Book Title: eTextbook: Business Law: Text and Cases Unit 6. Creditors' Rights and Bankruptcy Unit Six. Application and Ethics 600 Unit Six Application and Ethics Federal Student Loans-Default and Discharge Ruby borrows $26,000 from the U.S. Department of Education (DOE) to help pay for her education at State University. To obtain the funds, she signs a note for the borrowed amount plus interest payable to DOE. She does not make payments on the loan when they come due. Has Ruby defaulted on the loan? What will happen? Federal Student Loan Programs Federal government loans make up over 90 percent of the student loan market. Loans from private lenders make up the rest. It is important for borrowers to know which type of loan they owe. The collection methods available to private lenders are different from the methods available to federal lenders. Federal student loan programs include the following: • William D. Ford Federal Direct Loans, which are made by the DOE. * • Federal Perkins Loans, which are made by schools to students who demonstrate financial need. Default A borrower is in default on a federal student loan if he or she fails to repay it according to the terms in the note. For most federal student loans, this occurs if a payment has not been made for more than 270 days. * Consequences of Default on a Federal Student Loan If a borrower defaults on a federal student loan, the entire balance of the loan, including both principal and interest, can become due in a single payment. TRANSFER OF THE NOTE TO A COLLECTION AGENCY. Once default occurs, the holder of the note—which may be the DOE, the school that made the loan, a state agency, or a private nonprofit organization—can transfer the note to a collection agency to recover the unpaid debt. Any additional costs to collect payment can then be added to the outstanding principal. These expenses can be up to 18.5 percent of the defaulted amount of the principal and interest for Federal Direct Loans and more for Federal Perkins Loans. 601 TREASURY OFFSET. There are other actions that the holder of the note might take. The DOE has the authority to collect the amount of the loan. This can be done by withholding funds from the defaulted borrower's sources of income. For instance, the DOE can ask the Department of the Treasury to withhold a defaulted debtor's federal income tax refund and other payments of federal funds, including Social Security payments. This is known as a Treasury offset. GARNISHMENT. The DOE or any other holder of the note can order the debtor's employer to withhold up to 15 percent of the debtor's disposable pay. No court order is necessary (unlike with a garnishment to recover the unpaid amount of a private student loan, which requires a court order). The withholding can continue until the debt is paid or otherwise taken out of default. The DOE can arrange for a similar amount to be withheld from a federal employee's wages through the federal salary offset program. Whether a debtor's employer is a private business or the federal government, the debtor has rights with regard to garnishment or offset. The debtor has a right to be notified of a proposed garnishment or offset, a right to object to it, and a right to a hearing on the objection. Forgiveness, Cancellation, and Discharge A federal student loan must be repaid. This is true even for borrowers who do not finish school, do not find a job related to their program of study, or are not satisfied with the education they received. . In certain circumstances, however, some or all of a loan may be forgiven, canceled, or discharged. For all federal student loans, these circumstances include the following: Closed school-A debtor may be entitled to a discharge if the school closes while the student is enrolled or within 120 days after he or she withdraws. Total and permanent disability-To prove total and permanent disability, the debtor must show that he or she is unable to engage in any substantial gainful activity due to a physical or mental impairment. Death If a borrower dies, his or her federal student loan will be discharged. Bankruptcy-A loan may be discharged in bankruptcy if its repayment would cause undue hardship. Undue hardship requires that repaying the loan would prevent the debtor from maintaining a minimal standard of living, the situation would continue for a significant portion of the repayment period, and good faith efforts to repay the loan were made before the bankruptcy filing. Federal Direct Loans may be discharged or forgiven in the following additional circumstances: . False certification of student eligibility—This can happen when a school falsely certifies a student's eligibility to benefit from its program. It can also happen when the student does not qualify for the occupation in which he or she paid to be educated (because of a health condition, for instance). Finally, it can result from forgery or identity theft. 602 • • . Unauthorized payment—A loan may be discharged if a school signed a student's name on the loan application or endorsed the loan check without the student's knowledge. An exception exists when the proceeds were paid to the student or applied against charges owed by the student to the school. Unpaid refund An unpaid refund occurs when a student takes out a loan to attend a school and withdraws, but the school does not refund the appropriate amount to the DOE. Full-time teacher-A teacher who has been teaching full time in a low- income school or educational service agency for five consecutive years may have some or all of a loan forgiven. Some or all of a Federal Perkins Loan may be cancelled for those who are employed in certain occupations. These include the following: Volunteers in the Peace Corps or VISTA (Volunteers in Service to America). Military personnel (serving in areas of hostilities). . Nurses and other medical technicians. Law enforcement and corrections officers. Workers for Head Start and other child and family services. Professional providers of early intervention services for disabled persons. Teachers who have been teaching full time in low-income schools or in certain subject areas. Finally, a Federal Direct Loan may be forgiven if the borrower is employed in a particular public service job and has made 120 payments on the loan. Ethical Connection Many of the ways to avoid paying a federal student loan without defaulting are ethical and even laudable. Individuals in the occupations listed above may make contributions to the public good that exceed any amount that they 603 borrowed to go to school. Ultimately, the public may accrue the greatest benefit from their service. Thus, it will be we who owe them—a debt of gratitude. Ethics Question In addition to the borrowers listed in this Application and Ethics feature, who else deserves to have their federal student loans forgiven? Why? Critical Thinking What are the consequences in addition to those stated in this Application and Ethics feature of failing to make timely payments on federal student loans? Discuss./n⚫INITIAL RESPONSE MUST answer two separate issues as follows: ⚫ 1.Provide a listing of five items (bullets or a numbered list), that you learned while reading this summary. You should include information about the different types of loans, what happens upon default, as well as forgiveness of loans and an example of when a loan may be cancelled. • 2.Provide a 6 to 8 sentence paragraph that provides your thoughts on the Ethical Connection section of the summary, answering the following question: In addition to the borrowers listed in the summary, who else deserves to have their federal student loans forgiven and why?

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