09: Student Loan Debt 101

For those of you who expect more out of life, you can learn more about prosperity Academy plus by going to their website, prosperity Academy plus.com well, as we prepare these shows, one of the things that we continually try to do is make sure we are getting top experts to help you and very seldom do we feel like we've gotten the top guy, the person that actually knows everything, maybe even had more experience than anyone else on the planet today. We feel like we have that show for you today.

I'm very excited to welcome with us today, Jay Fleischman . How are you today? Hey Dave, I'm good. How are you? Good, good. Well, I didn't tell them listeners what we're talking about, where we're actually going to be talking about today is student loan debts and tricks, tips. I did things people can do if they've got themselves overextended . All right , hit me. So it's been very interesting for me over the last probably month, two months, I do a lot of press birdie minutes.

I do a daily video where I share various financial literacy tips and over the last month or two the main topics that we focused on are student loans. And I realizing that it's a far bigger problem out there and there's a far bigger debt than I ever realized coming out of school of 20 plus years ago I was in a position where I didn't have to get much student load bet , but that has definitely changed.

So Jay, talk a little bit first here about how you got to where you are now and what interested you and trying to help people start solving their student loan problems. Well, when I went to college, my tuition was I think was $1,200 a year for four years. My three years of law school came out to about $26,000 now anybody going into college now that's an amazing deal for years of a private university is running a bout $183,000 for four years of public school. [inaudible]

gonna run you about $88,000 for four years. That is a significant amount of money. And I started out as a consumer bankruptcy attorney. I've been doing it for just about 25 years now. And over time more and more and more of my clients were coming to me with questions out student loan debt, either theirs or their children's, their spouses friends. And as many people know, bankruptcy isn't always going to be the ideal fix for a student loan problem. So what did I do?

I sat down and started trying to figure out what the heck do I do with these things that I can't do anything about right . And I did a significant amount of studying on my head down in the books. And then from there I spent out a year counseling individuals one on one with just the eye towards helping them get to the end of the road with [inaudible] .

Also the understanding that I was learning it as they were, so I counseled in the neighborhood of 750 people at no cost to them just as a means of teaching myself. And the reason that I did it that way was because there was nothing available to teach me how to handle these sorts of cases. So it was deal that I made with people who owed student loan debt. Now seven and change years later. It's all I've been doing and the problem unfortunately is not getting any better.

It's getting worse, it's getting heavier and the financial pressures that people are are confronting are so much worse and worse , bigger than most people would imagine. This morning we had an interesting conversation at the breakfast table. I'd actually written a check to cover part of our payroll and it was a $35,000 check.

I have three kids at home right now and they saw the check and started making comments on it and my daughter who's a senior got all excited and she's like, dad, that will pay for my four years of school, and I just started laughing. You could only wish, and I know where she wants to go to school. I'm like, that will pay for about one or two years of your school . Three of you that's not going to pay for four years of your school.

Exactly is a tremendous amount of money that people are spending for a four year undergraduate education that quite frankly, he's going to lead more often than not to a graduate school. Education college is the new high school. The only difference is high school is free.

College isn't, and there's a whole bunch going on with respect to that, but ultimately you're either going to kind of really make check with the understanding that you're going to have to cut another really big check or you're going to find yourself in a financial mess very, very quickly. I know I've worked with a number of people, obviously a number of doctors, professionals throughout my career, and we were doing one seminar about a year and a half, maybe two years ago.

I was talking to a bunch of dentists. One of the guys came up to me after I'd done my presentation. He goes, I need to talk to you about my student loan debt. I've got some issues. He was at a half a million dollars. Now , I don't know in your world that may be common, but I'm sitting here going, I cannot believe that someone's coming out of school with this much debt.

