AWG HEARING GUIDELINES

Transcription

1 AWG HEARING GUIDELINES Rev. 07/06/05 1

2 AWG Hearing Guidelines Table of Contents INTRODUCTION... 3 AUTHORITY OF CORPORATION/AGENCY... 4 STATUTORY/REGULATORY AUTHORITY... 5 HEA 488A (20 U.S.C. 1095a) CFR (b)(9) U.S.C DEBT COLLECTION IMPROVEMENT ACT OF 1996 ( DCIA ) AWG TIMELINE Notice Prior To Wage Withholding Issuance ( Notice ) Hearing Request Deadline Hearing Decision Issuance AWG HEARING PROCEDURES Notification To Borrower Burdens Of Proof And Presentation Of Evidence Standard Of Review Of Borrower Objections To Garnishment BORROWER OBJECTIONS Involuntary Separation From Employment Dispute Amount Owed Accrual Of Interest: Collection Costs Making Payments As Required Under A Previously Negotiated Repayment Agreement Extreme Financial Hardship Bankruptcy Filed And Case Still Open Loan Discharged In Bankruptcy Total And Permanent Disability Closed School, False Certification And Unpaid Refund Loan Discharge-General Closed School Discharge-Specific False Certification Discharge-Specific Social Security Discrepancy/Wrong Borrower Debt Enforceability Appendix Copies of various forms related to AWG and borrower objections Rev. 07/06/05 2

3 INTRODUCTION Rev. 07/06/05 3

4 AUTHORITY OF CORPORATION/AGENCY (Guarantor/Collection Agency Specific) The Emergency Unemployment Compensation Act (Pub.L ) allows for administrative garnishment by student loan guarantors of up to ten percent of a defaulted borrower s disposable pay until the loan debt has been paid in full. Disposable pay excludes state and federal income tax and FICA and OASI taxes. Child support, IRS levies and other amounts required by law are also excluded from disposable pay. Pub.L overrides any state prohibition against wage garnishment. Rev. 07/06/05 4

5 STATUTORY/REGULATORY AUTHORITY Rev. 07/06/05 5

6 HEA 488A (20 U.S.C. 1095a) (a) Garnishment requirements Notwithstanding any provision of State law, a guaranty agency, or the Secretary in the case of loans made, insured or guaranteed under this subchapter and part C of subchapter I of chapter 34 of title 42 that are held by the Secretary, may garnish the disposable pay of an individual to collect the amount owed by the individual, if he or she is not currently making required repayment under a repayment agreement with the Secretary, or, in the case of a loan guaranteed under part B of this subchapter on which the guaranty agency received reimbursement from the Secretary under section 1078(c) of this title, with the guaranty agency holding the loan, as appropriate, provided that - (1) the amount deducted for any pay period may not exceed 10 percent of disposable pay, except that a greater percentage may be deducted with the written consent of the individual involved; (2) the individual shall be provided written notice, sent by mail to the individual's last known address, a minimum of 30 days prior to the initiation of proceedings, from the guaranty agency or the Secretary, as appropriate, informing such individual of the nature and amount of the loan obligation to be collected, the intention of the guaranty agency or the Secretary, as appropriate, to initiate proceedings to collect the debt through deductions from pay, and an explanation of the rights of the individual under this section; (3) the individual shall be provided an opportunity to inspect and copy records relating to the debt; (4) the individual shall be provided an opportunity to enter into a written agreement with the guaranty agency or the Secretary, under terms agreeable to the Secretary, or the head of the guaranty agency or his designee, as appropriate, to establish a schedule for the repayment of the debt; (5) the individual shall be provided an opportunity for a hearing in accordance with subsection (b) of this section on the determination of the Secretary or the guaranty agency, as appropriate, concerning the existence or the amount of the debt, and, in the case of an individual whose repayment schedule is established other than by a written agreement pursuant to paragraph (4), concerning the terms of the repayment schedule; (6) the employer shall pay to the Secretary or the guaranty agency as directed in the withholding order issued in this action, and shall be liable for, and the Secretary or the guaranty agency, as appropriate, may sue the employer in a State or Federal court of competent jurisdiction to recover, any amount that such employer fails to withhold from wages due an employee following receipt of such employer of notice of the withholding order, plus attorneys'fees, costs, and, in the court's discretion, punitive damages, but such Rev. 07/06/05 6

7 employer shall not be required to vary the normal pay and disbursement cycles in order to comply with this paragraph; (7) if an individual has been reemployed within 12 months after having been involuntarily separated from employment, no amount may be deducted from the disposable pay of such individual until such individual has been reemployed continuously for at least 12 months; and (8) an employer may not discharge from employment, refuse to employ, or take disciplinary action against an individual subject to wage withholding in accordance with this section by reason of the fact that the individual's wages have been subject to garnishment under this section, and such individual may sue in a State or Federal court of competent jurisdiction any employer who takes such action. The court shall award attorneys'fees to a prevailing employee and, in its discretion, may order reinstatement of the individual, award punitive damages and back pay to the employee, or order such other remedy as may be reasonably necessary. (b) Hearing requirements A hearing described in subsection (a)(5) of this section shall be provided prior to issuance of a garnishment order if the individual, on or before the 15th day following the mailing of the notice described in subsection (a)(2) of this section, and in accordance with such procedures as the Secretary or the head of the guaranty agency, as appropriate, may prescribe, files a petition requesting such a hearing. If the individual does not file a petition requesting a hearing prior to such date, the Secretary or the guaranty agency, as appropriate, shall provide the individual a hearing under subsection (a)(5) of this section upon request, but such hearing need not be provided prior to issuance of a garnishment order. A hearing under subsection (a)(5) of this section may not be conducted by an individual under the supervision or control of the head of the guaranty agency, except that nothing in this sentence shall be construed to prohibit the appointment of an administrative law judge. The hearing officer shall issue a final decision at the earliest practicable date, but not later than 60 days after the filing of the petition requesting the hearing. (c) Notice requirements The notice to the employer of the withholding order shall contain only such information as may be necessary for the employer to comply with the withholding order. (d) 'Disposable pay 'defined For the purpose of this section, the term 'disposable pay 'means that part of the compensation of any individual from an employer remaining after the deduction of any amounts required by law to be withheld. Rev. 07/06/05 7

