Credit Encounters of the First Kind: Student Loans and Online Lending Assistant Attorney General Jessica Whitney Legal Intern Lily Dobson Disclaimer The opinions expressed today are those of the speaker and only the speaker. They do not necessarily represent the opinions of the Iowa Attorney General. 1
Why Today s Topics? Student Loans these loans may be a young adult s first experience with large, long-term lending Online Predatory Lending young adults may feel they are in need of quick and easy cash due to school and work circumstances Student Loans 2
In the News: National Student Loans There are around 39 million Americans with student loan debt More than 7 million borrowers are in default on federal and private student loans $1.2 trillion in student loan debt - now larger than credit card debt in America http://www.consumerfinance.gov/blog/a-closer-look-at-the-trillion/ http://www.newyorkfed.org/studentloandebt/index.html Student Loans in Iowa 2011-2012 academic year: 71% - Percentage of Iowa college graduates with student loan debt $29,456 - Average student loan debt Iowa had the 6 th highest average student loan debt in the nation http://db.desmoinesregister.com/average-student-loan-debt-iowa-students/ 3
Consequences of Non-Payment are Serious Overdue notices and demands in the mail Credit score affected, leading to problems getting an apartment, other loans, or a vehicle Interest rate increases Late fees assessed Creditors and collectors may file legal actions to garnish wages Bankruptcy and Student Loans Student loans can be almost impossible to discharge Student loans are subject to unique bankruptcy requirements Strict requirements make both federal and private student loans very difficult to discharge in bankruptcy Student loans can haunt borrowers indefinitely 4
What Can Students Do? Make Smart Borrowing Decisions Research and exhaust all other sources before borrowing student loans Carefully consider all loan products and compare their terms before signing up 5
Borrowing Alternatives Grants and scholarships Free online scholarship searches Federal Work-Study Family contributions Cutting costs Consider having roommates to lower the cost of rent Part-time job to balance costs Consider night or evening classes to accommodate a part-time job Types of Student Loans Federal loans originated by the federal government File the Free Application for Federal Student Aid (FAFSA) at https://fafsa.ed.gov/ Exhaust all federal loan options before considering private loans Private loans issued by a bank or credit union Far fewer protections available Higher fees and interest rates 6
Let s Compare Repayment Federal Student Loans Borrowers do not have to start repaying federal student loans until they graduate, leave school, or change their enrollment status to less than half-time Offer income-based repayment plans Private Student Loans Many private student loans require payments while a borrower is still in school Most do not offer income-based repayment options 7
Interest Rates Federal Student Loans Interest rates on federal loans are fixed at a specific rate Rates are often lower than private loans and much lower than some credit card interest rates Private Student Loans Private student loans often have variable interest rates and higher interest rate caps Variable rates may substantially increase the total amount owed Rates may be lower in the beginning to entice borrowers Subsidized Loans Federal Student Loans Undergraduate students with financial need will likely qualify for a subsidized loan where the government pays the interest while the borrower is in school on at least a half-time basis Private Student Loans Private student loans are not subsidized No one pays the interest on the loan except the borrower Interest accrues during school and is capitalized at repayment 8
Credit Checks Federal Student Loans Borrowers don t need a credit check for federal student loans Successful repayment of federal student loans can help a borrower establish a good credit record Private Student Loans Private student loans may require an established credit record Interest rates and fees of a private student loan will depend on a borrower s credit score and other factors Cosigners Federal Student Loans Borrowers won t need a cosigner for a federal student loan Loans are available to all full-time students, regardless of credit history Private Student Loans Borrowers will likely need a cosigner 9
Tax Deductible Interest Federal Student Loans Interest on federal student loans can often be a tax write-off / tax deductible,saving money Private Student Loans Interest may not be tax deductible Forbearance / Deferment Federal Student Loans If borrowers are having trouble repaying their loans, they may be able to temporarily postpone or lower their payments through forbearance or deferment plans Private Student Loans Very few private student loans offer forbearance or deferment options 10
Prepayment Penalties Federal Student Loans There is no prepayment penalty for paying loans early Private Student Loans Borrowers need to make sure there are no prepayment penalty fees before borrowing Loan Forgiveness Federal Student Loans Borrowers may be eligible to have some portion of their loans forgiven if they work in public service Repayment assistance available from the Peace Corps, Teach for America, etc. Private Student Loans It is unlikely that lenders will offer a loan forgiveness program 11
Cancellation Federal Student Loans In the event of permanent and total disability, borrowers can apply to have their loans discharged In the event of death, the loan is generally forgiven Private Student Loans In the event of death or disability, the burden of paying the remainder of the loan may pass to the cosigner Moral of the Story Always maximize federal loans and alternative options before resorting to any private student loans 12
Borrower Checklist Know types of aid available Choose responsibly how much to borrow Understand interest rates Keep track of how much is being borrowed Make interest payments while in school and consider working part time Begin budgeting for the monthly payments before repayment starts When Private Loans Are Necessary... Talk to financial aid officers to make sure all other options have been explored Shop around and compare loans from various lenders Ask important questions: How much will this loan cost in total? What will the monthly payment be? Is the interest rate fixed or variable? Is there a lower interest rate available? What fees are included or required? 13
