CHAPTER 2 DUE DILIGENCE PROCEDURES
CHAPTER 2 DUE DILIGENCE PROCEDURES
The sections in this chapter identify the required procedures which constitute due diligence.
The school must assure itself that the borrower clearly understands the terms of the loan and his or her responsibility to meet them.
The regulations require a school to conduct and document an entrance interview for each academic year during which the student receives loan funds and must obtain entrance interview documentation before it disburses loan funds to a borrower in any academic year. The school must comply with the entrance interview requirements by conducting an individual or group meeting with the borrower, or through an exchange of information by mail if a face-to-face meeting is not practical. Each school has latitude in deciding whether to conduct the entrance interview in person or by mail. However, schools are strongly encouraged to make individual or group entrance interviews a priority in the financial award process, as this will help prevent problems in the collection process. The school also has discretion in determining the specific format of the entrance interview and in deciding which official(s) (e.g., financial aid, fiscal, loan collection, dean's) will be responsible for the entrance interview.
The regulations do not require the school to conduct an entrance interview each time it makes a disbursement within a single academic year; however, it may be beneficial to the collection process to require a borrower to complete a new "borrower information" form at the time of each disbursement. Regardless of how the school conducts the entrance interview, it must obtain documentation which includes the following:
[42 CFR Part 57.210 and 42 CFR Part 57.310]
Each loan must be evidenced by a properly executed promissory note in a form approved by the Secretary. The school must safeguard the promissory note against fire, theft, and tampering. Each promissory note must:
In addition, a copy of each executed note must be supplied by the school to the student borrower.
See Health Professions Programs, Health Professions Student Loan, Chapter 3, and Nursing Programs, Nursing Student Loans, Chapter 3 for further information on promissory notes.
[42 CFR Part 57.208 and 42 CFR Part 57.308]
A school must require security or endorsement if the borrower is a minor and if, under the applicable State law, the note signed by him or her would not create a binding obligation. The school may not require security or endorsement in any other circumstances.
[42 CFR Part 57.208 and 42 CFR Part 57.308]
For any Health Professions FCC Loan made after June 30, 1986, the regulations require a school, at the time the loan is made, to provide the following loan information to the student:
[42 CFR Part 57.208]
For any Health Professions FCC Loan made after June 30, 1986, the regulations require a school, prior to the borrower's completion or termination of studies at the school, to provide the following loan information to the student:
[42 CFR Part 57.208]
Schools administering Health Professions and Nursing FCC Loan Programs must comply with the applicable requirements of Truth in Lending Regulation Z [12 CFR Part 226], as specified in Health Professions Programs, Health Professions Student Loan, Chapter 3, and Nursing Programs, Nursing Student Loans, Chapter 3.
The promissory note for any Health Professions FCC Loan made on or after October 22, 1985 allows a school to assess the borrower a charge to insure against the loss of the institutional share of a loan cancelled due to the borrower's death or permanent and total disability. Schools that choose to charge an insurance premium must determine the rate each year based on their cancellation experience. However, the rate may not exceed .6 percent of the loan amount. Proceeds collected from loan disbursements as insurance premiums must:
A school is not required to maintain a separate bank account for the insurance premiums, but it is required to maintain separate accountability.
The regulations require a school to conduct and document an exit interview (individually or in groups) with its borrowers. The school has the discretion in deciding which office(s) (e.g., financial aid, fiscal, loan collection, dean's) will be responsible for the exit interview, and for determining the specific format of the exit interview as long as the following documentation is obtained:
If a borrower fails to appear for an exit interview, the school must attempt to conduct the exit interview by mailing the exit interview information to the borrower and requesting that a copy of the repayment terms and the rights and responsibilities form or statement be signed and dated, the personal information form be completed and dated, and these items be returned to the school. If the borrower returns the information as requested, this will document that the exit interview was conducted.
