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What happens to your student loans if your school is shut down

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When you’re told that your college will be shutting down, there can be a lot of uncertainty about what comes next. Here is some helpful advice to help you navigate the situation.

This information and answers to other common questions about student loans are also available through Ask CFPB.

If you have federal student loans

If you have federal student loans and are currently enrolled or recently left a college or university that has shut its doors, you may be able to discharge (cancel) your loans if you apply for a loan discharge.

This option is only a possibility if your school closes. If you are attending a school that is sold, you may not be eligible to ask for discharge under this process, even if your school no longer offers your program of study.

If you do have your federal loans discharged and you end up transferring credits to a similar program, you may have to pay back the loans that were discharged.

You may have to pay income taxes if you get your student loans discharged when your school closes. If you don’t think you can afford to do so, you can petition the IRS to reduce your tax bill. Contact the Office of the Taxpayer Advocate to learn about your options.

If you have private student loans

Generally, if you have private student loans, you will still be responsible for repaying them. However, some states may have programs that assist students with private student loans in the event of a school closure. In addition, some private student lenders may offer options to assist certain borrowers in this situation.

If you think you won’t be able to afford to repay your private student loan, you should contact your student loan servicer immediately to learn more about your options. And if you run into trouble, you can also submit a complaint online or by calling (855) 411-2372.

If you’re offered an option for a “teach-out” to complete your program

If your school has announced that it is closing, you may be offered a “teach out,” an arrangement through which you may be able to complete your program and receive your degree or certificate.

If you accept a “teach-out” to complete your program at your school or another school, you will be responsible for repaying all of your student loans. If you decline a “teach-out” offer and the school closes, you may not have to pay back your federal student loans.

Rohit Chopra is the CFPB’s Student Loan Ombudsman. To learn more about the CFPB’s work for students and young Americans, visit consumerfinance.gov/students.

Consumer advisory: Co-signers can cause surprise defaults on your private student loans

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Today, we released a report that describes complaints we received related to the private student loan industry’s practice of placing borrowers in default even when their loans are current and in good standing. We’re also warning consumers that they can avoid surprise defaults by pursuing a co-signer release.

The vast majority of private student loans today have a co-signer (typically a parent or a grandparent). Having a co-signer can often lead to a lower interest rate, which can save you money in the long-term, because the co-signer will have to repay the loan if you don’t.

However, your loan might also contain provisions that allow your student loan servicer to put you in default — even if you’ve been making your payments on time.

That’s because your co-signer is also on the hook for your loan and therefore changes in their behavior can impact your loan, causing your loan to default and making your entire balance due all at once. We’ve received complaints that private student loan servicers are placing borrowers into default when their co-signer dies or files for bankruptcy.

Co-signer release

If you are a co-signer or have a student loan with a co-signer and you are in repayment, you should look into what’s called “co-signer release.” You should consider this option to avoid a surprise default. Both the borrower and co-signer can benefit from obtaining the release.

Many lenders advertise that a co-signer may be released from a private student loan after a certain number of consecutive, timely payments and a credit check to determine if you are eligible to repay the loan on your own. If your lender offers co-signer release, you will want to ask about this benefit and remove your co-signer as soon as you are eligible.

Unfortunately, many student loan servicers do not tell you when you are eligible to have your co-signer released, so you need to ask them how to do this.

To help you get started, we’ve put together sample letters you can edit and send to your student loan servicer. You can download sample letters to send by mail, or you can just cut and paste the text below into the “Send a Message” or “Contact Us” feature when you log into your account on the servicer’s website.

I want more information about how to obtain a release of my co-signer

I am writing to you because I am seeking the release of my co-signer on my loan. Please conduct a review of my account to determine if I am eligible for co-signer release.

If you determine that I am not eligible to have my co-signer released from my loans, please provide an explanation, including the following:

  • What is your current co-signer release policy?
  • For what reason(s) am I ineligible for co-signer release?
  • If I am not eligible for co-signer release now, when will I become eligible?
  • What steps do I need to take to qualify for co-signer release?
  • Do you anticipate modifying these requirements in the future? Will any future modifications apply to me when I seek to release my co-signer?

If I am unable to exercise this option at this time, please update/annotate my account to reflect that I intend to seek co-signer release as soon as possible. Please contact me at the point-in-time at which I am eligible to have my co-signer released.

In addition, if you are unable to provide any of the information or documentation I have requested or otherwise cannot comply with this request, please provide an explanation.

Thank you for your cooperation.

I am a co-signer, I want to be released

I am writing to request that I be released from my obligation to repay any loans associated with this account. Please conduct a review of this account and make a determination as to my eligibility to be released from my obligation.

