STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF EDUCATION, )

)

Petitioner, )

)

vs. ) Case No. 99-1592

)

CHRISTINA G. WHITE, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, the Division of Administrative Hearings, by its duly-designated Administrative Law Judge, Mary Clark, held a formal hearing in the above-styled case on June 22, 1999, by videoconference. Petitioner's counsel and witness appeared in Tallahassee, Florida; Respondent and the court reporter appeared in Orlando, Florida; and the Administrative Law Judge presided from Tallahassee, Florida.

APPEARANCES

For Petitioner: Ronald G. Stowers

Assistant General Counsel Department of Education The Capitol, Suite 1701,

Tallahassee, Florida 32399-0400

For Respondent: Christina G. White, pro se

Post Office Box 593276 Orlando, Florida 32859

STATEMENT OF THE ISSUE

The issue for resolution in this proceeding is whether Respondent's lottery prize should be withheld to be applied against an unpaid student loan.

PRELIMINARY STATEMENT

After the Department of Education (DOE) informed Respondent, in a letter dated February 25, 1999, that her lottery prize was being withheld to satisfy a debt to the DOE, she requested a formal hearing to contest the basis for the agency action. DOE then referred the case to the Division of Administrative Hearings, where the case was assigned and set for hearing as described above.

At the hearing DOE presented one witness, Mary Daniel, and offered 12 Exhibits into evidence. All were received in evidence as Petitioner's Exhibits numbered 1-12, including a current accounting of payments made on Respondent's loan at issue. This latter Exhibit, Petitioner's Exhibit numbered 12, was initially taken under advisement to give Respondent an opportunity to review the document and object. The Exhibit was furnished to Respondent on June 23, 1999, and no objection nor other response has been filed.

Respondent testified in her own behalf and presented 4 exhibits, received in evidence as Respondent's Exhibits numbered 1-4.

After the hearing Petitioner submitted a Proposed Recommended Order on July 2, 1999. Respondent filed a Proposed Recommended Order on July 28, 1999. These have been considered except to the extent that Respondent alleges facts that were not part of the evidence she presented at hearing.1

FINDINGS OF FACT

1. In an application and promissory note dated June 30, 1987, Respondent, Ms. White, applied for an auxiliary student loan in the amount of $2,000 to attend school at Orlando College in Orlando, Florida, for the loan period June 1987 through June 1988. The loan was issued by Florida Federal Savings and Loan Association (lender) in one disbursement on or about September 2, 1987. Interest accrues on the loan at a variable rate which is currently 10.27 percent per year. This loan is Loan Number AL00010400 (loan 10400) which was guaranteed by the federal government through the DOE.

2. In an application and promissory note dated December 9, 1987, Respondent applied for a second auxiliary student loan in the amount of $2,000 to attend the school for the same loan period. That loan was made by the lender in one disbursement on or about March 8, 1988. Interest accrues on that loan at a variable interest rate which is currently 10.27 percent per year. That loan is Loan Number AL00014434 (loan 14434) which was guaranteed by the federal government through DOE.

3. As auxiliary loans, each of Respondent's loans accrued interest from the date of disbursement. For auxiliary loans, the borrower is required to make loan payments even while attending school. However, a borrower may request a deferment or forbearance from payment for several reasons, including attending school on a minimum part-time basis. While an auxiliary loan is in deferment/forbearance status, interest still accrues on the loan.

4. In an application dated January 4, 1988, Respondent requested a deferment of repayment because she was attending school on a full-time basis. That application was approved for any payments due between June 22, 1987, through June 20, 1988.

5. Following the deferment period, Harper-Smith and Associates, Inc., the lender's loan servicer (herein referred to as HSA) sent Respondent a repayment disclosure letter dated August 31, 1988. The letter outlined the terms and conditions of the repayment schedule assigned to both of Respondent's loans.

   As of the date of the disclosure letter, Respondent owed

   
   

   $4,082.40 in outstanding principal and capitalized interest for both loans. Additionally, Respondent owed a total of $36.23 in accrued unpaid interest. The disclosure letter indicated that Respondent's first payment of $56.06 was due September 20, 1988.

6. Respondent failed to make any payments on the loans and Respondent was declared in default by HSA. HSA filed a lender application for claim payment with DOE dated May 11, 1989. On

   November 23, 1989, DOE, as guarantor of the loans, paid HSA for both of Respondent's defaulted auxiliary student loans.

7. When DOE acquired loan 10400 and loan 14434, the outstanding interest was capitalized, resulting in a balance of

   $4,680.86 ($4,082.40 in claim principal and $598.46 in claim interest). This sum is subject to a variable interest rate which is currently 10.27 per cent per year.

