits to the number of years this type o forbearance may be granted. While you are seeking one of these one-year discretionary forbearances, do not forget to ask for an "administrative" forbearance – generally with a few exceptions, the FFEL "administrative" forbearance is granted by discretion.

When seeking a forbearance, I would suggest that you do so in writing (even if the writing is to confirm an oral understanding of forbearance) by using a form available at the Department of Education’s website www.ed.gov.

Did Debt Kill Mozart? – Composer faced Garnishment of Half of his Income regarding May 2, 1789 loan & judgment – Owed Two Years’ Salary

The NY Times reporter Daniel J. Wakin reports on Monday, November 29, 2010, that famous composer Mozart died just two weeks after the entry of a judgment for twice his annual

income.

http://www.nytimes.com/2010/11/29/arts/music/29mozart.html

"When his [Mozart's] name was discovered two decades ago in a Viennese archive from 1791, it caused a stir. The archive showed that an aristocratic friend and fellow Freemason, Prince Karl Lichnowsky, had sued Mozart over a debt and won a judgment of 1,435 florins and 32 kreutzer in Austrian currency of the time (nearly twice Mozart’s yearly income) weeks before the composer died. …scholars have generally assumed that it concerned a loan connected with a trip the two men made to Berlin."

‘"It gives us a concrete picture of the misery level that Mozart lived with in the last two and a half years of his life,’ Mr. Hoyt said in a recent interview."

Peter Hoyt is a Mozart scholar and assistant profesor of music history at the University of South Carolina and serves as a program annotator and lecturer for the Mostly Mozart Festival in New York. It is largely believed that the loan from Lichnowsky to Mozart carried a 4.0% interest rate, and had been unpaid for two years.

Mr. Wakin reports that the judgment against Mozart called for the garnisheering of half of his salary. Lichnowsky is not known to have pressed Mozart’s widow Constanze for repayment following Mozart’s debt.

Did this judgment and looming garnishment contribute to the death of one of the world’s leading composers?

Bankruptcy relief is there for you… it might not have been as freely available to Mozart in the form in which it is offered to Americans…don’t let your debts impact your ability to care for yourself and your family.

Debt may have contributed to the death of the world’s finest musical mind….think about it. The world is so much worse off for the early and untimely death of Mozart.

"If true, the conclusion could add depth and texture to our understanding of Mozart’s anxieties over financial problems at the end of his life and of his reception during one of his last journeys."

“Trade School” Student Loans – Beware – High default rates, no collection statute of limitations, you can lose your professional license and yes, they will keep at it forever, even garnishing your old age social security

My friends, I really, really want you to think twice about student loans – especially those taken out at proprietary vocational trade schools. Here is why: An August 2009 U.S. Government GAO report noted a disturbing trend. (U.S. Gov’t Accountability Office, GAO-09-600, Proprietary Schools: Stronger Deparment of Education Oversight Needed to Help Ensure Only Eligible Students Receive Federal Student Aid (August 2009))

According to the GAO, four years into repayment, a whopping 23.3% of students at proprietary schools were defaulting upon federal loans, a higher rate than students at either public colleges, where 9.5% were defaulting, or private ones, where 6.5% were in default.

Student loans can be really, really damaging. The damage can extend forever. Keep checking/searching this blog for frequently updated student loan related posts.

Here are a few things you should know about student loan collections:

Most defaulted student loan garnishments are quite a bit different than say "normal" medical bill lawsuit garnishments – for starters, most student loan garnishments are limited to 15% of disposable income, which is more liberal than either a child support garnishment or a 25% normal creditor garnishment. While the differences between student loan garnishments and normal garnishments are too vast to fully explain here, I leave you with a few important points.

First, under the Higher Education Act and the Debt Collection Improvement Act of 1996, most student loans can be garnished without a normal lawsuit, judgment and writ/court order. This is a big difference – there is little chance for you to go to court to contest entry of the judgment on your defaulted student loan collection. The student loan garnishment just starts unexpectedly out-of-the blue.

Second, the exemption on the garnishable portion of wages is more liberal with student loan garnishments than with "normal" creditor garnishments. With federal student loan garnishments, the exemption amount is thirty times the minimum wage so you only lose the LESSER amount by which your income exceeds 30 times the current minimum wage or 15%. For example, if you have weekly disposable pay of $300.00, then you definitely get to keep $217.50 (30 times the current minimum wage of $7.25/hour, $300 – $217.50 = $82.50), but you don’t have to pay $82.50 weekly BECAUSE you get a “bonus” – since 15% of $300 is only $45 (.15 x 300 = $45), you only are garnished $45 instead of $82.50. What a deal!