8 34 CFR (b)(9) (9) Administrative Garnishment. (i) If a guaranty agency decides to garnish the disposable pay of a borrower who is not making payments on a loan held by the agency, on which the Secretary has paid a reinsurance claim, it shall do so in accordance with the following procedures: (A) The employer shall deduct and pay to the agency from a borrower's wages an amount that does not exceed the lesser of 10 percent of the borrower's disposable pay for each pay period or the amount permitted by 15 U.S.C. 1673, unless the borrower provides the agency with written consent to deduct a greater amount. For this purpose, the term ``disposable pay 'means that part of the borrower's compensation from an employer remaining after the deduction of any amounts required by law to be withheld. (B) At least 30 days before the initiation of garnishment proceedings, the guaranty agency shall mail to the borrower's last known address, a written notice of the nature and amount of the debt, the intention of the agency to initiate proceedings to collect the debt through deductions from pay, and an explanation of the borrower's rights. (C) The guaranty agency shall offer the borrower an opportunity to inspect and copy agency records related to the debt. (D) The guaranty agency shall offer the borrower an opportunity to enter into a written repayment agreement with the agency under terms agreeable to the agency. (E) The guaranty agency shall offer the borrower an opportunity for a hearing in accordance with paragraph (b)(9)(i)(j) of this section concerning the existence or the amount of the debt and, in the case of a borrower whose proposed repayment schedule under the garnishment order is established other than by a written agreement under paragraph (b)(9)(i)(d) of this section, the terms of the repayment schedule. (F) The guaranty agency shall sue any employer for any amount that the employer, after receipt of the garnishment notice provided by the agency under paragraph (b)(9)(i)(h) of this section, fails to withhold from wages owed and payable to an employee under the employer's normal pay and disbursement cycle. (G) The guaranty agency may not garnish the wages of a borrower whom it knows has been involuntarily separated from employment until the borrower has been reemployed continuously for at least 12 months. (H) Unless the guaranty agency receives information that the agency believes justifies a delay or cancellation of the withholding order, it shall send a withholding order to the employer within 20 days after the borrower fails to make a timely request for a hearing, or, if a timely request for a hearing is made by the borrower, within 20 days after a final decision is made by the agency to proceed with garnishment. (I) The notice given to the employer under paragraph (b)(9)(i)(h) of this section must contain only the information as may be necessary for the employer to comply with the withholding order. (J) The guaranty agency shall provide a hearing, which, at the borrower's option, may be oral or written, if the borrower submits a written request for a hearing on the existence or amount of the debt or the terms of the repayment schedule. The time and location of the hearing shall be established by the agency. An oral hearing may, at the borrower's option, be conducted either in-person or by telephone conference. All telephonic charges must be the responsibility of the guaranty agency. Rev. 07/06/05 8

9 (K) If the borrower's written request is received by the guaranty agency on or before the 15th day following the borrower's receipt of the notice described in paragraph (b)(9)(i)(b) of this section, the guaranty agency may not issue a withholding order until the borrower has been provided the requested hearing. For purposes of this paragraph, in the absence of evidence to the contrary, a borrower shall be considered to have received the notice described in paragraph (b)(9)(i)(b) of this section 5 days after it was mailed by the agency. The guaranty agency shall provide a hearing to the borrower in sufficient time to permit a decision, in accordance with the procedures that the agency may prescribe, to be rendered within 60 days. (L) If the borrower's written request is received by the guaranty agency after the 15th day following the borrower's receipt of the notice described in paragraph (b)(9)(i)(b) of this section, the guaranty agency shall provide a hearing to the borrower in sufficient time that a decision, in accordance with the procedures that the agency may prescribe, may be rendered within 60 days, but may not delay issuance of a withholding order unless the agency determines that the delay in filing the request was caused by factors over which the borrower had no control, or the agency receives information that the agency believes justifies a delay or cancellation of the withholding order. For purposes of this paragraph, in the absence of evidence to the contrary, a borrower shall be considered to have received the notice described in paragraph (b)(9)(i)(b) of this section 5 days after it was mailed by the agency. (M) The hearing officer appointed by the agency to conduct the hearing may be any qualified individual, including an administrative law judge, not under the supervision or control of the head of the guaranty agency. (N) The hearing officer shall issue a final written decision at the earliest practicable date, but not later than 60 days after the guaranty agency's receipt of the borrower's hearing request. (O) As specified in section 488A(a)(8) of the HEA, the borrower may seek judicial relief, including punitive damages, if the employer discharges, refuses to employ, or takes disciplinary action against the borrower due to the issuance of a withholding order. Rev. 07/06/05 9

