Student Lending Probes and Lawsuits

If you’re one of the hundreds of thousands who attended the for-profit University of Phoenix, there may be a gift waiting for you: a big fat student loan forgiveness.

A new crop of University of Phoenix students (UOP) have just been approved for full forgiveness of their federal student loans by the U.S. Department of Education (ED).

If you attended the school anytime between September 21, 2012 and December 31, 2014, and were misled by the school’s claims and submitted a valid application for relief through ED’s Borrower Defense program, there’s a high probability that you’re eligible for the agency’s loan relief. 

ED’s decision is based in part on the FTC’s 2019 court action against the University of Phoenix for using trickery in advertising practices to get students to enroll. At the time, the FTC alleged that UOP tried to attract students by claiming that it had relationships with employers such as Microsoft and could assist students in getting jobs once they got their UOP sheepskin.

The agency said these ads were specifically targeted at people in the military, veterans, and military spouses.

Already submitted a claim? Already got one?

If you’ve already submitted a borrower defense claim, you may be in luck. Just check the status of your application on the borrower defense page under “Manage My Applications” at StudentAid.gov. 

If you haven't submitted one yet, then time’s a-wastin’ so file your claim… now. The agency says that if you’ve already received a refund from the FTC’s settlement, don’t sweat it because you’re still eligible for loan forgiveness through ED’s borrower defense program.

Sweet, huh? The agency just asks that you mention that fact when you apply. Find out more at ftc.gov/UOP.

You’ve probably heard that the Biden administration’s sweeping plan to forgive a portion of government student loans was blocked by the Supreme Court. But it turns out some of the loans will be forgiven.

This week the U.S. Department of Education began the process of discharging 804,000 student loans that meet certain criteria. To qualify, the borrower must have been enrolled in the Department of Education’s income-driven repayment (IDR) plan and have been making payments for at least 20 years.

The White House announced the forgiveness plan in July after the high court ruled the administration’s unilateral move to forgive debt without consulting Congress was unconstitutional.

Under the plan announced last month, the government will write off approximately $39 billion in student loan debt.

“I have long said that college should be a ticket to the middle class – not a burden that weighs down on families for decades,” Biden said as he announced the plan.

Who qualifies?

Borrowers will qualify for forgiveness if they have made payments for 20 or 25 years depending on when a borrower first took out the loans, the type of loan they have, and the income-driven repayment plan they are on.

Eligible borrowers should have received notification of their loan forgiveness by mail. Government officials will not call borrowers, so if someone calls and claims to be able to help you with your loan, it’s a scam.

The Department of Education said qualifiers include people with Direct Loans or Federal Family Education Loans held by the department, including Parent PLUS loans of either type, who have reached the necessary forgiveness threshold as a result of receiving credit toward IDR forgiveness.

Everyone else with a student loan must resume payments by October.

Enough Republicans and Democrats in Congress found enough common ground to pass a debt ceiling bill and avert a U.S. government default.

But as a result, people with student loan debt – whose payments were suspended at the start of the COVID-19 pandemic three years ago – will resume making monthly payments. The resumption of loan payments was one of the many other features contained in the bill.

The bill, which President Biden is expected to sign, calls for the resumption of student loan payments “60 days after June 30, 2023,” which would be Aug. 29. Estimates of total student loan balances vary but investment banking firm Jefferies has reported that about 45 million Americans owe more than $1 trillion, with average monthly payments of $393.

Economists are concerned about what this will mean to the U.S. economy. Payments were suspended in 2020 because it was believed the pandemic would lead to widespread unemployment and severe economic hardship for student loan borrowers.

While unemployment spiked in the first couple of months, the U.S. quickly had a labor shortage and most people who wanted jobs could find one. At the same time, the U.S. government paid out more than $1 trillion in stimulus payments.

Belt-tightening

Student loan borrowers who have grown accustomed to not making those payments will now have to factor them back into their monthly budgets. And the political climate makes Biden’s student loan debt forgiveness proposal appear less likely to prevail.

In fact, the Senate, controlled by Democrats, this week passed a House measure to repeal the administration’s debt forgiveness program. Biden has said he will veto it.

Opponents of debt forgiveness say it is unfair to ask taxpayers who didn't go to college and those who have paid off their student loans to pay for those who still owe.

Even with the veto, the debt forgiveness program is at the mercy of the U.S. Supreme Court, which is set to rule on the measure’s constitutionality. Biden’s executive order would grant 40 million borrowers up to $20,000 in student loan forgiveness.

Since the White House announced its student loan debt forgiveness program, scammers have come out of the woodwork, seeking to convince borrowers they should pay for unnecessary and non-existent services related to loan forgiveness.

Lately, a new scam has emerged that appears to be among the most dangerous that have been reported so far. Instead of randomly targeting people who may or may not have student loans, these scammers have gathered specific information about their intended victims.

Some victims of this scheme have reported the scammer had their name, the date they graduated, their Social Security number, and even their FAFSA (Free Application for Federal Aid) information.