8. Since DOE acquired Respondent's loans, payments received from the Respondent's federal income tax returns (herein referred to as IRS offsets) have been applied to Respondent's outstanding

   balance as follows:
   	4/09/91	$1,082
   	3/30/92	$1,628
   	10/04/93	$1,140
   	5/08/95	$ 614
   	5/08/95	$ 727

   
   

   After applying each IRS offset payment according to federal regulations (outstanding interest first, then principal), Respondent's account had a net balance of $1,445.43 in principal due on May 8, 1995, and all interest was paid through that date. DOE's earlier certification of amount owed was based on DOE's records which did not include the 1993 and 1995 IRS offsets.

   Ms. White provided the evidence of those and DOE verified that those should be applied against her debt.

9. On June 30, 1995, Respondent filed for Chapter 7 bankruptcy protection. The filing occurred less than seven years after Respondent's loans went into repayment on September 20,

   1988. On October 17, 1995, the United States Bankruptcy Court for the Middle District of Florida, Orlando Division, issued a "Discharge of Debtor" order in Respondent's case,

   number 95-03350-687. That order provides in pertinent part, "The above-named debtor is released from all dischargeable debts . . .

   . . . [including] debts dischargeable under 11 U. S. C. [Section] 523."

10. On April 28, 1996, the Department subrogated (sold) loan 10400 to the United States Department of Education (USDOE). DOE still owns loan 14434. On May 8, 1995, the day the last IRS offset payment was applied, Respondent owed $722.72 in principal on loan 14434 which currently accrues interest at the rate of

    10.27 percent per year. No other payment was received between May 8, 1995, and the time the DOE received Respondent's lottery winnings which are the subject of this action. Ms. White produced evidence that an additional $941.69 was withheld in an IRS offset, but that was after her lottery winnings were withheld.

11. By letter of February 12, 1999, the DOE notified the Department of the Lottery (Lottery) that Respondent owed DOE

    $2,811.88, in principal and interest, as a consequence of her outstanding defaulted student loan. That amount has been amended as explained in paragraph 8, above. Pursuant to Section 24.115(4), Florida Statutes, the Lottery transmitted Respondent's

    $800 lottery prize to the DOE.

12. By letter of February 25, 1999, DOE notified Respondent that it was in receipt of her $800 lottery prize in accordance with Section 24.115(4), Florida Statutes. DOE applied Respondent's lottery winnings to her outstanding balance on the remaining loan, number 14434, held by DOE in accordance with federal requirements.2 DOE's letter also advised Respondent of her right to request a formal hearing pursuant to Section 120.57, Florida Statutes, to contest the action. This proceeding arose when Respondent made her request for formal hearing.

13. DOE has demonstrated that even when the five IRS offsets noted above were properly applied to both loans, there remained a balance due on loan 14434 of $722.72 in principal as of May 8, 1995, plus interest accruing since that date, plus

    $585.11 in collection costs. DOE also demonstrated that loan 14434 was not discharged in bankruptcy, because it was not in repayment for more than 7 years when the bankruptcy petition was filed, the minimum time required in order for a student loan to be eligible for discharge.

    CONCLUSIONS OF LAW

    
    

14. The Division of Administrative Hearings has jurisdiction over the parties to, and the subject matter of, these proceedings. Section 120.569 and 120.57(1), Florida Statutes.

15. The only issue in this case is whether DOE may collect Respondent's lottery prize in partial satisfaction of

    Respondent's defaulted student loan obligation, loan 14434, which is still owned by DOE. Respondent's argument that loan 14434 has been paid in full through IRS offsets or has been discharged in bankruptcy is not persuasive.

16. Pertinent to this case, Section 24.115(4), Florida Statutes, provides:

    (4) It is the responsibility of the appropriate state agency and of the judicial branch to identify to the department, in the form and format prescribed by the department, persons owing an outstanding debt to any state agency or owing child support collected through a court. Prior to the payment of a prize of $600 or more to any claimant having such an outstanding obligation, the department shall transmit the amount of the debt to the agency claiming the debt and shall authorize payment of the balance to the prize winner after deduction of the debt. If a prize winner owes multiple debts subject to offset under this subsection and the prize is insufficient to cover all such debts, the amount of the prize shall be transmitted first to the agency claiming that past due child support is owed. If a balance of lottery prize remains after payment of past due child support, the remaining lottery prize amount shall be transmitted to other agencies claiming debts owed to the state, pro rata, based upon the ratio of the individual debt to the remaining debt owed to the state.