10 15 U.S.C (a) Maximum allowable garnishment Except as provided in subsection (b) of this section and in section 1675 of this title, the maximum part of the aggregate disposable earnings of an individual for any workweek which is subjected to garnishment may not exceed - (1) 25 per centum of his disposable earnings for that week, or (2) the amount by which his disposable earnings for that week exceed thirty times the Federal minimum hourly wage prescribed by section 206(a)(1) of title 29 in effect at the time the earnings are payable, whichever is less. In the case of earnings for any pay period other than a week, the Secretary of Labor shall by regulation prescribe a multiple of the Federal minimum hourly wage equivalent in effect to that set forth in paragraph (2). (b) Exceptions (1) The restrictions of subsection (a) of this section do not apply in the case of (A) any order for the support of any person issued by a court of competent jurisdiction or in accordance with an administrative procedure, which is established by State law, which affords substantial due process, and which is subject to judicial review (B) any order of any court of the United States having jurisdiction over cases under chapter 13 of title 11 (C) any debt due for any State or Federal tax. (2) The maximum part of the aggregate disposable earnings of an individual for any workweek which is subject to garnishment to enforce any order for the support of any person shall not exceed (A) where such individual is supporting his spouse or dependent child (other than a spouse or child with respect to whose support such order is used), 50 per centum of such individual's disposable earnings for that week; and (B) where such individual is not supporting such a spouse or dependent child described in clause (A), 60 per centum of such individual's disposable earnings for that week; except that, with respect to the disposable earnings of any individual for any workweek, the 50 per centum specified in clause (A) shall be deemed to be 55 per centum and the 60 per centum specified in clause (B) shall be deemed to be 65 per centum, if and to the extent that such earnings are subject to garnishment to enforce a support order with respect to a period which is prior to the twelve-week period which ends with the beginning of such workweek. (c) Execution or enforcement of garnishment order or process prohibited No court of the United States or any State, and no State (or officer or agency thereof), may make, execute, or enforce any order or process in violation of this section. Rev. 07/06/05 10

11 DEBT COLLECTION IMPROVEMENT ACT OF 1996 ( DCIA ) The Debt Collection Improvement Act of 1996 (DCIA), part of Pub. L , enacted 31 U.S.C. 3720D, which gave authority to Federal agencies to use administrative wage garnishment to collect debts owed to those agencies. On April 12, 2002, the U.S. Department of Education ( Department ) issued a notice of proposed rulemaking (NPRM) regarding the Deparment s use of AWG under the DCIA (67 F.R ) ( DCIA NPRM ). On February 19, 2003, the Department issued final regulations (68 Fed. Reg. 8142) ( DCIA Final Regulations ). In the Background discussion of the NPRM, the Department noted that the terms and due process provisions of AWG under the HEA are virtually identical to those under the DCIA (67 F.R. 8072). In the Appendix to the DCIA Final Regulations, the Department further stated that [b]ecause the DCIA garnishment provision mirrors HEA section 488A, the Department s reasons for interpreting and implementing several DCIA provisions apply with equal force to identical terms of HEA section 488A, which the Department has authority to interpret (68 F.R. 8148). The pertinent similarities are explained infra. Rev. 07/06/05 11

12 AWG TIMELINE Rev. 07/06/05 12

13 NOTE: The statutory authority for this guidance can be found at HEA 488A, 20 U.S.C. 1095a. The regulatory requirement for these guidelines for guaranty agencies can be found in 34 CFR (b)(9). The timeline for guaranty agencies to perform activities related to the AWG process is as follows: Notice Prior To Wage Withholding Issuance ( Notice ) The borrower must be notified in writing at the borrower s last known address a minimum of 30 days prior to the issuance of the Order of Withholding from Earnings of: The nature and the amount of the debt involved. The guaranty agency s intention to order the employer to withhold wages. The right to request a hearing, which can be conducted either orally or in writing, and which will be heard before an independent hearing officer on: - the existence of the debt. - the amount of the debt. - the terms of the repayment schedule, other than a repayment schedule under a prior written agreement with the agency to prevent wage garnishment. The Notice is a form that has been approved by the Department. Hearing Request Deadline The hearing must be provided prior to issuance of an Order of Withholding from Earnings if the borrower s written request for a hearing is timely received (i.e., on or before the 15 th day following the borrower s receipt of the Notice). Absent contrary evidence, the borrower is considered to have received the Notice 5 days after it was mailed. If the borrower submits an untimely written request (i.e., outside the period noted above), a hearing must still be provided, but the AWG process nonetheless should proceed (e.g., garnishment under any existing Order of Withholding from Earnings should continue) pending the issuance of the hearing officer s decision, so long as the hearing is held and the decision is issued within 60 days from the receipt of the written request for hearing Hearing Decision Issuance The hearing officer shall issue a decision in the matter within 60 days after the receipt of the written Request for Hearing. This 60 day time period may be extended by mutual agreement of the borrower and the agency. In its discussion of the proposed DCIA regulations in the DCIA NPRM, the Department stated as follows: Based on experience in conducting garnishment under the HEA, we wish to clarify the consequences of failure to meet those requirements under the HEA, as Rev. 07/06/05 13