The contact usually comes by phone. A call comes out of the blue from someone who claims to be associated with the Department of Education’s loan forgiveness program. Because they know their victim’s name and have information about them, the caller may have added credibility.

How it works

However, no one from the Department of Education or from any part of the government’s loan forgiveness program cold-calls borrowers.

After gaining credibility with the victim, the caller says the borrower must pay an upfront fee of several hundred dollars, then a monthly fee until the loan forgiveness has been completed. That’s another sign of a scam, since demanding upfront fees for services is illegal.

The scammer also tells the intended victim that their services can result in having as much as $60,000 in student loans wiped clean. Not true. The White House plan allows for forgiveness of up to $10,000 in student loan debt and $20,000 for borrowers who took Pell Grants.

What to do

Student loan borrowers contacted in this manner with these kinds of promises should assume from the start that it is a scam. If there is any doubt, contact StudentAid.gov directly to verify the information.

Never pay a fee to participate in a free government program. A legitimate agency will not ask for a payment, only scammers will. 

Be highly suspicious of phone calls that come out of nowhere. Government agencies, especially, don’t make unsolicited phone calls.

If the caller is aggressive or pushy and warns you will miss out if you don’t act immediately, that’s yet another red flag. The hallmark of a scam is to close the net quickly before the victim has time for rational thought.

While all scams are scary, this one appears to be particularly dangerous. The scammer is targeting specific individuals using sensitive information they have obtained from either a data breach or from the dark web. 

Student loan borrowers should consider changing the passwords to their FAFSA accounts and taking other steps to protect their personal information.

People with federal student loan debt can now apply for forgiveness of a portion of their loans. The White House has announced the application form is now available online.

It's easy, it's fast," President Biden said in announcing the launch. "This is a game changer for millions of Americans to get moving."

The debt relief plan will wipe away up to $10,000 in federal student loan debt for borrowers who earn less than $125,000 per year. It will eliminate up to $20,000 for those borrowers who received Pell Grants.

In making the announcement, Biden noted that it only takes about five minutes to fill out the application. Required information includes the applicant’s name, date of birth, and Social Security number. The form is provided in both English and Spanish on desktop and mobile sites. It will be open through Dec. 31, 2023.

According to White House estimates, more than 40 million Americans may be eligible for some student loan debt forgiveness. Total student loan debt is estimated to be more than $1.5 trillion, with some economists saying it hurts the economy because it limits what young consumers can spend on other things.

Warning about scams

In advance of launching the forgiveness application, the White House warned borrowers to be vigilant against an expected barrage of student loan debt forgiveness scams. Signs of a scam include:

• Offering to assist borrowers for an upfront fee. There is NO charge to participate in the debt forgiveness program.

• Someone contacts a borrower and claims to be from the government. Government employees will not contact borrowers until AFTER they have applied.

• Someone offering help to secure loan forgiveness creates a sense of urgency, claiming the borrower will miss out if they don’t act immediately. 

• A website or email claiming to be affiliated with the program that DOES NOT have a .gov URL is not legitimate.

Amid a court challenge to his plan to forgive some student loan debt, President Biden has tweaked his proposal, reducing the number of borrowers who will qualify.

In August Biden announced the U.S. Department of Education (ED) would forgive $10,000 in federal student loans. 

Included in that group of borrowers were those who held Federal Family Education Loans (FFEL), issued by private banks but guaranteed by the U.S. government. 

Under current terms, those loans cannot be consolidated. But when the loan forgiveness program was announced, the Department of Education said FFEL borrowers could consolidate their loans and qualify for debt relief.

Altered guidance

Now the administration has changed its guidance. In a statement on the ED website, officials said: “As of Sept. 29, 2022, borrowers with federal student loans not held by ED cannot obtain one-time debt relief by consolidating those loans into Direct Loans."

"Our goal is to provide relief to as many eligible borrowers as quickly and easily as possible, and this will allow us to achieve that goal while we continue to explore additional legally available options to provide relief to borrowers with privately owned FFEL loans," a spokesman for the Education Department told Reuters.

The move coincides with lawsuits filed in several states that challenge the legality of the president’s loan forgiveness program. The suits specifically challenge the provision that allows FFEL borrowers to consolidate their loans into federal Direct Loans, which are eligible for the program.

As of the last official count, about 4 million student loan borrowers hold FFEL loans. Of those, the administration estimates the change will affect about 770,000 people.

In a highly-anticipated move, President Biden has announced plans to issue an executive order forgiving a portion of federal student loan debt for millions of borrowers.

The announcement comes a week before the moratorium on loan payments, in effect since early in the pandemic, is set to expire.

Under the administration’s plan, the Department of Education will provide up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education, and up to $10,000 in debt cancellation to non-Pell Grant recipients. 

Borrowers are eligible for this relief if their individual income is less than $125,000 – $250,000 for married couples. Meanwhile, the moratorium on loan payments that would have expired Aug. 31 has been extended to Dec. 31, 2022.

In explaining the move, the White House noted that nearly one-third of borrowers have debt but no degree, according to an analysis by the Department of Education. Many of these students either dropped out or could not complete their degree because the cost of attendance was too high. 

