Wednesday, February 5, 2014

The Complexity of Student Loans - Kentucky Edition

There are two general categories of student loans.
  1. Government originated or guaranteed student loans, and;
  2. Non-government originated uninsured student loans.
Both types of student loans may ultimately be collected by garnishment upon default. However, the legal authority and the procedures applicable in the event a garnishment is pursued depend upon the source and the type of the loan.

Administrative wage garnishments to collect direct student loans from the federal government are authorized by the federal Debt Collection Improvement Act of 1996. Most student loans from the federal government originate from the Department of Education. These are subject to the procedures contained within 34 Code of Federal Regulations (CFR) Part 34.

The federal Department of Health and Human Services helps fund specialized loan programs for medical and nursing students. These health profession student loan funds are established and administered by medical or nursing schools which do not have the legal authority for non-judicial administrative garnishment debt collections. School administered health profession student loan debts are collected through normal judicial procedures. See: 42 CFR Part 57, Subparts C & D. Although these school based programs are regulated and partially funded with federal money, the loans are administered and collected by non-government entities.

Administrative wage garnishments to collect student loans guaranteed by a state loan insurance program are authorized by the federal Higher Education Act and corresponding state statutes and regulations. The administrative wage garnishment procedures used by the Kentucky Higher Education Assistance Authority (KHEAA) are contained in Kentucky Administrative Regulation 11 KAR 3:100. These guaranteed student loans are made and administered by private lenders. Initial collection of delinquent guaranteed loans is undertaken by the private lenders but ultimately, defaulted loans are transferred to KHEAA which pursues final collection methods, including administrative wage garnishment.

The Kentucky Higher Education Student Loan Corporation (KHESLC) was created by Kentucky Revised Statute 164A in 1978 as an independent public corporation and political subdivision of the Commonwealth. KRS 164A.240(2)A3 specifically authorizes KHESLC to establish and use administrative garnishment to collect defaulted student loans.

The KHESLC and the KHEAA share a common board of directors, executive director, staff and office space and by statute, KRS 164A.050(12). They also provide technical, clerical and administrative assistance to each other. In addition to its other functions, KHESLC makes direct insured student loans. Presumably, the direct student loans made by KHESLC are insured by KHEAA.
The complex inner workings of these two public Kentucky corporations are unimportant to a student loan debtor. For all practical purposes, it seems, KRS 164A.050(13), a direct insured student loan from KHESLC is collected the same as an insured student loan from a private lender.

There are countless non-government sources for uninsured student loans, ranging from large financial institutions to small loan funds established by local civic or non-profit organizations. These are ordinary private loans that are recovered through standard debt collection and judicial processes.

Wage and non-wage garnishments to collect ordinary uninsured student loans from private lenders are subject to the same statutory law, procedural rules and appellate opinions as are all other judicial garnishments.

It is important to know which type of student loan is being collected, who currently owns the loan and who is collecting a delinquency.  However complicated the abstract legal framework may appear, it is actually fairly simple when compared to how the student loan business is implemented in actual practice. For example, the Kentucky Higher Education Student Loan Corporation, a public corporation, may administer loans originated by independent private non-profit corporations and then subcontract collections to a private debt collector. The loan account may bounce around among different organizations depending upon the phase of loan repayment, delinquency or default.  Selling loans in the secondary market is another common practice among lenders, possibly including buy-back provisions on default, so the financial institution or organization a borrower sends his or her payments to and ownership of the debt may change during the life of the loan. The ownership, servicing and collection of student loans may be divided among different organization and all may shift over time.

It can become very confusing for a debtor. Keep good records and keep your lender updated on your mailing address so that you always receive important notices, which you faithfully collect and retain in a file.

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