When the People Supposed to Help You Make Things Worse
If you’ve ever called your student loan servicer looking for help and walked away more confused than when you started, this episode is going to make a lot of sense. Steve Rhode and Damon Day dig into the Department of Education Inspector General’s report that confirmed what borrowers have been saying for years: the companies hired to manage your federal student loans are doing a terrible job.
The Student Loan Servicer Problem
The Inspector General reviewed the Department of Education’s oversight records from 2015 through September 2017 and the findings were damning. Servicers failed to tell borrowers about their repayment options, steered them into forbearance when income-driven repayment plans would have been better, and even miscalculated what borrowers should have to repay.
Here’s the circular problem: the CFPB tells borrowers to contact their servicer so they don’t get scammed by debt relief companies. But the CFPB also sued Navient for giving bad advice. The servicers, when sued, argued that giving advice isn’t even their job. So who exactly is supposed to help you?
“The federal student loan servicers’ job is not to help you craft a plan to solve your problem. That’s not what they’re there for. So calling them for advice is still usually going to end in a train wreck.”
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Damon shares a story of being on a three-way call with a client and a servicer. The servicer told the client to hang up on Damon and call back without him. The servicer was pushing a repayment plan that didn’t fit the client’s overall financial strategy. The servicer didn’t know or care about the client’s other debts, cash flow, or long-term plan.
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Argosy University: Another For-Profit School Collapse
Argosy University joined the growing list of for-profit schools in financial freefall, including ITT Tech, Corinthian, and Education Corporation of America. Students were waiting for about $13 million in federal financial aid that the school received but never distributed.
If you attended a for-profit school that closes, you may qualify for a closed school discharge of your federal student loans. But there are strict requirements: you must be enrolled at the time of closing or have withdrawn within 120 days. If you re-enroll in another school, you may lose eligibility for up to three years.
Damon raises an interesting question: if a school is clearly about to close and you attended years ago, could you re-enroll now to qualify for the discharge when it happens? It’s untested, but it’s the kind of creative thinking that comes from actually caring about the borrower’s outcome.
7 Million Car Loans Past Due
More than 7 million car loans were 90+ days past due in Q4 2018. This is what happens when lenders get greedy during periods of low unemployment and start extending credit to people who can’t afford it. The lesson is straightforward: just because a lender approves you for a loan doesn’t mean you can afford it.
What to Do About Old Judgments
A listener in Steve and Damon’s online support group was dealing with a Discover judgment from years ago that had been sold to a new collector. If you’re sued by a creditor, the absolute worst thing you can do is nothing. Default judgments lead to wage garnishment and bank account levies.
But even after a judgment, there’s still room to negotiate. Creditors would rather have money now than chase a garnishment for years. And bankruptcy can eliminate judgments entirely.
Free Tool — Wage Garnishment Calculator: Worried about your paycheck being seized? The free Wage Garnishment Calculator shows exactly how much creditors can legally take in your state — and some states prohibit garnishment entirely. Calculate My Risk →
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Key Takeaways
- The Department of Education Inspector General found student loan servicers were steering borrowers into forbearance instead of recommending income-driven repayment plans that could help them.
- Student loan servicers admitted in legal proceedings that providing financial advice is not their job, yet the CFPB directs borrowers to contact their servicers for help.
- Argosy University students were left without $13 million in financial aid while the school entered court-ordered receivership, a pattern seen with ITT Tech, Corinthian, and Education Corporation of America.
- Closed school discharge can forgive federal student loans if you were enrolled or withdrew within 120 days of the school closing, but re-enrolling in another school may disqualify you.
- More than 7 million car loans were past due by at least 90 days in the fourth quarter of 2018, driven by lenders extending credit to increasingly unqualified borrowers.
- If you are sued by a creditor, doing nothing leads to a default judgment that can result in wage garnishment of up to 25% of your disposable income or a bank account levy.
- Even after a creditor obtains a judgment, there is still a window to negotiate a settlement for less than the full amount owed, because creditors prefer money now over years of garnishment.
Full Transcript
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Episode Introduction
Steve Rhode: Hi, this is Steve Rhode, your Get Out of Debt Guy from GetOutOfDebt.org. Here’s the latest practical money, credit, and debt advice.
Damon Day: Hey Steve, what’s the haps?
Steve Rhode: Well, we got all sorts of tools to play with here. And I’ve got all sorts of audio clips of you.