Third, a 15% student loan garnishment will not freeze out other creditors, so if the Department of Education or some student loan guarantee agency or its collector is garnishing 15%, then at the same time Ford Motor Credit shows up with a repo-ed vehicle deficiency judgment garnishment, then 15% goes to the Department of Education and 10% of your net wage goes to Ford Motor Credit, up to a total of 25% garnished from your net pay.

Fourth, while a bankruptcy will usually not eliminate student loans (but note that you can seek a “hardship” discharge of student loans while in bankruptcy) you can usually temporarily eliminate student loan garnishments while in a Chapter 13 plan.

Fifth, student loans are awful – student loans can even garnish (offset) your social security benefits when you are old and retired (and perhaps even when disabled) and living on a fixed income.

Sixth, Washington law is very unfriendly with defaulted student loans. Even though you are being garnished 15% for the defaulted student loan, you can still lose your job/occupation license if you owe defaulted student loans – your professional license may be revoked for defaulted and unpaid student loans in occupations including but not limited to the following jobs: lawyers, accountants, architects, auctioneers, cosmetologists, barbers , manicurists, boarding homes, contractors, embalmers, funeral directors, engineers, land surveyors, escrow agents, birthing centers, poison center directors, poison center specialists, real estate brokers, real estate salespersons, landscape architects, water well contractors, plumbers, health professionals, real estate appraisers, fire system sprinkler contractors, private investigators, security guards, and bail bond agents.

Economy slowing down again, and Federal Reserve Bank is running out of traditional stimulus options says UCSC Economics Professor Carl E. Walsh

The economy is slowing down again despite interest rates being lower than ever: What is the government going to do next? Here is the answer, by NY Times Reporter Sewell Chan:

“The challenges the Federal (Reserve Bank) faces aren’t going to get any easier in the coming months,” said Carl E. Walsh, a professor of economics at the University of California, Santa Cruz. “The choices ahead are only getting worse as the economy seems to be slowing down.” Professor Walsh was quoted in the New York Times Thursday, August 12, 2010 edition, Section B1

Sewell Chan’s August 12, 2010 NY Times article introduces us to a new term, “Quantative Easing”, and says that after lowering short term interest rates, about the only thing that the Federal Reserve can do is to pursue a policy of “Quantitative Easing”. According to Mr. Chan, Quantitative Easing is a controversial and uncertain central bank tactic. There is little modern historical precedent by which Quantitative Easing can be studied and analyzed by economists to predict results.

Mr. Chan explains that because short term interest rates are already close to zero, that now the Federal Reserve Bank’s last and final option is more “Quantative Easing”. Will it work?

What is “Quantative Easing”? Simply put, it is the printing of additional money to purchase financial assets in the market place, by using government money to buy instruments held by investors. The instruments purchased by the Government Treasury in “Quantitative Easing” are things such as (a) mortgage backed securities (b) buying/cashing out debts owed by the government such as Fannie Mae and Freddie Mac obligations/bonds and (c) buying Treasury Securities like government bonds.

How does “Quantative Easing” seek to help the economy? My understanding is that Quantitative Easing intentionally creates some inflation as it increases the money supply, and thus with more money rolling around, there is an incentive to invest it by lending it to others. People and investors who now have this freshly borrowed cash then go on spending sprees, and it is these sprees which are supposed to stimulate economic growth by more lending to people who buy things with the newly borrowed proceeds.

In short, more people buying things with borrowed money increases demand for goods and services and such. Increased demand keeps prices for goods and services higher, which is supposed to offset the deflation of prices of goods and services that is occurring in this recession. (See following blog post describing why deflation is “bad”)

Shortly put, deflation is supposed to be “bad” during a recovery from economic recession because deflation will result in a further economic slowdown as people conserve their cash and do not spend it in order to wait for lower prices on everything from TVs to cars to houses to ocean cruises.

This would be a “Second Wave” of “Quantitative Easing” as the Federal Reserve Bank already took a first “Quantitative Easing” step between January 2009 and March 2010 by printing money in the amount of $1.725 trillion (that is 1,000,000,000,000!) dollars to purchase $1.25 trillion in mortgage-backed securities (essentially buying mortgages from private investors), $175 billion in debts owed by government-controlled entities like Fannie Mae (more mortgages) and $300 billion in Treasury securities.