If the borrower fails to return the information, the school must maintain in the borrower's file a copy of the repayment terms sent to the borrower and the date the exit interview information was mailed as documentation of the contact. Further attempts to obtain the exit interview information are not required to comply with the regulations, except that if the information is returned to the school due to an incorrect address, the school must record the date the information was returned or retain the returned envelope. The school must then initiate an address search and, if successful, must record the date the information was mailed to the borrower's correct address.
Although not required, schools are strongly encouraged to make a second contact, by mail or telephone, with any borrower who fails to return the exit interview information within a reasonable time. Schools are also strongly encouraged to encumber the records of students who fail to return the exit interview information (and notify students of this action), unless State law prohibits such action.
[42 CFR Part 57.210 and 42 CFR Part 57.310]
The school must provide each borrower with an individual repayment schedule or plan at the time the borrower leaves school. Providing each borrower with an individual repayment schedule has several advantages. The borrower is kept informed of the date each payment is due; the amount of each payment; the amount credited to principal and interest from each payment; and, by a simple calculation, he or she may determine for tax purposes the total amount of interest paid each year. The school is saved the chore of computing interest each time a payment is received.
Subject to the provisions of Chapter 2, Section 1 D3, Minimum Payments Required below, a borrower must establish a repayment schedule with the school providing for payments not less often than quarterly. Any borrower whose repayment is delinquent more than 60 days must establish a monthly repayment schedule with the school. However, a borrower may at his or her option and without penalty, prepay all or part of the principal and accrued interest at any time.
[42 CFR Part 57.210 and 42 CFR Part 57.310]
Each loan, including accrued interest, will be repayable in equal or graduated periodic installments in amounts calculated on the basis of a 10-25 year repayment period. Repayment of a Health Professions FCC Loan must begin one year after the student ceases to be a full-time student. For Nursing FCC Loans, repayment must begin nine months after the student ceases to be a full-time or half-time student, except that if a borrower reenters the same or another school as a full-time or half-time student within the nine-month period, the date upon which interest will accrue and the repayment period will begin will be determined by the date upon which the student last ceases to be a full-time or half-time student at that school.
[42 CFR Part 57.210 and 42 CFR Part 57.310]
See also Chapter 2, Section 1F, Primary Care Loans for computing Primary Care Loan repayment when a borrower fails to comply with the agreement.
Deferment periods that will affect the repayment period are discussed in Health Professions Programs, Health Professions Student Loan, Chapter 4, and Nursing Programs, Nursing Student Loan, Chapter 4.
Repayment schedules must be computed on a simple interest basis. If the borrower chooses to make sporadic payments, either in the amount or the time (but always prior to or by the due date), the school will have to calculate the interest accrued from the date of the previous payment to the date of the current payment. To calculate this interest, the following formula is used:
The school may require the borrower to make payments of at least $40 per month on all outstanding Health Professions or Nursing FCC Loans during the repayment period.
[42 CFR Part 57.210 and 42 CFR Part 57.310]
If the original repayment schedule is interrupted because of deferment, cancellation or other factors, this plan may no longer be valid. The school should at that time negotiate a new repayment schedule with the borrower to accommodate the interruption in payments. For more information on how the revised repayment schedule may be affected by deferment, cancellation or other factors, see Health Professions Programs, Health Professions Student Loan, Chapter 4, and Nursing Programs, Nursing Student Loan, Chapter 4.
The interval after the time the borrower ceases to be a student until the repayment period begins is the grace period. Repayments need not be made by the borrower and interest does not accrue during the grace period.
The regulations require a school to contact borrowers in writing twice during the grace period. Since the regulations do not state specific intervals at which the contacts must occur, each school has discretion in developing reasonable intervals for the two contacts (e.g., 90 and 180 days into the grace period). To comply with this requirement, a school can use whatever form of written notification it finds most effective, including lettergrams, letters, or a message on a billing statement (with the billing portion indicating that no payment is yet due). Mailed exit interview information may not take the place of one of the two grace period contacts. However, if the school mails the first bill during the grace period, and includes a message section which provides the borrower with appropriate information, the school can consider this one of the two grace period contacts.