14 well as under the DCIA. Because the applicable provisions in the two statutes are identical, we would consider the same principles in the DCIA to apply, also, to time limits established in the HEA with respect to garnishment actions. 67 Fed. Reg The Department further stated that The DCIA, like its HEA counterpart, directs the creditor agency to complete any hearing within 60 days of the date on which the debtor files a request for a hearing (citation omitted). Neither statute adopts a particular consequence for failure to complete the hearing within 60 days. Therefore, consistent with well-established case law, we would not consider our failure to issue a decision within the 60-day period to invalidate a garnishment proceeding or preclude issuance of a garnishment order when we issue a decision beyond that period. Id. In responding to a specific comment to the DCIA NPRM asking the Department to state that the position taken in the DCIA NPRM regarding the effect of a failure to issue a decision within 60 days of an untimely request for a hearing applies as well to AWG under the HEA, the Department stated that [f]ailure by a guarantor to meet the HEA 60- day decision requirement, like a failure to meet the same duty under the DCIA addressed in these rules, does no more than suspend the garnishor s right to issue or continue in effect an existing garnishment order (68 F.R. 8151). Rev. 07/06/05 14

15 AWG HEARING PROCEDURES Rev. 07/06/05 15

16 Notification To Borrower The borrower is sent notification of the hearing prior to the scheduled hearing date. The notification letter will include at a minimum, information concerning the date and time of the hearing, verification of the phone number at which the borrower will be contacted or directions to the hearing site, as applicable, and deadlines for submitting additional documentation. The borrower can choose the type of hearing to be held: in person, telephone conference call or review of the borrower s written statement. In the last instance, the hearing officer will review written submissions from both the borrower and the agency. In-person and telephone hearings may be tape-recorded and a copy of the proceedings can be provided to the borrower upon request. Borrowers are responsible for all travel expenses related to in-person hearings, while all telephonic charges are the responsibility of the agency for hearings held by telephone conference. The date, time and location of the hearing are established by the agency. Burdens Of Proof And Presentation Of Evidence The agency has the burden of proving the existence and amount of the debt. This is commonly demonstrated by providing oral testimony and, in some cases producing exhibits that may include, but are not limited to: -Copies of loan applications and promissory notes -Evidence of disbursement -Evidence of claim payment -Evidence of payments made or applied to the account -Copy of the Notice Prior to Wage Withholding sent to the borrower The HEA does not specifically address the issue of AWG burdens of proof. However, under the DCIA, the facts necessary to establish objection(s) to the existence or amount of the debt; that the proposed garnishment rate would cause financial hardship; or that applicable law bars the Department from collecting the debt by garnishment at this time must be proven by the borrower by a preponderance of the credible evidence (34 CFR 34.14(b)-(d)). A similar standard applies under the DCIA to financial hardship claims (34 CFR 34.24(d)). The borrower also has the burden under the DCIA of informing the Department of circumstances surrounding an involuntary separation from employment. (34 CFR 34.23(b)) In the Appendix to the DCIA Final Regulations, in addressing a comment to the DCIA NPRM regarding proof of financial hardship, the Department stated that Independent hearing officials conducting hearings under HEA section 488A must rule in accordance with applicable law, including Department program regulations. Rev. 07/06/05 16

17 FFELP regulations do not contain any provision that expressly allocates the burden of proof of financial hardship. Section 34.21(sic)(d) does not bind either debtors or hearing officials, but rests on principles that courts generally apply to allocating the burden of proof between litigants. Those principles, as well as common sense, should persuade FFELP hearing officials to place on the debtor the burden of proof and persuasion of a hardship claim. (68 F.R. 8152). The decision of the Hearing Official should be based on the evidence presented and applicable laws and regulations. This evidence includes oral testimony provided by the guaranty agency, the borrower, and any witnesses of either party, guaranty agency records, documents and records provided by the borrower at or before the hearing, and the written Request for Hearing. Within this context, any oral or documentary evidence may be received, but the Hearing Official is entitled to exclude irrelevant, immaterial or unduly repetitive evidence. Any person(s) providing testimony and/or evidence at a hearing must do so under oath or affirmation. The guaranty agency will present its evidence first followed by the borrower s presentation and both parties will have an opportunity to question the other and any witnesses. In the event the borrower does not appear for an in-person hearing or is not present at the telephone number provided for a telephone hearing, the hearing will proceed as scheduled. The Hearing Official s determination will then be based on oral testimony and/or written submissions from the agency, in addition to the borrower s original hearing request and any written documentation supported by credible evidence submitted by the borrower. Standard Of Review Of Borrower Objections To Garnishment The statute requires the guaranty agency to provide a hearing on the determination of the Secretary or the guaranty agency, as appropriate, concerning the existence or the amount of the debt, and [where not established voluntarily] the terms of the repayment schedule. 20 U.S.C. 1095a(a)(5), (b). The Hearing Official who conducts this hearing will generally make an independent, de novo determination on questions of law and fact raised by borrower objections to the existence, amount, and enforceability of the debt, as well as claims of financial hardship. However, some borrower objections rest on claims for discharge relief on grounds (closed school, false certification of eligibility to borrow, unpaid refund, and total and permanent disability) authorized only by HEA U.S.C That statute gives authority to determine those discharge claims to the Secretary, who has delegated that responsibility to the guaranty agency. See, e.g., 34 C.F.R (c)(7) (disability), (d)(6) (closed school), (e)(6) (false certification), (o)(1) (unpaid refund). The principles that guide the Hearing Official in considering objections based on discharge claims arise from court rulings in instances in which borrowers sued for this discharge relief. The case law is unanimous that borrowers cannot seek these kinds of discharge relief directly from a court, but must present their claim, and obtain a determination from, the Secretary or the guarantor, who is initially responsible for Rev. 07/06/05 17