Damon Day: So whenever you hear me interject with something weird, it won’t be me, it’ll be Steve hitting his buttons.
Steve Rhode: So let me actually queue up. We’re going to talk about three things. We’re going to try to do them quickly, we’re going to try to get the information out there and get this show on the road.
Inspector General Report on Student Loan Servicers
Steve Rhode: First, I want to talk about the Inspector General report that came out. Department of Education. The Inspector General found that the Department of Education is doing a really crappy job supervising their collectors, their servicers, the people they hire to manage student loan payments.
Steve Rhode: The Inspector General found that the U.S. Department of Education’s independent watchdog issued a scathing new report. It says the department’s student loan unit failed to protect borrowers from the companies it pays to manage federal student loans.
Damon Day: That can’t come as a shock. We’ve been saying that for years. And Seth Frotman used to be the guy at the Consumer Financial Protection Bureau that oversaw student loan servicing and the problems that went with it. Seth was probably the guy that did a lot of research that led to the CFPB suing Navient for just being crappy servicers and giving bad advice.
Steve Rhode: Among the findings: servicers failed to tell borrowers about their repayment options and sometimes steered them into forbearance. They even miscalculated what borrowers should have to repay.
Steve Rhode: So the big problem here is that everyone says don’t go to a student loan assistance company. Instead you need to go talk to your servicer for help with your student loans. And the servicers are doing a horrible job.
Damon Day: It’s very hard to give advice when there’s not a very good option. You’ve got Option A, talk to a servicer. Option B, talk to a student loan company. There’s just not very many people out there that you can go to and just get some good, straightforward advice.
Damon’s Three-Way Call With a Servicer
Damon Day: I had my client on the line with me and we called the servicer together. We wanted to put the account on forbearance because when I work with a client, we come up with an overall financial plan and strategy. It’s not just how do we put your student loans on a payment plan. It’s let’s look at your overall situation and come up with a strategy.
Damon Day: For that particular client, it actually made sense to put her federal loans on forbearance for a little bit because she had some other debt issues that were draining her cash flow that we could clear up fairly quickly within a year.
Damon Day: This rep kept pushing, “No, no, no, she needs to get on an IBR, she needs to get on a payment plan.” The rep went so far as to say to my client, “Hey, this guy’s giving you bad advice. You should hang up the phone and call us back directly without him on the phone so we could get you signed up in a repayment plan.”
Steve Rhode: That’s not their job. The federal student loan servicers’ job is not to help you craft a plan to solve your problem. That’s not what they’re there for. So calling them for advice, while probably better than calling a student loan debt relief company, is still usually going to end in a train wreck.
Department of Education’s Response
Steve Rhode: The Department of Education disagrees with the report and says basically that their servicers are doing a perfectly good job. In a statement, the education department’s press secretary Liz Hill says the department “fundamentally disagrees with the assertion that we do not have processes and procedures in place to ensure loan servicers provide high quality compliance service to borrowers.”
Steve Rhode: The Department of Education is hiring companies to provide both good advice about someone’s financial situation and maximally collect on the debt. It seems like trying to do two things that are polar opposites.
Damon Day: They’re not hiring anybody to provide good advice. In fact, the servicers themselves have admitted that their job is not to provide good advice. When they’re getting sued for providing bad advice, their defense was, “We’re not providing advice.” So that’s not what they’re there for. “We’re not supposed to provide that, but if you want advice, call us, but we’re not supposed to give it to you.”
Argosy University in Financial Trouble
Steve Rhode: Let’s talk about Argosy University. Argosy University is another for-profit university. It’s part of a group of others that are having severe financial problems. Students in Argosy University have worked for years toward their degrees, but now their school can’t pay its bills. It’s under court-ordered receivership, leaving students without access to thousands in financial aid.
Steve Rhode: The Washington Post reports students across the country are waiting for about $13 million in federal financial aid sent to Argosy but then not sent to the students.
Steve Rhode: If you have federal student loans, there is something called a closed school discharge that you should look into. If you have private student loans, there’s still some options.
Closed School Discharge Strategy
Steve Rhode: You have to be enrolled at school. You have to have not withdrawn more than 120 days. The school can’t have an alternative plan on how you can complete your degree. If you’re going to one of these schools like right now, Argosy or Art Institutes, I would suggest that you talk to some local colleges that might have programs that you’re in and see if they will accept any of your credits if you have to transfer later.