[42 CFR Part 57.210 and 42 CFR Part 57.310]
The regulations do not specify information which must be included in the grace period contacts, but instead leaves this at the discretion of the school. A school should use these notices as opportunities to remind the borrower of information that is pertinent to assure timely repayment, including:
The school must document the grace period contacts by keeping a copy of each contact sent to each borrower, or by maintaining samples of the grace period contacts and documenting for each borrower the month when each contact was mailed. If any grace period contact is returned due to an incorrect address, the school must record the date the contact was returned or retain the returned envelope. The school must then initiate an address search and, if successful, must keep a copy of the contact mailed to the correct address or record the date this contact was mailed.
If an updated address is not located until after one of the next regularly scheduled contacts should have been mailed, documentation of the date the address was obtained and the school's schedule for sending grace period contacts would determine whether any grace period notices must be sent or regular billing initiated immediately. For example:
The regulations require a school to contact a borrower one to three months prior to the completion of an approved deferment period. The school must make this contact for any borrower in deferment when the approved deferment period is due to expire and an extension has not been requested by the borrower (by submission of a new deferment form) at the time the deferment contact is to be mailed.
[42 CFR Part 57.210 and 42 CFR Part 57.310]
The deferment contact is not required if a borrower in deferment extends his or her deferment period by submitting a properly completed deferment form prior to the time that the deferment contract is scheduled to be mailed. For example, a deferment contact is scheduled to be mailed 60 days before the end of an approved deferment period and the borrower submits a deferment form extending the deferment period 75 days before the end of the approved period. In this case, a deferment contact would not be needed until one to three months prior to the completion of the newly approved deferment period. The date that the deferment form extending the period of deferment was approved by the school, which would be prior to the date the deferment contact was to occur, would document that a deferment contact was unnecessary at the time.
To comply with this requirement, a school can use whatever form of written notification it finds most effective, including lettergrams, letters, or a message on a billing statement (with the billing portion indicating that no payment is yet due, but also indicating when the approved period of deferment ends and/or when the next payment will be due).
The regulations do not specify information which must be included in the deferment period contact, but instead leaves this at the discretion of the school. The school should use this contact as an opportunity to remind the borrower of information that is pertinent to assure timely repayment, such as that listed for grace period contacts. If a school expects the borrower's deferment status to continue, it is suggested that the school include with this notification a blank deferment form for the borrower to complete and return prior to the time his or her repayment period would otherwise resume.
The school must document the deferment contact(s) by keeping a copy of each contact sent to each borrower, or by maintaining samples of the deferment contacts and documenting for each borrower the month when each contact was mailed. If any deferment contact is returned due to an incorrect address, the school must record the date the contact was returned or retain the returned envelope. The school must then initiate an address search and, if successful, must keep a copy of the contact mailed to the correct address or record the date this contact was mailed. If an updated address is not located until after billing should have begun or resumed, this deferment contact would not be required for this borrower.
The regulations require a school to perform and document regular billing. To comply with this requirement, a school must either send a statement prior to the due date of each payment or use a coupon payment system which provides coupons to borrowers no less often than biennially.
If a school sends billing statements prior to the due dates of each payment, the school must document this:
If a school uses a coupon payment system, it must send coupons to borrowers on at least a biennial basis, and must document this:
A school that uses an outside billing agent must also have available a copy of the service agreement and its effective dates.
If any billing statement or coupons are returned due to an incorrect address, the school must record the date returned or retain the returned envelope. The school must then initiate an address search on all returned statements or coupons and, if successful, must keep a record of the date the correct address was obtained and the date the billing contact (statement or coupons) was mailed to the correct address.