17. The only payments applied to the loans 10400 and 14434 were five IRS offset payments between 1991 and 1995. On

    April 28, 1996, loan 10400 was subrogated to the USDOE. However, the Florida DOE still owns loan 14434. As of May 8, 1995, the date of the last payment on the account prior to the lottery prize, the principal balance of loan 14434 was $722.72 and

    collection costs of $585.11 were due. The principal currently accrues interest at the rate of 10.27 percent per year.

18. Respondent's first student loan payment was due September 20, 1988. (See paragraph 5, above.) Respondent filed for bankruptcy protection on June 30, 1995.

19. In 1995, Title ll United States Code Section 523(a) provided in pertinent part:

    1. A discharge under . . . this title does not discharge an individual debtor from any debt--

       1. for an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or part by a governmental unit or nonprofit institution, or for an obligation to repay funds received as an education benefit, scholarship or stipend, unless--

          
          

          1. such loan, benefit, scholarship, or stripend overpayment first became due more than 7 years (exclusive of any applicable suspension of the repayment period) before the date of the filing of the petition . . .

    
    

    (Emphasis supplied.)

    
    

20. Respondent filed for bankruptcy 6 years, 9 months, and

    
    

    10 days following the date the first payment on her student loans was due. Respondent's student loan at issue in this proceeding was not eligible for discharge by the 1995 bankruptcy action, because the first payment on the loan became due less than 7 years before the date of the filing of the petition. Therefore, the loan was not discharged. See, In re Bachner, Bkrtcy, N.D.ILL.1994, 165 B.R. 875 (Legal standard for determining when

    student loans "first became due," and thus, for determining whether student loan obligations are dischargeable, is a question of contract interpretation, and relevant inquiry is to determine when payment was due or, in an installment arrangement, the date that the first installment became due).

21. DOE has met its burden of proving by a preponderance of the evidence that Respondent owed a minimum of $800 for loan 14434 as of February 12, 1999. DOE appropriately received that amount from Respondent's total lottery winnings of $800 and applied the full amount it received toward the satisfaction of Respondent's outstanding debt.

RECOMMENDATION

Based on the foregoing Findings of fact and conclusions of Law, it is

RECOMMENDED that DOE enter a final order which authorizes Respondent's lottery prize of $800 be applied toward her outstanding debt for a defaulted student loan.

DONE AND ENTERED this 2nd day of August, 1999, in Tallahassee, Leon County, Florida.

MARY CLARK

Administrative Law Judge

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

(850) 488-9675 SUNCOM 278-9675

Fax Filing (850) 921-6847 www.doah.state.fl.us

Filed with the Clerk of the Division of Administrative Hearings this 2nd day of August, 1999.

ENDNOTES

1/ In her Proposed Recommend Order Respondent denies knowledge of a second loan. Her argument and evidence presented at hearing were based on her position that she had repaid the debt through Internal Revenue Service (IRS) tax refund offsets and that her debt had also been discharged through bankruptcy. Respondent's Exhibits 1-A, 1-B, 1-C, and 1-D reflect that she was on notice, at least since 1990, that her debt was substantially more than the $1,536.42 she acknowledges in her Proposed Recommended Order.

2/ Student loan borrowers who default on loans are subject to collection costs which are assessed at the rate of 25 percent of the outstanding principal and interest due. Payments are normally applied as follows: the first 20 percent to outstanding collection costs, then to outstanding interest, with the remainder to principal. One exception to this formula is IRS offsets. IRS offsets may not be applied to collection costs when a loan is in the possession of a guarantee agency, such as DOE. Because all of the payments applied to Respondent's loan 14434 were the result of IRS offsets, none of the payments were applied to the collection costs as originally assessed when DOE acquired the loan from HSA. As a consequence, the amount due for collection costs on loan 14434 as of May 8, 1995, is more than 25 percent of total due on the loan. (See Petitioner's Exhibit Numbered, 12) Additionally, when Respondent's lottery winnings were applied to the account, only the first 20 percent of the winnings could be applied to the outstanding collection costs. (Petitioner's Exhibits numbered 1, 2, 12 and Daniel testimony)

COPIES FURNISHED:

Ronald G. Stowers Assistant General Counsel Department of Education The Capitol, Suite 1701

Tallahassee, Florida 32399-0400

Christina G. White Post Office Box 593276

Orlando, Florida 32859

Tom Gallagher Commissioner of Education Department of Education

The Capitol, Plaza Level 08 Tallahassee, Florida 32399-0400

Michael H. Olenick, General Counsel Department of Education

The Capitol, Suite 1701 Tallahassee, Florida 32399-0400

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within 15 days from the date of this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the final order in this case.

Docket for Case No: 99-001592

Orders for Case No: 99-001592