Getting out of Default: Rehabilitation for your Student Loans
A guide for curing your default through rehabilitation.
OverviewIf you're like most people with a college or graduate degree, you financed your education through student loans. The majority of students simply cannot afford the exorbitant, ever-increasing tuition costs of a higher education degree. To finance their education, therefore, they must take out student loans in an amount sufficient to cover their tuition and living expenses for the duration of their enrollment. For purposes of this guide, I will focus specifically on federal student loans. Keep in mind that the information provided does not apply to private or state loans.
To find out whether your student loans are federal, log onto www.nslds.ed.gov. Create a username and password, and log into the system. Take a look at your financial aid snapshot to see a list of all your federal student loans. To see a detailed description of each of your loans, simply click on the loan and you will be given all the information you ever wanted to know, including current status, relevant deadlines, and contact information for your loan servicer. Note that if your loan is not listed on this database, then it is not a federal loan, and is very likely a private or state loan.
Timing is EverythingKeep in mind that when it comes to student loans, timing is everything. Now, most borrowers know that they do not have to make payments on their student loan debt while they are enrolled. This is called in-school deferment. It is, indeed, nice while it lasts. However, once you graduate or reduce your enrollment status to less than 1/2 time, you are no longer eligible for in-school deferment.
Eventually, the in-school deferment period comes to an end, and you are automatically given a grace period, which lasts between 6-9 months, depending on the kind of federal loan. Keep in mind that the grace period can only be applied once per loan.
The idea behind the grace period is to give the borrower time to set up a repayment agreement. I recommend to all my clients that they set up a payment plan during the grace period, but I know from personal experience that many borrowers do not have a plan in place by the time it ends. For these borrowers, this is when the panic starts to set in. And because this article is meant to be geared towards borrowers who have already missed their first student loan monthly payment, I will now address the issue of default.
DefaultStudent loans go into default after approximately two hundred and seventy (270) days after you miss a payment. Note that loans become delinquent just one day after the due date for making your monthly payment. If you are between 1 and 270 days past due on a payment, your loans are considered delinquent. What happens when your loans are delinquent? The answer is, nothing, yet. But delinquent loans turn into defaulted loans, and that is when the consequences truly start revealing themselves.
Once your loans go into default, the debt collection agency is free to pursue administrative remedies against you, such as wage garnishment or tax setoffs, in order to repay your debt. Depending on which state you live in, there are a variety of administrative remedies the debt collector can elect to pursue. The worst part is they don't even have to get prior court approval!
Pursuant to the Debt Collection Improvement Act of 1996 (DCIA) - 31 U.S.C. ?3720(D), and authorized by 20 U.S.C. 1095(a), 34 C.F.R., and 682.410(b)(9), your loan servicer may hire a collection agency to garnish your wages. As long as they give you 30 days written notice, they can begin garnishing your wages to repay your debt. There is no hearing on the issue, unless you elect to have a hearing by requesting one within 30 days from the date the letter from your loan servicer was issued informing you that your loans are in default. At that point, the garnishment halts until the hearing outcome is determined. It is possible to request a hearing after garnishment starts, but note that the garnishment will not cease during the first 60 days of the hearing review. Note that loans cannot be consolidated once the garnishment process starts. The only way to avoid garnishment is by entering into an acceptable repayment arrangement.
Rehabilitation for your Defaulted LoansFor a repayment arrangement to be acceptable, you are required to enroll in a plan that allows you to cure your defaulted loans. This is done through a process known as rehabilitation. No matter what stage of default you are in, you will need to cure the default before your loans are considered in good standing. Note that you can rehabilitate the following kinds of defaulted federal loans: Federal Family Education Loan (FFEL), Federal Perkins, National Direct, National Defense and/or Direct Loans held by the U.S. Department of Education (ED).
Broadly speaking, the goal is to "rehab" your defaulted loans over the course of 8 to 9 months. This is accomplished by making consecutive monthly payments to your debt collector, who is acting as an agent of your loan servicer. If you follow the terms of your agreement and complete the program successfully, your default will be cured and your loans returned to good standing.
So, what do you have to do to complete the program successfully? You make at least 9 monthly payments in the amount specified in your rehabilitation repayment agreement. Generally speaking, you are allowed to make two payments in your first month, which means the rehabilitation can be completed in as short as 8 months, as long as you are consistent in making the payments. After making 9 payments, the rehabilitation will be completed within 30 days. At that point, you will receive written notice of your new loan servicer. You will need to apply for your long-term repayment plan with this new loan servicer, and you have three months from the time your loans are rehabilitated to enter into a long-term arrangement.
Wage Garnishment and RehabilitationFor those borrowers whose wages are currently being garnished, rehabilitation can stop the garnishment process after you make 5 consecutive monthly payments. You can accomplish this within 4 months by taking advantage of the debt collector's offer to make 2 payments in one month. After you've made 5 consecutive payments, you are sent a letter confirming that you have made these payments. At this point, make sure to contact the debt collector to instruct them to send the letter to your employer to cease garnishment of your wages.
Things to Keep in Mind during the Rehabilitation ProcessSome things to keep in mind while you are rehabbing your defaulted loans:
o You must make each payment no more than 20 days before, or 20 days after the due date for that payment;
o Payments are due on the same day each month, and you may elect to authorize an auto-debit each month from your checking or bank account.
o "Default" notation is removed from your credit report within a few months of successfully rehabbing your defaulted loans;
o You can only rehabilitate your defaulted loans once after 2008 (the only other option for curing default is through consolidation, which cannot be used once an administrative wage garnishment starts).
Income Based Repayment (IBR) as a Long-Term Repayment OptionIf you are thinking to yourself, "OK, but I already couldn't make my monthly payments, so how am I ever going to be able to rehabilitate my defaulted?" The answer is that your rehabilitation monthly payment should be significantly less than whatever it was prior to going into default. The rehabilitation repayment amount is based on a formula that considers your income, expenses, and family size. This type of approach is called, "IBR", or Income Based Repayment. We have clients for whom their monthly payment is as low as $5 per month. While you can work directly with the debt collector to determine your monthly payment, the best option is to hire an attorney to complete the application process on your behalf, to ensure you are getting the most affordable rate possible for your situation.
Remember, the best way to avoid the consequences of default is to keep up with the status of your loans. If you think you have missed a payment, don't be afraid to call your loan servicer to ask questions such as, "how many days am I past due on my payments?" The sooner you find out, the more days you have to cure the problem!