In cases where the school and borrower elect to use electronic funds transfers, billing statements would not be sent to the borrower. However, the school should provide the borrower with an annual statement showing the principal paid, interest paid, and outstanding balance. This option is available for borrowers on a monthly, bi-monthly or quarterly payment plan. Insufficient funds in the borrower's account would be treated like an NSF check, subject to the borrower losing the right to use this method. Usually two incidents of insufficient funds in a borrower's account would terminate this method of payment.
To satisfy the due diligence requirements, the school must have available documentation to substantiate that participating borrowers were up-to-date on their payments prior to their participation in the plan. The signed authorization forms to begin the electronic transfer, dates that annual statements were sent to the borrowers, and written requests to terminate the service must be maintained to document the period of time during which billing statements were not required. Documentation of the date and amount of each payment must be available to support that payments were received from each borrower (i.e., a repayment history) and, where applicable, documentation must also be available relating to the borrower's suspension from the plan. When a borrower's account becomes past due, as a result of insufficient funds available for transfer, past due follow-up must be performed as specified in the regulations.
In order to follow up on overdue accounts systematically, a current Delinquent List must be maintained. Compilation of an overdue account list from the individual ledger cards or subsidiary account sheets permits a review of all contacts with pertinent notes and/or information about the borrower every month, thus assuring current data at the time collection letters are sent.
In administering the penalty charge provision of the regulations, for any Nursing FCC Loan made after June 30, 1969, but prior to October 1, 1985, and for any Health Professions FCC Loan made after June 30, 1969, but prior to October 22, 1985, the school may:
[42 CFR Part 57.210 and 42 CFR Part 57.310]
For any Nursing FCC Loan made on or after October 1, 1985, and for any Health Professions FCC Loan made on or after October 22, 1985 the school must assess a charge for failure of the borrower to pay all or any part of an installment when the loan is more than 60 days past due and, in the case of a borrower who is entitled to deferment for any failure to file satisfactory evidence of the entitlement within 60 days of the date payment would otherwise be due. In addition:
[42 CFR Part 57.210 and 42 CFR Part 57.310]
The regulations require a school to make four follow-up contacts during the first 120 days of a borrower's delinquency, three of which must be written contacts at not more than 30-day intervals. The specific time frames for the three required written contacts (e.g., 30-, 60-, and 90-days past due; 15-, 45-, and 60-days past due; etc.) are at the discretion of the school, based on what has been most successful in the past and/or what is done for other loan programs. The school may make the fourth contact in writing, by telephone, or by personal contact at whatever point during the 120-day period the school determines will be most effective.
[42 CFR Part 57.210 and 42 CFR Part 57.310]
If a written follow-up contact is returned due to an incorrect address, the school must record the date returned or retain the returned envelope. The school must then initiate an address search and, if successful, must keep a copy of the contact mailed to the correct address or record the date and type of contact (e.g., 15-day, 45-day, final demand, etc.) mailed. If an updated address is not located until after one or more of the next follow-up contacts should have been mailed, documentation of the date the address was obtained and the school's schedule for sending follow-up contacts would determine which follow-up contacts must be sent.
If a school does not locate a correct address until after the loan is more than 120 days past due, schools are strongly encouraged to make one or more written or telephone contacts, as appropriate, before referring the loan to a collection agent, although this is not required by the regulations.
For the written contacts, the regulations do not specify a required format. Each school may use whatever form of written notification it finds most effective, including lettergrams, letters, or messages on billing statements which are comparable to information that would be provided in separate written notifications. Although this provision gives schools latitude in determining the format of the written contacts, the Division of Student Assistance strongly recommends that they be separate from billing statements. Regardless of the format, the written contacts should contain language which becomes progressively stronger in tone. For example:
The school must document the written contacts by maintaining copies of each contact sent to each borrower, or by maintaining sample copies of the contacts and documenting for each borrower the date each contact was sent.