18 determining whether the student loan should be discharged. In re Schol, 239 B.R. 345 (Bankr. N.D. Iowa 2001) (closed school claim). See U.S. v. Wright, 87 F.Supp.2d 464 (D. Md. 2000); U.S. v. Bertucci, C.A. No , 2000 U.S. Dist. LEXIS (E.D. La., Aug. 30, 2000) (unpaid refund claim); In re Bega, 180 B.R. 642 (Bankr. D. Kan. 1995). Accordingly, where a borrower objects to garnishment by claiming discharge relief under HEA 437, the Hearing Official must first determine whether that claim has been presented to the guarantor in the manner required by Federal regulations, and then whether the guarantor has make a decision on that claim. Federal regulations, for example, require the borrower to complete an application in order to have the claim considered. 34 C.F.R (c)(2) (disability), (d)(3) (closed school), (e)(3) (false certification), (l)(4) (unpaid refund); McComas v. Riley, C.A. No. 3: , 1998 U.S. Dist. LEXIS (S.D. W.Va. Feb. 27, 1998), at 7. If the guarantor has not already received a completed application from the borrower and made a determination on that claim, the newly-presented discharge claim must be referred to the guarantor for decision. This may require an adjournment in the hearing procedure to accommodate this discharge determination. 1 Furthermore, Federal regulations allow the borrower whose false certification claim is denied by the guarantor an administrative appeal to the Secretary. 34 C.F.R (e)(11). A favorable decision by the guaranty agency on a discharge claim generally moots the garnishment action. Where the guaranty agency denies the discharge claim, the Hearing Official then considers the determination by the guarantor on that claim by applying the same standards a court applies in reviewing other informal administrative agency determinations. The Hearing Official, like the court, determines whether the determination by the guarantor (or the Secretary) denying the discharge claim was "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law." 5 U.S.C. 706(2)(A). Allen v. Riley, C.A. No , 2000 U.S. Dist. LEXIS (W.D. Ky. March 28, 2000) at 12. This inquiry whether conducted by the reviewing court or by the Hearing Official is limited to "whether the [Secretary or guarantor s] decision was based on consideration of relevant factors and whether there has been a clear error of judgment." Allen, 2000 U.S. Dist. LEXIS 21101, at 11; see also Sandler v. Riley, C. A. No. 00-CV-4432, 2001 U.S. Dist. LEXIS (E.D. Pa. July 19, 2001), vacated on other grounds, Oct. 16, 2002; U.S. v. Onyi, C.A. No JTM (D. Kan. Nov 17, 2000); Most v. U.S. Dep t of Educ., No. 98CV2910 (D.D.C. Dec. 21, 1999). Under this standard, the Hearing Official upholds the guarantor s denial on a discharge claim if the Hearing Official concludes that the decision denying the discharge claim is rationally based, founded upon a consideration of relevant factors and does not exhibit clear error of judgment. Lee v. Riley, No. 3:96CV-719-H (D.D.C. Feb. 27, 1998), slip opin. at 2. If the court, or the Hearing Official, concludes that the guarantor s denial decision on the discharge claim does not meet this test, the case must be 1 Federal regulations generally require the guarantor to suspend collection action on a loan when the guarantor receives reliable information indicating that the borrower may be eligible for discharge relief, to inform the borrower how to apply for discharge relief, and to evaluate and determine the claim for relief if received. See. e.g., 34 C.F.R (e)(6). Rev. 07/06/05 18

19 remanded to the [guarantor] for further consideration. Most v. U.S. Dep t of Educ., No. 98CV2910 (D.D.C. Dec. 21, 1999), slip opin. at 6. Finally, in conducting this determination, the Hearing Official must give controlling weight to the Department s interpretation of its own regulations unless [that interpretation] is plainly erroneous or inconsistent with the regulation. Stinson v. U.S., 508 U.S. 36, 46, 113 S.Ct. 1913, 1919 (1993), citing Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414, 65 S.Ct. 1215, 1217 (1945). 2 2 This bears, in particular, on handling of disability claims. Federal regulations provide that unlike other discharge relief listed above the guarantor has no authority to actually discharge a loan on the basis of borrower disability. Rather, the guarantor can, at most, determine that the claim merits consideration for potential discharge by the Department, and if it does so, it assigns the loan to Education. 34 C.F.R (c)(8), (11). Education conducts its own review, and either grants a conditional discharge or denies the claim and demands payment from the borrower. 34 C.F.R (c)(12) - (14). In either case, Education retains the loan, and collection action by the guarantor, including the pending garnishment action, therefore ceases when the loan is assigned to Education. Rev. 07/06/05 19

20 BORROWER OBJECTIONS The following section describes objections often raised by borrowers in AWG hearings and how they are commonly handled by guaranty agencies. Some of the matters that may be raised as borrower objections are governed by other Federal laws and/or regulations which have prescribed standards and procedures for review. The right of a borrower to assert that the loan was discharged in bankruptcy or should be canceled by reason of total and permanent disability, closed school or false certification discharge, or an unpaid refund due from the school are among such objections and, for informational purposes, are further described in this section. In the Appendix to the DCIA Final Regulations, the Department stated that hearing officers must rule in accordance with applicable law, including Department program regulations.(68 Fed Reg at 8152). Rev. 07/06/05 20