By that point, you've basically taken all your freedoms away or to go and obviously do what you've got to do to make substantial amounts of money to be able to pay it back off. Sure. I've seen people, my highest amount of student loan debt that I've seen personally with a client of mine , yeah . [inaudible] about one point $2 million mind boggling, so obviously it's quite easy from what I see. Maybe you can correct me if I'm wrong, but it seems quite easy for to get

And then you've got [inaudible] banks and private lending institutions that are giving out private loans to pretty much all comers.

There is no requirement for anything [inaudible] for the fact that you've gotta be enrolled and not currently be in default in in another federal student loan. Now, how does the government ensure that they're going to get paid? Well, there the government, there's no statute of limitations. They can chase a borrower until that borrower dies, pays off the loan , or is otherwise forgiven or discharge of their obligation. And there are a variety of ways of getting that done.

But the government really doesn't care how long it takes you to pay the loan back because they're more than happy to wait or as long as they need to to either get that money or otherwise arrange for a discharge forgiveness or or something along those lines.

With respect to private student loans, over 95% of private student loan debt [inaudible] co-signed or guaranteed I a parent, grandparent , aunt , uncle, somebody who's got deeper pockets, somebody who's got a credit score because those are credit based .

So somebody who's got deeper pockets probably as assets, probably as a pretty good credit score in spite of the fact that the students are or themselves doesn't have any money, it doesn't have any assets, doesn't really have a means of repaying that debt back. The private lenders , um, I'm going to rely more heavily on that guarantor as a result.

Do you see a lot of problems with those private loans or are those people coming to you or because they have somebody else in the mix, you kinda get pushed out of the scenario. Private student loans have a far lower default rate overall. The reason that they have a far lower default rate is not because the lender makes it easier. Yeah , but rather because the parent is more likely to step in and make the payments when the student borrower can't or is unwilling to do so.

Because again, the parent is afraid that they're going to get sued. There's going to be a lien on their house, they're going to lose the house, they're going to lose assets, what have you. So those loans are far more problematic on a day to day basis. Even though the default statistics don't necessarily bear that out.

I do get a lot of people calling me about private student loans, particularly parents, because again, they're more concerned about their own assets and those loans will be far more likely to have higher interest rates. Most of them have variable interest rates with no cap on them. They don't have four , they don't have a deferment. They're like loan sharks as far as I'm concerned. Yeah, it's pretty crazy. When you have a blown that's going to just continue to increase and increase and increase.

So if you're looking at a typical student loan, someone goes in, they come in and go in as a freshman, they start taking out loans and very easy for them to get the funding, get the money that they need. They think they're going to become a doctor or a lawyer or whatever. That's gonna make a lot of money. They're going to be able to pay all these back because you're correct, they're not paying any payments basically until they graduate. Is that correct ?

That they're not required to make any payments until they graduate? For federal student loans, you get a grace period of six months after you dropped below hard time status to begin making payments. Now, that doesn't mean that interest doesn't accrue. Interest starts to accrue the minute that you take the loan out. That's federal or private.

The only nuance there is that certain federal student loans are subsidized and what that means is that during periods of [inaudible] in school deferments or other deferments, not forbearances, the government will actually pay the interest that accrues on that loan for any other loan.

What happens is not only does the interest accrue, but when you go into repayment, the interest capitalizes, which means that interest becomes principal and of course, yes , pay interest based upon your principle balance. If your interest capitalizes, your principal balance goes up. Okay . The amount of interest rises that much more quickly.

So what a lot of people try to do, particularly with those private student loans, is they will try to make interest payments while they're in school to the extent that they're able to do so, and that's going to go a long way towards bringing down the ultimate amount that's going to be paid over the life of a loan. Yeah, great advice. I think that's one of the things that people don't

You've talked earlier about it being very open. How high could that interest rate really go?

I love being a student again, so if you and I both went to college next semester and we both took out federal student loans, we would both get the same interest rate on our loan and that does fluctuate annually, but once you get the loan, the interest rate is locked in the entire time.