If the school chooses to do the fourth contact by telephone or personal visit, this must be documented by a record of the date of the telephone call or visit and a brief description of the conversation with the borrower (conversation with relative/roommate not acceptable). If the school attempts telephone or personal contact and is unable to reach the borrower, a fourth contact must be made in writing.
The regulations require a school to perform an address search when it finds that its address for a borrower is not correct. Since this provision does not specify methods of skiptracing that must be used, each school may determine the skiptracing methods that it finds most effective in locating its borrowers and use those as a basis for developing institutional skiptracing procedures.
[42 CFR Part 57.210 and 42 CFR Part 57.301]
To comply with this requirement, a school must have written procedures it initiates on a timely basis in attempting to locate a borrower's correct address. The skiptracing efforts must be documented by a record of the date and results of each attempt. If a school's attempts to locate a correct address fail, and the school hires a commercial skiptracing agency, it must document the date the assistance of the commercial agency was enlisted for each account, the date the account was returned, and the results of the agency's efforts. Resources for skiptracing might include:
The regulations require a school use collection agents. However, each school has latitude in determining whether to use an in-house collection agent and/or one or more commercial collection agents and in deciding how long to leave an account with a collection agent. For each collection agent to which an account is referred, the school must document the date of referral, the results of the collection agent's efforts, and the date the account was returned to or recalled by the school if the collection agent was unsuccessful in collecting the account in full. In addition, a copy of the procedures followed by the in-house collection agent, or a copy of the contract (i.e, service agreement) with the commercial collection agent, must be available.
[42 CFR Part 57.210 and 42 CFR Part 57.310]
The school may charge the fund for the costs of employing a commercial collection agent. The fees charged by the agent should not exceed the normal and reasonable collection fees for the area in which the school is located. Effective May 16, 1986, the cost of salaries, in addition to the previously allowed costs of postage, stationery, telephone calls and other reasonable costs directly associated with the internal collection process, are allowable charges to the fund, provided that the school is exercising due diligence, subject to the following restrictions:
Under no circumstances can overhead expenses, such as rent, heat, electricity, etc., that are not identifiable as costs of the particular collection procedure be charged to the fund. In addition, collection costs paid by the borrower are not chargeable to the fund.
The regulations require a school to litigate against a delinquent borrower, after all other collection efforts have failed, unless the school determines, subject to the approval of the Secretary, that litigation would not be cost-effective. A school may litigate earlier, but before the school can be considered to have completed its due diligence it must litigate if litigation is deemed to be cost-effective. In addition, a school that would like to litigate for deterrence (i.e., to encourage other borrowers to repay) in a case where litigation is not cost-effective may do so.
[42 CFR Part 57.210 and 42 CFR Part 57.310]
To determine whether litigation is cost-effective, a school must consider the costs that it reasonably can expect to incur as a result of litigating compared with the amount it reasonably can expect to recover from the borrower. This determination may be based on input from a third party, such as an outside attorney.
If the school determines that litigation is cost-effective, the school must document the dates litigation was initiated and completed, the results, and any further efforts taken after litigation to collect the loan. If the school determines that the cost of litigating is expected to exceed the amount to be recovered, the school must document how this determination was made, and is not required to litigate, except that if the Secretary determines in a subsequent review that litigation would be cost-effective, the school may be required to litigate at that time.
The regulations require a school to report any loans more than 120 days past due to one or more credit bureaus. This requirement does not preclude reporting delinquent accounts to a credit bureau before they are 120 days past due if the school believes that an earlier time frame is more effective. A school must document compliance by providing a copy of a credit bureau report which lists the delinquent status of the loan account, or by other documented evidence supporting the fact that the account was reported to a credit bureau(s). In addition, the school must indicate in the borrower's historical record the date the account was reported to a credit bureau(s).