Here are the pros and cons:

Pros of “Quantitative Easing” to buy mortgages and investment instruments held by private investors when lowering interest rates doesn’t seem to be getting the job done to stimulate the economy: Sewell Chan of the NY Times writes that the Federal Reserve Bank’s Chairman Ben Bernanke is an astute student of the Great Depression and that Mr. Bernanke has long argued that the central bank (The Federal Reserve Bank) has the additional tool of Quantitative Easing which should be somewhat readily used to avoid deflation in prices, as deflation will slow, stop or reverse a recovery as people look at cash as an investment in and of itself instead of spending the cash. For example, if you know that the $500 TV set will reduce to $475 in six months (a mere 5.0% deflation in price) then you are more inclined to wait six months to purchase. If you know that your $300,000 home you are looking at buying will decrease 5.0% in one year to $285,000 then you will keep in renting one additional year and will not buy the home, thus stagnating the housing market.

Cons of “Quantitative Easing” More conservative voices (according to the NY Times Swell Chan) propose that the Federal Reserve Bank should not go out into the marketplace to buy mortgages, and that the most aggressive steps taken should be to lower short term interest rates (please note that short term interest rates are almost zero!)

Problem #1: Those economists wary of “Quantitative Easing” say that in a “perfect storm” of circumstances, Quantitative Easing can lead to 1970s style “stagflation” as the government floods the economy with too much available money when it buys out the debt obligations of (a) mortgage backed securities (b) debts owed by government entities to investors such as Fannie Mae bonds and (c) Treasury securities, in an atmosphere when the economy is operating at a reduced level, because there is a surplus or bumper crop of money floating around, but not so much to buy.

Problem #2: According to economists skeptical of “Quantitative Easing” say that further purchases of mortgages, government debts and treasury bills by the Federal Reserve will undermine faith in the US dollar as an accepted stable world currency and the safety of the US Treasury bill as keeping ahead of inflation because it fosters “perceptions of monetizing indebtedness,” according to Mr. Chan’s analysis of economist Kevin M. Warsh, in that it looks like it is the printing of money to pay off the public debt. “On a very simple level [with Quantitative Easing], the Federal Reserve Bank is printing money so the Treasury can spend more than it’s collecting in tax revenues…these are highly unusual circumstances, so no one is too worried about it [right now]. But it is always a temptation to use the central bank to finance government expenditures.”

Mr. Chan writes that economist Kevin M. Warsh notes that the Federal Reserve already has purchased 2.3 trillion worth of debt which includes vast sums of Treasury Bills, perhaps too much. The Treasury Bills are essentially a large share of the national debt. (Note that the Chinese probably now hold the remaining balance. That is a none too funny note for another day). Mr. Warsh notes that the Federal Reserve Bank’s institutional credibility is at stake, if it threatens the currency’s stability to pursue domestic growth.

Problem #3: Economists wary of Quantitative Easing relate that economists “don’t have a lot of good historical episodes in modern economies to know exactly what the effects of quantitative easing are.” Mr. Chan quotes Professor Walsh.

Consumer Alert: Judges suspicious of the rising tide of lawsuits and garnishments

Unscrupulous collection lawyers are being “called on the carpet” by consumers and some judges to show proof that the amounts alleged in collection lawsuits and garnishments can be verified through extrinsic evidence. This was reported on Tuesday, July 13, 2010 in the New York Times ( link).

The article explains that “debt buyers” purchase old debts from other collection agencies and credit card companies after the preceding collector/creditor has given up on trying to collect. The new “debt buyer” then often proceeds to file suit with scant evidence supporting the allegations in the lawsuit. Many Judges are dismissing these suits for lack of reasonable extrinsic (outside) evidence of the origin and the composition of the debt. If a consumer will both (1) respond in writing to a collection lawsuit demanding verification of the origin and composition of the debt and (2) show up for Court, the Judge in the case might dismiss the suit if the suing “debt buyer” cannot produce at least copies of billing statements which verify the underlying transaction in which credit was extended or wherein goods and services were purchased with the credit. The NY Times article linked above is very interesting; one small law firm in New York files over 80,000 lawsuits per year, frequently without securing any paperwork to verify that there exists a valid underlying debt of which enforcement is sought. Each lawyer in the firm was filing 5,700 lawsuits per year utilizing computerized and automated software. Very intriguing.