Now when you consolidate your federal student loans, which is kind of like a refinance, most people can understand what a refi is, but a consolidation of federal student loans, which is only available for federal student loans and only available through the us department of education involves taking your existing federal loans and trading them in for brand new loan. The interest rate on that is a weighted interest rate of all of the interest rates have all of the loans that you're trading in.

So that's going to vary based on what the interest rates are of the loans that you're trading in. But aside from that, it's fixed every year.

So any federal loan, so long as you are not in either an active wage garnishments situation, your default and the government does garnishing your wages or [inaudible] there has been a lawsuit against you by the government because the federal government does two people for defaulted federal student loans when it has to , if there's a lawsuit and a judgment against you for a defaulted federal student loan, you cannot consolidate that loan.

Um, so wage garnishment or judgment can't consolidate everything else Kartra on the table. You're good to go. So long as you've got more than one loan . So if you've got, and it's gotta be more than one direct loan, so if you've got one loan, it's a direct loan. It's sitting out there. You can't trade in that single loan for another single loan. Anything else, Damon ? If someone gets himself in trouble, how long is it gonna take before the government's going to start filing that lawsuit?

When do they need to come and see someone like you in this process? If they've started falling behind and just be like, they aren't sure if they can keep up. Maybe I can, maybe I can't. Not sure if I'm going to be able to make it out of the situation. Sure. If in doubt, I am the best value that you're going to get. I or somebody like me, it doesn't have to be me, but somebody who actually knows what they're, what they're doing and what they're talking about and can explain the process to you.

Once you go past you on a federal student loan, it's 270 days until you go into default. Up until that time you can cut a check to your servicer , catch up and you're all set. And when I say 270 days, I mean 270 days worth of payments that are past due. So if you've got, let's say a federal student loan payment is $100 a month, you have your first payment due in January, you miss it. You have your second payment in February, right ?

You send them $100 you are only past you for February at this point your payment goes to the earliest amounts do . Okay. So I've actually had clients who have been past to for years, but they've always been six months past due or racking up the late fees. I don't know why they don't ask me first, but when they come to me, that's what they'd been doing for years and years and years. As you get closer to two 70 things start getting a little bit more urgent.

Once you get to 270 days alone goes into default. At that point, the entire balance is due. Collection fees are automatically added prospectively up to 25% of principal and interest. Interest continues to accrue. Lone sent out to a debt collector and at that point the government can take variety. [inaudible] collection enforcement roads , they can start and administrative wage garnishment garnishee 15% of your earnings without filing a lawsuit or getting a judgement .

Yeah , they can take your federal income tax return, a refund rather. Some people call it a return even though the return is just the paper part. Take , take your federal income tax refund. They can take part of your social security. If you're getting social security, they can take your federal benefits. So let's say you're getting any federal benefits, they can take those and if all else fails, the federal government may elect to file a lawsuit against you. They don't like to do that.

It really is the move of last resort because the other things that they can do are so much easier for them. So they'll Sue you if they need to. Typically, I will see a lawsuit only against somebody who is self-employed, has been self employed for a very long time, does not get any tax refunds from the IRS. That's typically who's going to get sued.

Is there opportunities to , to ever get away from that when you consolidate or do you work with them or no? Hey, I'm stuck with this. I've just got to work in this box.

Once you stop coloring inside the lines, they turn into the person who beats the kid up for their lunch money every day at school. Now what that means is so long as you are a willing to catch up, B willing to enter into a repayment option that the government does provide for you in there are a ton of them. There are income driven repayment options. There are extended and graduated repayment options. There are tons of different ways to repay that loan.

So long as you're in a position to play by the rules of one of those games, government is thrilled with you, happy to work with you, happy to do it all with you. If you're in default, you can consolidate your way out of default. Again, so long as there's not a wage garnishment and so long as there's not a judgment against you, you can also rehab yellow tape that defaulted federal student loan. I hate that term because it sounds like, it sounds like you're a criminal, but you're not.