[42 CFR Part 57.210 and 42 CFR 57.310]
In determining which credit bureau(s) to join, the school must consider the geographical location(s) most frequented by its borrowers. Although the regulations do not specify the number of credit bureau(s) a school must join, it is strongly recommended that a school join at least two credit bureaus, one which provides local coverage and one which provides regional or national coverage.
If a school must incur additional credit bureau costs to use the credit bureau for skiptracing, it may charge these costs to the loan funds, provided that the school is exercising due diligence in the collection of its loans. If the Division of Student Assistance finds that a school is charging the costs of skiptracing through a credit bureau to the fund without having followed the applicable due diligence requirements that preceded skiptracing, the school will be required to reimburse the fund for these charges.
The borrower's failure to make any payment according to the repayment schedule or to submit required documents for deferment or cancellation prior to the due date for any payment renders the entire amount of the loan, plus any accrued interest and penalty charges, immediately due and payable when the promissory note contains an acceleration clause.
Schools are cautioned to use this authority with discretion and consistent with State collection statutes only when the results of due diligence collection activities suggest that the borrower will not fulfill his or her obligation to repay the loan.
Schools are not permitted to compromise the promissory note, i.e., extend the repayment period beyond the legal requirements or settle for repayment of less than the full amount owed. In the litigation of a loan, a school is required to raise all applicable defenses in the collection of the loan. If, however, it appears that either a compromise or settlement of the loan is necessary or that an adverse decision might result, a school must contact the Division of Student Assistance for guidance prior to the compromise or, if possible, prior to the adverse decision. If the court denies a school's complaint to collect the loan or compromises the amount, the school must:
The Division will then provide guidance and direction to the school.
In the case of voluntary bankruptcy, the debtor admits his or her inability to pay legal obligations and hands over to the court his or her total assets, less certain exceptions, for distribution among creditors. The bankruptcy judge's decision as to whether a student educational loan is dischargeable or nondischargeable is binding on both the creditor and debtor.
In the event of bankruptcy, a school is required to take all necessary action to protect the loan from discharge. The following guidelines cover only the basic actions that schools must take. It is recommended that schools consult with their legal counsel for advice on how to deal with borrowers who file for bankruptcy.
When a petition in bankruptcy is filed, the court issues an automatic stay. This means that when notified of the petition in bankruptcy, a school and its agents must immediately suspend any collection efforts outside the bankruptcy proceedings against the borrower. When the debtor files a Chapter 13 bankruptcy petition, a school must also suspend collection against any cosigner on the loan [11 U.S.C. 1301(a)]. However, this suspension is temporary. If the Chapter 13 plan does not provide for full payment of the loan according to its terms, the school should file a motion with the court to obtain relief from the stay and proceed against the cosigner on the note.
In 1976, Congress passed legislation preventing discharge of educational loans made under any program funded in whole or in part by a governmental unit within a five-year period beginning on the date of commencement of the payment period of the loan. When the Federal bankruptcy laws were revised in 1978 and 1984, Congress included the five-year rule in bankruptcy proceedings under Chapter 7 and extended the five-year period to seven years with the Federal Debt Collections Procedures Act of 1990, effective May 28, 1991. This Act also made the seven-year bar to discharge applicable to Chapter 13 bankruptcies.
Under Public Law 105-244, effective 10/7/98, Federal educational loans are nondischargeable regardless of how long they have been in repayment, unless the debtor demonstrates undue hardship. This new provision applies to any bankruptcy case commenced on or after the date of enactment.
A bankruptcy under Chapter 7 of the Act is known as a "liquidation." This gives a debtor a fresh start by liquidating or discharging debts. A debtor turns over all his or her assets, with the exception of those which are exempt under State law, to the court. Creditors file claims for their debts and the court then makes a distribution of any available assets to the creditors based on their claims. The debtor receives a general discharge releasing him or her from all debts under the Bankruptcy Code. Chapter 7 bankruptcies are relatively short in duration, lasting about 3 months.