21 Involuntary Separation From Employment Borrowers are exempt from wage garnishment if they were involuntarily separated from their previous employer and have not been continuously re-employed for 12 consecutive months. This exemption can be based on information provided by the borrower or independently obtained by the guaranty agency that may include: Documentation from a state employment agency/commission demonstrating entitlement to unemployment compensation or, if not eligible for benefits, even if involuntarily separated, a statement to that effect from the state agency/commission; or Documentation from the borrower s previous employer showing that the borrower was involuntarily separated from employment and stating the date of the separation; and Evidence from the present employer demonstrating when employment began. Dispute Amount Owed Borrowers may dispute the amount owed on their debt for a variety of reasons, including: Portion of loan already repaid - the borrower should enclose copies of the front and back of all checks, money orders, and any receipts showing payments made that are not included in the guaranty agency s records. Accrued interest the amount of interest is set by the terms of the promissory note. The lender is allowed to credit the entire payment amount first to any late charges accrued or collection costs and then to any outstanding interest and principal [34 CFR (b)(1)]. Collection costs Pursuant to 484A(b) of the HEA, 20 USC 1091a(b), and the terms of most borrowers promissory notes, borrowers are liable for the costs of collecting defaulted Federally-financed student loans. The lender may credit the entire payment amount first to any late charges accrued or collection costs and then to any outstanding interest and then to outstanding principal [34 CFR (b)(1)]. See also Collection Costs, below. School refunds (see Loan Discharge Due to Unpaid Refund below) Accrual Of Interest: Interest accrues on student loans as simple interest, and with limited exceptions is not compounded ( capitalized ). HEA 427A, 20 U.S.C. 1077a, sets the formula for Rev. 07/06/05 21

22 the interest rates on FFELP loans. Generally, FFELP loans made after 1993 have variable interest rates, adjusted annually. The rates are based, typically, on the 91-day Treasury bill rate plus a margin of 2.3% to 3.1% during the repayment period, and are capped at 8.25% to 10%, depending on when the loan was made. Some FFELP loans made earlier have similar variable rate mechanisms, with different caps. Consolidation Loans, on the other hand, almost always have fixed interest rates set as the weighted average of the rates in effect on the original loans at the time the Consolidation Loan is made and those loans are paid off. Federal regulations allow interest to be added to principal, or capitalized, in several instances. Before default, the lender may capitalize interest for which the borrower is liable 3 that accrues while the borrower is in school, in the grace period, and during periods of deferment and forbearance C.F.R (b)(2). In the FFELP promissory note, the borrower consents to this kind of capitalization. Unpaid interest also becomes part of the principal owed by a defaulter when the guarantor pays a default claim, if the defaulter does not pay that amount in full promptly on demand by the guarantor. The loan guarantee covers both unpaid principal (which may include interest already capitalized by the lender prior to default) and simple interest that accrued during the repayment period and that was owed but not paid by a defaulter. Under common law, a guarantor that pays an obligation acquires a claim for reimbursement against the debtor for the amount paid pursuant to that guaranty commitment. Courts recognize that student loan guarantors, like other guarantors, have this common law right against the defaulting borrower. See U.S. v. Bellard, 674 F.2d 330 (5th Cir. 1982). This right to indemnification for its loss from the defaulter is a separate cause of action from the rights against the defaulter acquired from the lender by the guarantor as assignee of the loan. When the defaulter fails to honor the guarantor s demand to pay the amount paid out by the guarantor, that liability accrues interest, as would any other financial obligation not paid timely. Moreover, unlike capitalization of interest that accrues prior to default, which rests on consent given by the borrower, the guarantor s claim for reimbursement bears interest as a matter of law, and does not depend on debtor consent. Federal regulations, moreover, direct the guaranty agency to charge the debtor interest on the full amount paid by the guarantor to the lender by reason of the borrower's default. 34 C.F.R (b)(3). The amount paid to the lender thus becomes the principal of the debt the guarantor s account receivable and accrues interest. Collection Costs 3 Borrowers who meet Federal needs tests qualify for payment by Education of interest that accrues on their loans while they are in school, in the grace period, and in periods of deferment. 20 U.S.C. 1078(a)(3); 34 C.F.R (b). 4 Forbearance includes any suspension of payment for grounds not qualifying as a deferment, any extension of time for making payments, or any reduction in the amount of payments required. Rev. 07/06/05 22

23 The following is a summary of the rationale for assessing collection costs on defaulted student loans on a cost-spreading (as opposed to debt-specific) basis. Defaulted Federally-reinsured student loans are "claims" owed to a federal agency (i.e., the U.S. Department of Education) on which federal law requires the imposition of collection costs [(31 U.S.C (b)(1)(a), 3717(e)(1)]. Under the Federal Claims Collection Standards, the calculation of collection costs may be based on estimates as determined by the subject federal agency [(31 CFR (c)]. Consistent with this mandate, section 484A(b)(1) of the Higher Education Act ( HEA ) provides that defaulted borrowers must pay reasonable collection costs [20 U.S.C. 1091a(b)(1)]. The HEA does not specify which costs are reasonable or how those costs are determined. However, regulations promulgated under the HEA 5 require guaranty agencies to charge reasonable costs incurred in collecting these Federally-reinsured defaulted loans using a make whole formula, computed like a contingency fee and applied against each defaulted borrower s payment, [34 CFR (b)(2); 34 CFR (f); 34 CFR 30.60] which calculation is capped at the rate currently charged by the Department with respect to its own defaulted student loan collections 6. This regulatory method results in a cost spreading approach, which does not attempt to track or charge each defaulter with the costs actually incurred to collect each specific debt. In some cases, the actual costs of collection will be higher and in other cases lower. However, by capping the rate, the regulations minimize any potential disparity between averaged costs and actual individualized costs in any given instance. This method has been upheld in the only case to date that has addressed a challenge to the method as a reasonable method of assessing collection costs (ECMC v. Barnes (2004 WL (S.D. Ind. Dec. 15, 2004). Congress intended that the borrower become liable for collection costs borne by the Department in trying to collect defaulted student loans. 7. The collection cost recovery method dictated under the Department s regulations furthers that intent. Upon default, lenders assign the loan to the agency that guaranteed it; the guaranty agency pays the default claim and then claims reimbursement from the Department. The Department pays that reinsurance claim and become entitled to a portion of all sums collected by the guarantor on that loan [(HEA sec. 428(c), 20 U.S.C. sec 1078(c)]. To the extent the guaranty agency does not charge and collect enough to cover all cost of collection, in 5 The Higher Education Act provides the Secretary of the Department of Education with the express authority toregulate in this area (20 U.S.C. 1082) 6 34 CFR (b )(2)(ii). The Department is the largest holder of defaulted student loan debt. It seeks competitive contingency fee bids from contractors to provide default collection services, which bids serve as a surrogate for a market rate for collection costs. 7 H.R. Rep. No. 300, 99 th Cong. 2d Sess (1986) 274, 396, reprinted in 1986 U.S.C.C.A.N Rev. 07/06/05 23