It's not a criminal thing. Rehabilitation involves making an agreement with the debt collector to make reasonable and affordable payments to the debt collector for a period of time. At the end of that period of time, the loan is brought out of the fall, brought back into active repayment and then you can choose among one of the various payment options when it comes to settlement or lowering the balance due . People are thinking about it all wrong. It's never a question of settling the debt.

It's always a question of how little can I, Hey, over how long of a period of time. And that's really where the income driven repayment options come in. Settlement does exist, but it's very limited for federal student loans. [inaudible] normally you're not going to save a lot of money. Right . And you're going to have to write a big check really quick because it's not settlement with payment plan and settlement cash at the door when it comes to private student loans, those loans, they settle .

Different lenders settle on different terms. Yeah . But if you're in default, they do settle. And the reason why they settle is they're not restricted by federal regulations and there is a statute of limitations. They've only got a limited amount of time to force you to make payment by resorting to the court system. So they've got a ticking time bomb. And uh , if you haven't been paying them, the creditors really kind of afraid that you're never going to be able to pay them.

So they'd like to be able to get whatever they can as fast as they can. So there, there are greater opportunities there. Jay , how long can someone pay on a student loan? How long would they extend that out? How many years? Federal student loans forever. Okay, so good . That was a quick answer. 60 seventies and still be paying that debt. Oh gosh. You have no idea how many 60 and 70 year old people I have as clients. You have no idea. Quick story I had , I had a client. Yeah .

Uh, three years ago at this point. He had been in the real estate field all through the boom years and then of course in Oh seven what happened to everybody in the real estate field? Everybody went, the bottom drops out, right ? So he's got three kids, twins and one kid who is two years younger than the twins. They're all going to college and they're all going to private schools, good schools, but private. This is an old school guy.

His position is a parent pays for their college education for their kids, signs on for student loans for all three of the kids, all three of them calls me up. He owed at that point I think was $680,000 in student loan debt. No way of ever paying it off.

Wow. This guy, he's in bad shape and he's going to be in bad shape for a not insignificant the amount of time we were able to help them with a number of things, but you know the albatross is still going to be around his neck for private student loans. The amount of time that they can chase you depends upon how your state handles that. It's called a statute of limitations. Different States handle it in different ways.

I am licensed to practice in New York as well as California, so I can speak to those. New York has a six year statute of limitations from the date that the debt goes into default on a promissory note. California has a statute of limitations of four years from the date if the loan goes into the fall. So if you go into default on a private student loan, set your clocks and uh, don't make any payments or any promises to pay because that's going to reset that.

A statute of limitations to answer the follow up question most of my clients have is [inaudible] . What's the likelihood that they file a lawsuit against me? It's always a follow up questions that my clients have, so you need to presume that they will file a lawsuit against you. If you don't settle, make a payment arrangement, do something about that loan. You should presume that they're going to settle, that they're going to file a lawsuit. Is that having been said?

It is not by any means out of the realm of possibility that they don't file a lawsuit against you. There are some lenders I'd prefer not to file lawsuits. There are some lenders that I prefer to file every lawsuit possible and the business reason behind it is without going into things like securitization and bundling and bond markets and stuff that yeah , is just incredibly inside baseball. The business model is much like credit card debt and regular consumer debt.

When a lender files a lawsuit against a consumer, 90 plus percent of all consumers absolutely nothing. When they're served with a complaint for a lawsuit, they do nothing, and if they do nothing, the lender gets a judgment against them. It's called the default judgment . They failed to do anything. They just get a judgment against them and then the lender can go ahead and enforce that judgment through garnishment, through freezing bank accounts, loving or seizing assets, liens on property.

That's when it gets real nasty. Yeah . That's one of the things that many people don't realize is the legal process that involved as you're talking about this, obviously you don't want to get sued if you can keep from doing it, but I know I learned the hard way. I learned on the other side, I was owed a bunch of money from a big ass food restaurant. I won't name their name on here, but they owed me a bunch of money. My attorney said, Hey, let's go ahead and Sue him.