When notification of a Chapter 7 bankruptcy is received from the court or the debtor, the school must file a proof of claim with the court stating the outstanding balance of the loan, plus accrued interest and any unpaid penalty charges as of the date that the petition in bankruptcy was filed. These forms are available from the bankruptcy court. The notice will indicate if the case is a no asset case. In this event, no proof of claim is necessary because there will be no distribution of assets. Creditors have 90 days from the date set for the first meeting of creditors in which to file a proof of claim.
Chapter 11 bankruptcy is commonly referred to as a "business reorganization." However, it is available to individual debtors and can include personal debts. It is often used by debtors who have unsecured debts exceeding $100,000 and thus are ineligible for Chapter 13.
Schools, whose loans are listed among the debtor's liabilities, need not file a claim in Chapter 11 unless the debt is disputed or the amount is wrong. The court sets the time by which to file a proof of claim.
The debtor is required to file a reorganization plan which makes distributions to creditors over a period of time. A school can ask the court to set a date for filing the plan or to move to dismiss it if a debtor fails to file a plan within 120-days of filing the petition [11 U.S.C. 1112(b)(2) or (3)]. The school can also file a motion for relief from the stay [11 U.S.C. 362(d)]. The grounds for these motions are:
Creditors are sent ballots and asked to vote to approve the plan. A school should object to the plan if it does not demonstrate the best efforts and good faith of the debtor [11 U.S.C. 1129(a)(3) and (7)(A)]. After the confirmation of the plan by the court, the debtor is discharged of all debts, except as provided for under the plan.
Chapter 13 bankruptcy, commonly known as the "Wage-earners Plan," permits a debtor to propose a plan to make payments out of future income to satisfy the debtor's creditors. Chapter 13 is limited to debtors who have a regular income and whose unsecured debts do not exceed $100,000. The plan lasts from three to five years and must be confirmed by the court prior to implementation. The court appoints a trustee to administer the plan, by making monthly distributions to creditors, and to monitor the debtor's compliance with the plan. At the completion of the plan, the debtor is discharged of all debts dischargeable under the Bankruptcy Act.
A school must file a timely proof of claim, when notified of a Chapter 13 bankruptcy, within 90 days from the date of the first meeting of creditors. If possible, the school should attend the first meeting of creditors.
The school must file a timely objection to the plan or move to dismiss or convert it to a Chapter 7 if the following events occur:
Lack of good faith applies when the debtor has not provided reasonable payments in the plan for his or her student loan. The plan should provide for full payment of the loan, which can be partial payment of the loan during the plan, with payments continuing after the bankruptcy is over. These motions and objections must be made prior to the confirmation hearing. After confirmation, the school can move to dismiss the plan for failure to make payments.
For bankruptcies commenced prior to October 7, 1998, and based on 11 U.S.C. 523(a)(8) of the Bankruptcy Code, the debtor's student loan is not dischargeable in Chapter 7 or 13 before the expiration of seven years (exclusive of any periods of deferment) prior to the filing of the bankruptcy petition unless the debtor obtains a finding from the bankruptcy court that the nondischarge of the loan would cause an undue hardship on the debtor and the debtor's dependents.
Under Public Law 105-244 Federal educational loans are nondischargeable regardless of how long they have been in repayment, unless the debtor demonstrates undue hardship. This new provision applies to loans made under Title VII and VIII of the PHS Act (HPSL, LDS, PCL, NSL, HEAL), and applies to any bankruptcy case commenced on or after October 7, 1998.
The statutory bar to dischargeability is self-executing. The burden is on the debtor to prove undue hardship. To obtain this discharge, the debtor must file an adversarial complaint and serve the school as a defendant. If the debtor fails to do this, the general discharge in a Chapter 7 or 13 bankruptcy does not discharge the debtor's student loan, and collection must resume following the bankruptcy. If the Chapter 7 bankruptcy is a no asset case, the school does not have to appear in the bankruptcy and the loan is not discharged.