If you determine that I am not eligible, please provide an explanation, including the following:

  • For what reason(s) am I ineligible for co-signer release?
  • What steps do I need to take to qualify for co-signer release?
  • What is your current co-signer release policy?
  • Do you anticipate modifying these requirements in the future? Will any future modifications apply to me when I seek to be released from this obligation?

If I am unable to exercise this option at this time, please update/annotate this account or accounts to reflect that I intend to do so as soon as possible. Please contact me at the point-in-time at which I am eligible for co-signer release.

In addition, if you are unable to provide any of the information or documentation I have requested or otherwise cannot comply with this request, please provide an explanation.

Thank you for your cooperation.

We also have other sample letters you can send to your student loan servicer to give payment instructions and others you can send to a student loan debt collector.

Remember, if you’re having a problem with a student loan, you can submit a complaint online or call us at (855) 411-2372.

If you have questions about repaying student loans, check out our Repay Student Debt tool to find out how you can tackle your student loan debt.

Rohit Chopra is the CFPB’s Student Loan Ombudsman. To learn more about our work for students and young Americans, visit consumerfinance.gov/students.

Explainer: Federal student loan interest rates to jump

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Updated on May 7, 2014

Right now, many students and families across the country are receiving financial aid offers and deciding how to pay for college. Most students will need to shop for student loans now, and some of you have asked us what the new rates will be. While rates aren’t set in stone yet, interest rates on new federal student loans are expected to jump this July.

We’ve updated our Paying for College tool using our best guess of what the rates will be, so you can have a better estimate of what your monthly payment might be after graduation.

Interest rates on most federal student loans are based on a certain type of bond that the Treasury Department issues, known as the ten-year note. The yield is the rate at which investors charge the federal government for borrowing money. Next month, there will be a Treasury bond auction, and that rate will set federal student loan interest rates.

Here’s what federal student loan interest rates on new loans might look like, compared to this past year.

Current and estimated interest rates on federal student loans

Loan type Interest rate on loans taken out between July 2013 and June 2014 Estimated new rate on loans taken out between July 2014 and June 2015
Direct Subsidized and Unsubsidized Loans (for undergraduate students) 3.86% 5.09%
Direct Unsubsidized Loans (for graduate/professional students) 5.41% 6.64%
Direct PLUS Loans (for parents and graduate/professional students) 6.41% 7.64%

Higher rates will mean a higher monthly payment after graduation. You can simulate this on your own by using our Paying for College tool, but here’s a quick summary of the changes.

Estimated monthly payment for every $5,000 in balances entering repayment

Loan type Monthly payment for this year’s rate Monthly payment for next year’s rate (estimated) Total increase over ten years
Direct Subsidized and Unsubsidized Loans (for undergraduate students) $50.29 $53.25 $355.49
Direct Unsubsidized Loans (for graduate/professional students) $54.04 $57.13 $370.84
Direct PLUS Loans (for parents and graduate/professional students) $56.55 $59.72 $380.59

Yet many students end up borrowing more than $5,000 for their education. For instance, graduate students borrowed an average of approximately $18,600 in PLUS Loans per year, according to the National Center for Education Statistics. With interest rates set to go up, many graduate students who borrow after July will pay an additional $1,400 over ten years of repayment for each year they are in school, compared to this year’s rate.

We’ll be sure to update these rates in our tool once they’re finalized. In the meantime, you should use your Financial Aid Shopping Sheet and our Paying for College tool to help you figure out how your school choice might impact your loan payments after graduation.

Rohit Chopra is the CFPB’s Student Loan Ombudsman. To learn more about the CFPB’s work for students and young Americans, visit consumerfinance.gov/students.

Updates

Updated on May 7, 2014:
Today, the Treasury Department released the rate for the ten-year note, which sets the interest rates for federal student loans. Interest rates on new federal student loans taken out between July 2014 and June 2015 will indeed be higher compared to last year’s rates. The actual rates are lower than the previous estimates noted above, which were based on Congressional Budget Office projections. The Department of Education will post the official interest rates, but here is a preview of the rates we expect:

Loan type New interest rate on loans taken out between July 2014 and June 2015
Direct Subsidized and Unsubsidized Loans (for undergraduate students): 4.66%
Direct Unsubsidized Loans (for graduate/professional students): 6.21%
Direct PLUS Loans (for parents and graduate/professional students): 7.21%

The Perkins Loans interest rate for undergraduate and graduate/professional students remains fixed at 5 percent.

Choosing a college is a big deal. We can help!

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This month, students across the country will receive college acceptance letters. For many people, the excitement of being one step closer to realizing their dream or reaching a major life milestone is coupled with anxiety about how to pay for it and the prospect of taking on student loan debt.