There's possibly going into bankruptcy, but let's see if we can't get a judgment against them. We spent more money on the lawsuit than they owed me. We got a judgment and they're like, Oh, now you're gonna have to go enforce collection. Really didn't do me a lot of good. If I'd known that, I would've never spent the money. It's like, okay, let's just let the money go by the wayside. And so very important that they understand that.

Be well aligned with people like yourself who understand the process so they can get the right information and understand if they're having to go through this. And if lenders are chasing them, what their options and their rights are so they can make the right decision. Sure. For everybody who owes money on a private student loan in particular, it's important to look at this as a business decision.

Negotiation and settlement is always about [inaudible] cost and benefit always what it's going to be about. Because ultimately if you get sued and you need Ty or me or somebody like me to defend you in that lawsuit, and ultimately you settle, win, lose, or draw, there's only one person in that equation who wins. And that's me and it's great. I love to be able to help people. I love to provide value, right ? You don't want to spend money needlessly.

Don't want to line my pockets when it could be going to make your life a better one. Make your financial future a lot more stable and certain so a little bit in knowledge goes a really long way and trying your best [inaudible] separate yourself from the emotions they come with. Owing money is always going to get you a lot further. It's going to reduce your legal fees. It's gonna reduce your stress. [inaudible] a better outcome overall.

Raspberry nation , I hope you're listening right now what Jay saying, because it's so important for you. I see it all the time on the IRS side. People get in debt with the IRS, they're scared to death. So there's all these companies out there preying on them, hoping that they will give them thousands and thousands of dollars to solve the problem. Well then it gets down to the end and it's like, Oh, we can't solve the problem for you. Well, they never intended to solve the problem, unfortunately.

And it's something that could happen in this world as well, but there's no reason to add to your burden, all the headache , all the pressure that you're going through by adding a bunch of unneeded fees when you're getting someone that's not ethical and trying to look out for your best interest, and that's what I really appreciate about what you do is you're so focused on education, providing free services via podcasts , other methods where people can get this information that it's very helpful

and very informative for them to know that they can get aligned with the right person. Absolutely. There's , when you owe money, you walk around with a target on your back, everybody once what little you've got, and most people are more than happy to give that up in exchange for a fix. Somebody just come in and fix this for me. I'll pay you whatever you want.

Unfortunately, as you said, there's a lot of scammers out there, especially when it comes to student loans, taxes and credit card debt and , okay , we saw it with the mortgage

Make sure you get someone else involved in the equation that is not so emotionally tied to the consequences of what may potentially happen, and again, I realize that these financial decisions have consequences. They can't be emotional, but we can still do the right thing and make sure we're helping ourselves make a better decision.

I've seen clients who go through forbearances for, I actually have a client that I spoke to yesterday who has been going through forbearances for over 20 years now. Why do they do that? First of all, it's easy. There's no paperwork that's involved. [inaudible] picks up phone calls to the servicers servicer, presses a button. That's it . Yeah . There's nothing that needs to get done financially. Why do they do that? Well, it's great. Remember we talked about capitalization.

Every time you go out of forbearance, your forbearance period ends. All your interests were capitalizes, becomes principal , more interest, more interest, more interest, so it gets you into that cycle of doom financial aid. When it comes to deferments, those are handled a little bit differently because deferment is automatically given to a borrower when they are enrolled more than half time at a university, undergraduate or graduate or certification.

So long as they're enrolled, more than half time the loan goes into deferment. There are also financial hardship, deferments, unemployment deferments. There's actually a deferment if you are battling cancer, there's a deferment. If you're in active service in the military, which a lot of people don't know about, there are bunch of different deferment reasons now why deferment is a great option to look at if you have to look. Yeah .