If the debtor does file a complaint to determine dischargeability of the student loan, the school must file a timely answer to the complaint and assert that the loan is nondischargeable unless the debtor proves that the nondischarge of the loan would cause undue hardship on the debtor and his or her dependents. In making this determination, courts generally use three tests:
Discharge of student loans is not easily granted. The loan simply creating a burden on the debtor does not constitute undue hardship. The debtor must be in a financially hopeless situation, with little or no prospects for the future. Present inability to pay is not necessarily undue hardship.
After a loan has been discharged, the school is enjoined from taking further collection action. The school could, however, inform the borrower that, although the loan was discharged, there is a moral obligation to repay the loan so that others may also benefit from the loan program. The school may tell the borrower that he or she is permitted to make voluntary payments on the loan. However, these payments would not create a new obligation to repay the loan, nor may they be required or enforced.
The regulations allow a school to grant forbearance whenever extraordinary circumstances such as unemployment, poor health or other personal problems temporarily affect the borrower's ability to make scheduled loan repayments.
[42 CFR Part 57.210 and 42 CFR Part 57.310]
In order to grant forbearance, a school must have sufficient documentation to clearly indicate the basis for its determination. The documentation must be updated and the borrower's situation reevaluated no less than annually. Health Professions Programs, Health Professions Student Loan, Chapter 4, and Nursing Programs, Nursing Student Loan, Chapter 4 describe in greater detail the types of documentation that a school must have on file to support its decision to grant forbearance. Periods of forbearance must be counted as part of the repayment period, since the regulations do not include such periods under the deferment provisions.
The regulations require schools to monitor a borrower's compliance with certain requirements under the following health professions student assistance programs.
The Health Professions Education Extension Amendments of 1992 established new requirements for the use of Health Professions Student Loan funds for allopathic and osteopathic medical schools. With the exception of the borrower service obligation, this program is similar to the Health Professions Student Loan Program and the same due diligence requirements listed above apply. More details on the Primary Care Loan Program are provided in Health Professions Programs, Primary Care Loan, Primary Health Care Service Obligation.
A borrower, who received Primary Care Loan funds, agrees to:
In the event a borrower fails to comply with the agreement, the school must:
The Secretary is authorized to provide for the waiver or suspension of the primary health care service obligation in the following circumstances:
This provision does not waive or suspend the borrower's obligation to repay the Primary Care Loan, but merely waives or suspends the primary health care service obligation and the associated penalties for non-compliance. Thus, any borrower who fails to graduate from a school of medicine or osteopathic medicine must still repay the Primary Care Loan in accordance with its normal terms (interest rate and repayment period). However, such a borrower is not subject to the 18 percent interest, compounded annually, which otherwise applies to a borrower who fails to comply with the primary health care service obligation.
It should be noted that there are other conditions which must be met by the school for participation in the Primary Care Loan Program. These are explained in detail in Health Professions Programs, Primary Care Loan. Reference is also made to Fiscal Management, Program Monitoring, Chapter 2.
These scholarships carry two obligations for recipients. First, recipients must agree to complete the program of education for which the scholarships were awarded and, second:
A recipient breaches his or her obligations under the following circumstances:
In the event a recipient breaches his or her obligations, any amount the Federal Government is entitled to recover must be repaid by the scholarship recipient not later than three years after the date on which the individual breaches the agreement. The amount of repayment is made directly to the Federal Government, and not to the school. The school is required to monitor the recipient and notify the Federal Government of a breach of obligation.
The Secretary is authorized to provide for the waiver or suspension of liability for failure to fulfill the service obligation if compliance by the individual with the agreement is impossible or would involve extreme hardship to the individual and if enforcement of the agreement would be unconscionable.
Health Professions Programs, EFN/FADHPS, discusses Exceptional Financial Need Scholarships and Financial Assistance for Disadvantaged Health Professions Students in detail.