24 addition to principal and interest, sums remitted by the agency to the Department are reduced. This means the (unrecovered) costs of collecting defaulted loans effectively would be borne by the Department and, ultimately, by the taxpayer. As implemented by the make whole rule, HEA Section 484A(b)(1) instead imposes these costs on the defaulter. Making Payments As Required Under A Previously Negotiated Repayment Agreement Borrowers sometimes state that they are current in a repayment schedule with the guaranty agency. In these cases, the agency researches the account to verify what arrangements, if any, were made. The borrower must provide documentation regarding previously negotiated payment arrangements, as well as evidence of payments made. Proper documentation of payments made would be a copy of the front and back of the canceled payment instruments. Extreme Financial Hardship The Department limits AWG objections to the terms of the repayment schedule under the DCIA to consideration of whether the rate or amount of the proposed garnishment would result in financial hardship to the borrower and the borrower s dependents (34 CFR 34.7(a) and See 67 F.R.18073). This interpretation should also be applied to HEA AWG and the same AWG objection under the HEA (20 U.S.C. 1095a(a)(5)) should be similarly limited. Other regulatory provisions regarding the financial hardship objection to AWG under the DCIA, and the Department s views of them, are instructive and should be followed in addressing this same borrower objection under the HEA. For example: (a) financial hardship should be found to exist only where the proposed garnishment will cause significant short-term inability to meet basic monthly living expenses (b) the borrower should provide credible documentation of the claimed costs for basic living expenses and disclose all income available to meet those expenses, including the income of all persons whose expenses are claimed by the borrower (e.g., spouse and dependents); (c) the reasonableness of expenses should be determined with reference to national standards adopted by the IRS 8, and proof of unique circumstances should be required to support expenses that exceed that standard for family units of the same size and similar income of the borrower (The IRS standards can be found at 8 These rules do not expressly apply to AWG under the HEA. However, in the Appendix to the DCIA Final Regulations, the Department stated that it believes that hearing officials in HEA garnishment proceedings should accept the (National Standards adopted by the IRS) as persuasive evidence of the amounts reasonable and necessary and should require any debtor who claims larger amounts are needed to support that contention by persuasive evidence (68 F.R. 8152). Rev. 07/06/05 24

25 or by going to the Department s website at and selecting Collection Financial Standards ); and (d) borrower inconvenience or inability to satisfy lifestyle choices (for example, preferences regarding expenses such as private schooling, retirement, automobiles, vacation, entertainment, charitable contributions) and career choices should be discounted, as should other financial obligations (e.g., credit cards, except to the extent used to meet basic living expenses) incurred in disregard of the subject student loan debt. In the Appendix to the Final Regulations, the Department agreed with a comment that the degree of financial hardship under the DCIA differs from, and is less than, the financial hardship needed to support a bankruptcy hardship claim, noting that the DCIA regulations measure hardship using national standards, which compare the debtor s expenses to the average amounts incurred by families of similar size and income, while bankruptcy hardship analysis compares the debtor s expenses to those needed to maintain what case law refers to as a minimal standard of living Brunner v. N.Y. Higher Educ. Serv. Corp., 831 F. 2d 395, 396 (2 nd Cir. 1987). The amounts spent for living expenses by peers of the debtor will in many instances significantly exceed those justifiable for a minimal standard of living (68 F.R. 8151). Under the DCIA, a borrower objection based on a claim that, under applicable law (e.g., 15 USC 1673), the amount or rate of garnishment is limited, or no amount can be withheld, should not be considered the proper basis for a financial hardship objection (34 CFR 34.7(c) and 34.14(e). Information documenting expenses and income should be submitted by the borrower prior to the hearing date for review by the guaranty agency. Based on the information received, the hearing officer will determine whether garnishment in the amount of ten percent of disposable pay would constitute an extreme financial hardship, and if so, the percentage amount of garnishment permissible. The agency s representative will be prepared to recommend an acceptable payment amount based on its analysis of the borrower information provided and the agency s own data. This information will also be provided to the hearing officer during the hearing. Because income and expenses change from time to time, any determination of financial hardship is necessarily a temporary one and may change as the borrower s financial circumstances change. The hearing officer s decision should explicitly recognize the provisional nature of any determination regarding hardship. If the hearing officer determines that garnishment at the full ten percent rate would impose an extreme financial hardship, then the decision should specify the period for which the determination shall apply, and that the guaranty agency may conduct a periodic review of the borrower s financial circumstances. This review may result in a new action to seek a larger garnishment amount where justified by the results of that review. Rev. 07/06/05 25