Damon Day: One of the qualifications for this closed school discharge is it won’t work if you went to the school five years ago and then they close now. You have to be enrolled or within 120 days of their school closing.
Damon Day: If you know the school’s about to close, maybe you attended five years ago and now you’ve got $50,000 in loans and you wish you’d never attended. Well, if you don’t qualify for this closed school discharge unless you’re enrolled at the time of the school’s closing, I thought to myself, well what if you just went and re-enrolled at the school now? Got in before they closed, so then you are technically enrolled at the school when they close.
Steve Rhode: I’ve never heard of anybody doing that, but if anybody does, please let me know. I’d like to know the answer.
Car Loans Going Past Due
Steve Rhode: Car loans are going past due. More than 7 million car loans were past due by at least 90 days in the fourth quarter.
Damon Day: What’s happening is the economy is going really well, unemployment’s low, so you get a lot of lenders that get greedy at times like this. It’s happened every cycle that we’ve been in. They started extending credit out to people who otherwise wouldn’t have access. There’s subprime credit and now we have below subprime credit. And it’s those people that are defaulting.
Steve Rhode: Just because somebody will approve you for a loan doesn’t mean that you can afford it. This is wisdom that goes into every part of your life. Just because a lender will approve you doesn’t mean you can afford it.
What to Do When You Have a Judgment Against You
Steve Rhode: We had a question in our online debt support group meeting. One of the people was talking about what to do when they have a judgment that resurfaces years later. She was sued by Discover apparently years ago, and it didn’t sound like she tried to defend it at all. She got a judgment against her for the debt, and then that was sold on years later and they’re trying to collect again.
Steve Rhode: If you run into any sort of problems like you are sued by one of your creditors, I don’t know how to express clearly enough that you should seek good competent advice. You can find an attorney who is licensed in your state and talk to them about the situation. The last thing you want to do is do nothing because you’re going to lose.
Damon Day: The system runs on defaults. That’s what they look for. So especially in the case of this attendee, she already had a judgment. If you continue to ignore it, what’ll happen is one day you’ll wake up and you’ll get a zero balance in your bank account and find out that they put a levy on the account. Or you could go into work one day and your employer says, “I’m sorry, I got this letter and we’re gonna have to start garnishing 25% of your disposable income.”
Damon Day: That doesn’t mean there’s still not a window of opportunity there. You can negotiate with them, maybe even settle the debt for less. They’re usually fairly willing to work something out because money now to them is better than a wage garnishment over the next four years.
Show Wrap-Up
Steve Rhode: The way that you can reach Damon is going to DamonDay.com. The way you can reach me is by going to GetOutOfDebt.org. You can ask us any questions there.
Steve Rhode: This is Steve Rhode, your Get Out of Debt Guy. If you want more advice or you want some free help, be sure to visit me at the GetOutOfDebt.org website, and while you’re at the site, don’t forget to subscribe to this podcast for even more practical tips and advice.
Frequently Asked Questions
What did the Inspector General find about student loan servicers?
The Inspector General found that the Department of Education's student loan servicers failed to inform borrowers about repayment options, steered them into forbearance instead of income-driven repayment plans, and even miscalculated what borrowers should have to repay.
What is a closed school discharge for student loans?
A closed school discharge is a federal program that can forgive your student loans if your school closes while you are enrolled or within 120 days of your withdrawal. It applies only to federal student loans, not private loans.
What happened to Argosy University students?
Argosy University entered court-ordered receivership and failed to distribute approximately $13 million in federal financial aid to students who were counting on that money for rent, food, and transportation.
What should I do if I have an old judgment against me?
Seek competent legal advice immediately. You can still negotiate a settlement or payment plan even after a judgment. Filing for bankruptcy can also eliminate judgments. The worst thing you can do is ignore it, as creditors can garnish wages or levy bank accounts.
Why are so many car loans going past due?
Lenders extended credit to increasingly unqualified borrowers during a period of low unemployment, including below-subprime borrowers. Over 7 million car loans were 90+ days past due in Q4 2018, a pattern that repeats in every economic cycle.
Who are Steve Rhode and Damon Day?
Steve Rhode is the Get Out of Debt Guy at GetOutOfDebt.org, a consumer debt expert who has been helping people with debt issues for decades. Damon Day is a financial consultant at DamonDay.com who works directly with clients to create overall financial strategies.