Resources for Students Scholarships Information about scholarships: https://studentaid.ed.gov/types/grantsscholarships/finding-scholarships Federally-sponsored scholarship search: http://careerinfonet.org/scholarshipsearch/scholarsh ipcategory.asp?searchtype=category&nodeid=22 Federal Work-Study Information about Work-Study: https://studentaid.ed.gov/types/work-study Iowa Student Loan Game Plan SM Free, online tool to help high school and undergraduate students understand how student loans impact future finances http://www.studentloan.org/education- Tools/Student-Loan-Game-Plan.aspx 14
Other Resources Consumer Financial Protection Bureau (CFPB) http://www.consumerfinance.gov/paying-forcollege/ Federal Trade Commission (FTC) http://www.consumer.ftc.gov/articles/0160- student-loans Tools and Calculators https://bigfuture.collegeboard.org/pay-forcollege/tools-calculators Questions? 15
Online Predatory Lending What Type of Online Lending Are We Discussing? Short-term loans based on electronic access to the borrower's bank account deposit borrowed funds electronically No Credit Check On the assigned due date, the lender automatically withdraws the amount owed, plus any fees or interest, from the borrower s account Usually within 2-3 weeks or on the borrower s next payday payday loans 16
How They Often Work John borrows $100, deposited straight into his bank account Two weeks later, the lender withdraws the $100, plus a $16.67 fee from John s bank account A $16.67 fee for a two-week, $100 loan is more than 434% APR An expensive credit card would only charge around 24% APR That s only $.92 fee for that same $100 Many online lenders fall under the category of. Predatory Lenders 17
What is Predatory Lending? No Legal Definition It isn t a legal term, but rather a phrase used by many to describe a form of lending Working Definition A loan with excessive fees or interest that tends to perpetuate the consumer s debt cycle and where little care has been paid to the consumer s ability to repay the loan Practical Definition You ll know it when you see it Why Students Should Beware Young adults may be vulnerable to predatory online lenders due to a lack of developed credit, lower income, or lack of knowledge about borrowing money What may seem like quick and easy money can pile up and cause serious problems for borrowers 18
Who Do Predatory Online Lenders Target? Subprime Borrowers Risky credit history Credit score of 620 or less Unsophisticated Borrowers First time borrowers like students Uninformed consumers Desperate Borrowers Need money now for things like rent, bills, and food Fast, Flexible, Cheap Loans! While this may sound great to an uninformed borrower, be warned It s a trap! 19
Reality of Many Online Predatory Loans While online loans may seem like quick and easy money: Interest rates range in the hundreds Insufficient funds in bank accounts due to multiple or unexpected withdrawals create large overdrafts and more fees Vicious debt cycle for the consumer Many consumers may become trapped and driven to bankruptcy Common Online Loan Characteristics Contain little or no underwriting Unaffordable repayment terms Lack of recourse for consumers mandatory arbitration clauses Designed to foster a cycle of debt Do not build positive credit scores 20
The Debt Cycle Most borrowers are tight on cash to begin with (that s why they need the loan), so the extra fees put a high burden on already stretched budgets Short term loans don t provide borrowers time to reacquire the borrowed funds May have to borrow more to pay back previous loans Iowa Lender Requirements Payday lenders are required to have a physical presence in Iowa Companies must be a registered with the State Lenders must abide by state laws, limiting interest rates and fees 21
Pop Quiz! An Iowa consumer visits a website for a quick and easy payday loan. The consumer completes the transaction through the website and receives the loan 22
The lender is not physically located in Iowa, nor is it licensed to operate here The loan charges interest and fees above those allowed by Iowa law The borrower is asked to agree to another state s law governing the transaction 23
Is this legal in the State of Iowa? NO! It is illegal under Iowa laws. 24
If it s illegal, can borrowers get their money back? Borrower is not excused: From paying back the borrowed amount and; The legal amount of interest and fees under Iowa law for a nonregistered company 25
But the borrower may be entitled to: A refund of the amount paid over the legal limit on interest and fees Excused from paying any further finance charges past the Iowa limit Moral of the Story Avoid predatory online lenders! Any immediate benefits gained from the online loan are not worth the long term risks 26
Alternatives #1: Budget Save Plan! Be aware of where money is spent and try not to spend wastefully Cut costs where available Try to save for unexpected events and bills Ask family, friends, or community groups for short-term assistance Alternatives Consider small loans from a local credit union Credit cards APR is likely better Utility bills contact provider and ask about payment assistance programs 27
In the News: Tribe-Affiliated Online Loans Online lenders are teaming up with some Native American tribal entities or tribeaffiliated individuals to avoid state limits on interest rates and fees Tribes and some tribal entities retain the right of Sovereign Immunity protection from state regulations and lawsuits Questions and Concerns The level of the tribe s involvement in these businesses Tribal sovereignty and the lender s ability to enforce loans made to a non-tribal members in different states Courts are currently deciding the matter Current litigation and settlements with major loan providers nationwide 28
Victims of Predatory Lending: File a complaint with the Iowa Attorney General s Office Call at (515) 281-5926 Visit www.iowaattorneygeneral.gov Questions? 29