26 NOTE: Federal law provides for protection against garnishment of a prescribed floor level of income at or under which the employer may not honor a garnishment order from the guaranty agency or other creditor. Under 15 U.S.C. 1673, for debts other than family support and taxes, the employer may honor a garnishment order only from those earnings that exceed the protected amount, which is either the sum equal to thirty times the then-current minimum wage per week or 75% of disposable earnings per week, whichever amount is greater. Bankruptcy Filed And Case Still Open Chapter 7 Chapter 7 cases generally last between four to six months. Upon filing of a Chapter 7 bankruptcy petition, all collection activity must be suspended until the petition is either discharged or dismissed. The borrower is required to prove the automatic stay, preventing any collection activity, is still in effect. Proof of filing of bankruptcy should include the First Meeting of Creditors or other confirmation issued by the Bankruptcy Court [34 CFR (f)(2)(3)]. Chapter 13 Chapter 13 cases generally last three years with a five-year maximum. Upon filing of a Chapter 13 bankruptcy petition, all collection activity must be suspended until the petition is either discharged or dismissed. The borrower is required to prove the automatic stay, preventing any collection activity, is still in effect. Proof of bankruptcy should include the First Meeting of Creditors, or other confirmation issued by the Bankruptcy Court [34 CFR (f)(2) and (3)]. In each of these instances, the co-makers on PLUS loans and spouses on Spousal Consolidation loans remain liable, however collection activity is suspended until the bankruptcy is dismissed or discharged. [34 CFR (f)(2)]. Additionally, the hearing officer s decision should reflect that the borrower is in bankruptcy and the guaranty agency is entitled to restart the AWG process upon dismissal or discharge of the bankruptcy proceeding to determine if the student loan was discharged in bankruptcy. Loan Discharged In Bankruptcy Presumptive Nondischargeablity Of Student Loans Student loans are presumed to be non-dischargeable, and may only be discharged if the bankruptcy Judge enters an Order specifically discharging the student loans at issue because repayment of the loans would impose and undue hardship on the debtor and the debtor s dependents [11 U.S.C. 523(a)(8)(A) and (B)]. Prior to October 7, 1998, Rev. 07/06/05 26

27 student loans were also dischargeable if they had been in repayment for more than seven years, exclusive of any applicable suspension of the repayment period [11 U.S.C. 523(a)(8)(A)]. The Higher Education Amendments of 1998, Pub. L , 971, amended 11 U.S.C. 523(a)(8) to eliminate the seven-year provision. The undue hardship exception is self-executing and the guaranty agency does not need to file a complaint to determine non-dischargeabilty. U.S. v. Davis, 142 B.R. 293 (S.D. Ind. 1992). The debtor bears the burden of proving an undue hardship exists, Woodcock v. Chem. Bank, 45 F.2nd 363(10th Cir. 1995), or that the loan became due prior to the seven year period. Chisari v. Fla. Dep t of Educ., 183 B.R. 963, 967 (Bankr. M.D. Fla. 1993). Courts agree that Chapter 13 plans that include provisions purporting to discharge a student loan should not confirmed, but are divided on whether such plans, if confirmed, bind the creditor and discharge the debt. Compare, e.g., In re Pardee, 193 F.3d 1083 (9 th Cir. 1999), and In re Anderson, 215 B.R. 792 (10th Cir. BAP 1998) (plan provision binds student loan creditor), with In re Banks, 299 F.3d 296 (4 th Cir. 2002) (plan provision does not bind creditor). If the student loan is discharged in bankruptcy, co-makers on PLUS loans who did not obtain a discharge remain liable unless they otherwise qualify for discharge. [34 CFR (a)(3)]. Repayment Start Date: For cases prior to October 7, 1998, when loans were dischargeable under the seven year rule, several cases identified when the loan first became due by stating the seven year period of presumptive non-dischargeabilty begins when the loan first became due. This is when the lender required the first installment payment to be made, not the start of the repayment period [34 C.F.R (a)(3)(ii)]. The following cases have addressed the repayment start date: Woodcock v. Chem. Bank, 45 F.2 nd 363 (10th Cir. 1995); Chisari v. Fla. Dep t of Educ., supra; Nunn v. Washington, 788 F.2nd 617, 619, (9th Cir. 1986); In re Bachner, 165 B.R. 875 (Bankr. N.D. Ill. 1994); and Scott v. U.S.E.D., 147 F.3d 788 (8th Cir. 1998) (date first payment is scheduled to be made). Consolidation Loans: Consolidation loans are considered new loans and the repayment start date is the date the first payment was due on the consolidation loan. Hiatt v. Indiana State Assistance Comm n. 36 F.3d, 21 (7th Cir. 1994), In re Toberst, 1993 U.S. Dist. LEXIS 8086 (D.Kan. 1993), U.S. v. McGrath, 143 B.R. 820 (D Md. 1992), aff d 8 F.3d, 821 (4th Cir. 1993), In re McKinney, 1992 U.S.Dist. LEXIS (N.D. Ohio 1992), rev d 120 B.R. 416 (Bankr. N.D. Ohio 1990); In Re Cobb, 196 B.R. 34 (Bankr. E.D. Va. 1996); In re Hesselgrave, 177 B.R. 681 (Bankr. Ore. 1995); In re Mendez, 151 B.R. 972 (Bankr. M.D. Fla. 1993); In re Saburah, 136 B.R. 246 (Bankr. C.D. Calif. 1992); In re Martin, 137 Rev. 07/06/05 27