Compare your financial aid offers now.

To help you navigate these new waters, we’ve just launched a crisp new version of our Paying for College tool kit. Making apples-to-apples comparison of your financial aid offers has never been easier. Now you can compare offers from community college, bachelor’s, certificate, and graduate programs. We’ve incorporated a more user-friendly design and reintroduced the GI Bill calculator, which gives servicemembers the ability to calculate the benefits available to them through the GI Bill and tuition assistance programs.

We also heard from you that you wished our tool would provide information that complemented what schools are providing to students in their financial aid packages. We’re currently piloting a way to do just that. More than 2,000 schools have adopted the Financial Aid Shopping Sheet (developed in partnership with the Department of Education), which they’ll send to prospective students this year. Using this shopping sheet, you’ll be able to compare information, like average debt after graduation, side by side. If you don’t have a financial aid offer, we’ll show you where to find cost info for each school.

If you’re considering student loans to help you pay for school, you’re not alone – many students need loans to cover their full cost of attendance. If you have to take out student loans, comparing your options can help you find the student loan best suited for your needs.

We’re excited for your new adventure, and we know that choosing a college is a big deal.

Oh, and — congratulations!

We’re protecting students from predatory lending

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Today, we filed a lawsuit against ITT Educational Services, Inc., accusing the for-profit college chain of predatory student lending. We believe that ITT used high-pressure tactics to push many students into expensive private student loans that were likely to end in default.

This is our first public enforcement action against a company in the for-profit college industry.

“Today’s action should serve as a warning to the for-profit college industry that we will be vigilant about protecting students against predatory lending tactics,” said Director Richard Cordray.

You can read the press release, read Director Cordray’s full remarks, and view the formal complaint against ITT.

You can also watch a recording of today’s press conference.

What sunshine for student financial products can show us

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Recently, we alerted financial institutions about the potentially risky practice of not readily disclosing arrangements with colleges and universities to market bank accounts, prepaid cards, debit cards, and other financial products to students. Director Cordray called on financial institutions to voluntarily make these agreements available on their websites.

According to a survey of school officials, 69 percent of debit card agreements are already available to the public, since many contracts with public colleges and universities are subject to state open records laws. We identified agreements available in the public domain by checking state open records databases and other websites where agreements were disclosed.

Some financial institutions offer low-cost student financial products as a way of developing long-lasting relationships with students as they start their financial lives. For example, one credit union told us that “over 85 percent of student accounts remain open one year following graduation.” But other financial institutions generate a significant amount of their revenue on these products while students are currently in school.

Here’s how they work

Some of these agreements were difficult to find, but here are a few examples of the different agreements financial institutions have with colleges and universities. We didn’t verify whether these agreements are current, but the examples give us a sense of how some of these agreements work.

1. Direct payments for using school logos

We found several agreements where a financial institution offers a licensing fee in order to use a school’s logo to market its financial products. (In 2008, Congress restricted this practice for student loans, but not for other financial products.) For example, we found an agreement which provides $25 million to a university for use of the school’s logo, among other benefits.

2. Bonuses for recruiting students

Other agreements provide bonus payments based on whether students sign up for a financial institution’s student checking account marketed on campus. For example, one agreement paid a university an upfront payment of $400,000 and an additional bonus of upwards of $200,000 each year if enough new students signed up for the accounts.

3. Discounted prices in exchange for marketing access

Some colleges receive discounted – or even completely free – services in exchange for allowing a provider to market financial products to students. For example, we found many agreements where a financial institution charges a university to transfer loan and scholarship funds to students.

However, some school officials have told us that these charges may be heavily discounted, since these agreements provide the financial institution with unique access to market to students receiving financial aid. This gives the financial institution a foot in the door to generate significant revenue in fees from students, making it worthwhile to provide discounted services to schools.

Committed to transparency?

Many financial institutions offer good products at competitive prices. But as we’ve stated before, voluntarily disclosing these arrangements is a sign of a financial institution’s commitment to transparency when marketing deposit accounts, prepaid cards, financial aid disbursement accounts, and other financial products to students. In doing so, they also want to make sure students know that they have a financial relationship with their school. Responsible financial institutions also want students to know they don’t have to choose their product if they don’t want to.

Actions you can take

Students, schools, financial institutions, or anyone else who wants to share information about the availability of these agreements can email us.

If you are a student, or family member of a student, you can check out our guide to Managing Your College Money and our consumer advisory on accessing student loans and scholarships.

If you have a complaint about a student loan, checking account, or credit card, you can submit a complaint online or by calling (855) 411-2372.