At [inaudible] [inaudible] option at [inaudible] all is during periods of the federal government pays the interest that accrues on your subsidized federal student loans, so that's going to go a long way. [inaudible] it's keeping that balance from exploding so quickly. That being said, I'm not a big fan of deferment or forbearance for the vast majority of people though. It does happen. Yeah ,

And if there is, it's oftentimes very minimal to many people, especially doctors, attorneys, those that have large balances, they're so large that they exceed the income limits. And so they're not able to to take those deductions. So now not only do you have all this money, you've got to pay back, but you're paying back F with money that you're gonna have to pay tax on. So it ends up costing many times, twice the amount that you think you're going to have to pay.

Just because you have taxes as well that you've got add on to that amount.

But essentially what you're doing is you're getting your federal student loan payment set at a percentage of your adjusted gross income minus a baseline that is tied to the poverty level. I have a family of your size, so let's say you're married, you've got two kids, you've got a family of four, so you've got [inaudible] baseline of income below which you're not going to have to make any payments. So that's really good for people who have families.

It's really good for people who may have a lower income relative or a lower taxable income relative to their student loan balance. New earners are really in a great position for that because they tend to have a lower income [inaudible] also, people who are front-loading , they're pretax retirement planning.

So if you're putting 18 $19,000 into your 401k, that's gonna come off the top of your taxable income, reduces your taxable income, and when you reduce your taxable income, you get to reduce your federal student loan payment. All of these income driven repayment plans come with eight discharge of the remaining balance after either 20 or 25 years depending upon what income driven repayment plan you're in. So there's a real way of saving some significant money.

So I , I like that for federal student loan borrowers, great advice and advice and most of our listeners are not going to understand. They're not going to know. I mean, so many things you've shared today are so important. There's one last topic that I want to cover today and that's the topic of bankruptcy. I know many people think I can just go bankrupt. It's all going to go away. Let's talk briefly about options there. Can any of it go away through bankruptcy?

How does that look for most people? Real quick, you said no , but seriously , bankruptcy does not discharge a student loan balance without taking some additional steps. In order to get a student loan discharged or wiped out in bankruptcy, you need to be able to prove, yeah , that there is something called [inaudible] undue hardship and it's normally in, in most parts of the country, it's a three part test state. You're required to meet undue hardship.

Doesn't mean does those words don't mean what you think that they mean as the, as a the princess bride [inaudible] I paraphrase that, but anyway, so you've got to take some additional actions to be able to prove that undue hardship exists. That being said, number one, it's not impossible to discharge your student loans in bankruptcy. Number two, if you have other debt, bankruptcy may make sense financially because like getting rid of that other debt you may be able to then be able to afford.

There's student loan payments, free up some money every month. So bankruptcies got some benefits there. If you've got a private student loan, not a federal student loan and not a federally guaranteed student loan. There's some other ways that we can attack those in bankruptcy to either forced the creditor to the table [inaudible] leverage that bankruptcy, right ? And bring about a lower settlement or perhaps be able to [inaudible] what's typically considered a workout.

So there's more to bankruptcy than meets the eye. It's very easy to say yes , can't wipe them out in bankruptcy. But like I said, there's more to it than meets the eye. J great information that you've shared with us today. So happy to have had you on our show. So happy to have our listeners better understand the situation they're in. Because again, that's not necessarily your student loans. That may be your kids, maybe someone else that you signed on to help.

And here you are years later thinking everything's going to be fine and you're getting a notice saying, oops, things didn't work out quite the way you thought they did. And now we've got to deal with that. So great information. Jay, I know you've got a podcast, I know you obviously website. How can our listeners get ahold of you and learn more about it? Only you, but all the information that you share out there to the public.

Sure. My podcast is student loan show at.com it's the student loan show. You can search me up on Apple podcasts or anywhere that you get your podcasts or just go online, student loans , show.com my main website and blog are located@moneywise.com or if all else fails, look for me just on the a Google machine because you can find me on pretty much any social platform where I'm fairly active. Thank you so much, Jay . Thanks for being on the show. Thanks for having me. Take care. Prosperity nation.

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