Could help borrowers  in default

The White House also said about 16% of borrowers are in default, including nearly a third of senior citizens with student debt. Federal student loan debt cannot be discharged through bankruptcy so defaulting on a loan usually results in the government garnishing a borrower’s wages or lowering a borrower’s credit score. 

“We must also remember that, while debt cancellation is good news for those who currently hold student loans, it does not solve the underlying problems that caused the student debt crisis in the first place: the exorbitant cost of college, the declining purchasing power of the Federal Pell Grant, and our flawed student loan system,” said Rep. Bobby Scott (D-Va.), chairman of the House Education and Labor Committee.

The forgiveness announcement is likely to be politically controversial, coming a little more than two months before the midterm elections. It may also be challenged in court. Biden has long favored a student loan debt forgiveness program but said it should be done through the legislative process, not with an executive order.

For more than two years, people who have taken out federal student loans have been able to suspend payments. Congress placed a moratorium on payments as a way to relieve some of the financial burdens created by the COVID-19 pandemic.

After being extended a couple of times, the payment pause is scheduled to end on August 31, unless President Biden extends it again. A survey of borrowers found most are dreading a resumption of payments. In fact, only 14% said they can afford the payments with no issues when the forbearance period ends.

The survey, conducted by ScoreSense, also found that 42% of respondents are worried about working the resumed payments back into their household budgets.

Eighteen percent of survey respondents said they will need to overhaul their budgets or rely on family to help them resume loan payments. About 25% of borrowers between the ages of 18-34 are counting on help from family members to help with their student loans.

What changed?

What changed between March 2020 and now? During the payment pause, nearly 25% of respondents said they used the money they would ordinarily pay to student loan servicers to pay off other debts and loans. Some said they invested the money in the stock market.

"Unfortunately, we're seeing the perfect storm of economic stress on households where higher prices, interest rates, property assessments, and more is making it very difficult for many people to live within their means,” said Carlos Medina, senior vice president at One Technologies, LLC., which offers ScoreSense. “For many student loan holders, making payments in 2020 was much easier than it will be when they resume." 

Forgiveness is still on the table

Some Democrats in Congress are pressing Biden to forgive a portion of student loan debt, something the president has suggested should be done through Congressional legislation. Currently, Democrats lack the votes to do that.

However, a new poll conducted for CNBC points to possible unintended consequences of wiping away a portion of student loan debt. The survey found that 59% of Americans expressed concern that student loan forgiveness would make inflation worse.

There are also political considerations that could cause the administration to hesitate. While student loan borrowers would no doubt applaud the move, other taxpayers who did not attend college and have no student loan debt might not think it is such a good idea.

Why? Because, according to the Federal Reserve, about 44 million borrowers owe a collective $1.7 trillion in federal student loan debt – money that could possibly be used to fund other initiatives or applied toward something that has more universal benefit.

The Federal Reserve has raised its overnight lending rate by 0.75%, the largest single increase since 2008 and the latest move to try to contain rising inflation.

The rate is still low by historical comparison, and more increases are anticipated at future Fed meetings between now and the end of the year. The federal funds rate is not paid directly by consumers, though it influences the interest rates on several types of consumer loans.

The Fed rate hike will increase the interest rate banks pay when they borrow money from the Federal Reserve. After a Fed rate hike banks usually raise their prime rate – the interest rate they offer their best customers.

That filters down to the consumer level in several different ways. The rate on auto loans will usually go up to reflect the increase, for example.

Higher credit card rates

The interest rate on credit cards, already near a record high, will also go up as a result. The interest rate on personal loans can also be expected to rise. ConsumerAffairs has listed other factors that influence the interest rate on personal loans.

The federal funds rate does not directly affect mortgage rates, which tend to move with the yield on the Treasury Department’s 10-year bond. That yield has been rising because of inflation and in anticipation of the Fed’s action.

Holden Lewis, home and mortgage specialist at NerdWallet, says the mortgage market sometimes moves ahead of any action taken by the Federal Reserve.

“Mortgage rates tend to go up and down in anticipation of Fed rate moves, which is a way of saying that the Fed increase was already ‘baked into’ mortgage rates,” Lewis told ConsumerAffairs. “In other words, mortgage rates are more likely to go up or down before Fed meetings than after Fed meetings. Over the next week or two, we probably won't see big movements in mortgage rates like we did last week.”

Mortgage rates are now over 6%

This week saw a major move in interest rates, with the average interest rate on a 30-year fixed-rate mortgage rising to more than 6%, a major blow to people shopping for a home. But the rate can be higher or lower.

ConsumerAffairs has published a breakdown of the factors affecting an individual's mortgage rate. They include credit score and the amount of the down payment.

“Home sales are slowing dramatically because of skyrocketing mortgage rates,” Lewis said. "The decreased demand means we'll soon see a slowdown in home price increases.”

Meanwhile, consumers looking for a home will have to shop carefully for a mortgage. ConsumerAffairs has listed the latest mortgage rates here.