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Government Student Loan Rehabilitation
Pennsylvania consumer guide for student loan rehabilitation after loans are in default
A Consumer Guide on Student Loan Rehabilitation After DefaultThere are very few ways of rectifying student loan defaults, but it is still possible. One of the main repayment programs offered for government student loan borrowers is rehabilitation.
Here is what you need to know:
Basic provisions under the Federal Educational Loan Program:
Under the Family Federal Educational Loan Program, (FFEL) 34 C.F.R. 682, et. seq., a guaranty agency (whether it be the original agency that loaned the money or a debt collection agency) MUST enter into a loan rehabilitation agreement.
This agency MUST establish a loan rehabilitation program for all borrowers with an enforceable promissory note for the purpose of rehabilitating defaulted student loans, except for loans for which a judgment has been obtained, so that the loan may be purchased, if practicable by an eligible lender and removed from default status.
In other words, the company collecting on a defaulted student loan debt MUST enter into a loan rehabilitation program with the debtor (so long as a judgment has not been obtained on this loan). The rehabilitation program will allow the defaulted loan to be purchased by a lender and removed from default status. This will allow the debtor to "get back on track" so to speak.
According to the FFEL 34 C.F.R., a loan is considered to be rehabilitated only after the following has been met:
The borrower (debtor) has to make 9 monthly payments within 20 days of the due date during a period of 10 consecutive months. (Be advised the Perkins program has separate rules.) The 9 out of 10 rule basically allows you to miss your payment one month, but still be eligible to rehabilitate.
The required amount of the monthly payment must be reasonable and affordable based upon the borrower's (debtor's) total financial circumstances. "Voluntary Payments" are those made directly by the borrower (debtor), and do not include payments obtained by Federal offset, tax withholding, wage garnishment, and/or income or asset execution after a judgment has been entered on a loan.
After the payments are made, the agency MUST attempt to secure a lender to purchase the loan. This will take the defaulted student loan out of "default" status.
** Within the past year, it became difficult to find buyers willing to purchase the rehabilitated loans. With no buyer, the companies were not allowing the borrower to get out of default status, making this a HUGE problem. The GREAT NEWS is that on June 23, 2009, Congress passed a bill that allows agencies to sell rehabilitated federal loans to the DOE (Department of Education) if they are unable to find buyers for those loans.**
How is the monthly payment amount determined? What is reasonable and affordable?
When the agency and borrower are entering into the rehabilitation program, they must come up with a reasonable and affordable payment. The borrower must keep in mind that he/she needs to be able to afford this payment for 9 consecutive months.
Under the guidelines, the borrower's and spouse's disposable income and reasonable and necessary living expenses MUST be taken into consideration. These expenses include, but are not limited to, housing expenses, utilities, food, medical expenses, work-related expenses, dependent care costs, childcare costs, and other Title IV payments.
The agency is NOT allowed to have a "minimum payment amount". In other words, the agency cannot tell the borrower they have a set minimum payment of say $50. The agency can determine that a reasonable and affordable monthly payment is less than $50 a month depending on the borrower's finances.
The agency is entitled to request documentation from the borrower regarding their income, their spouse's income, and proof of monthly expenses.
VERY IMPORTANT!!!
Be sure to request a written statement confirming the borrower's reasonable payment amount, setting forth any and all terms and conditions applicable to the required series of payments that must be made before this account can be considered for repurchase by a lender, thus taking the loan out of default.
PLAIN and SIMPLE, get your agreement in writing.
When going through the steps of student loan rehabilitation with your agency, you need to know there are common problems and roadblocks that might arise. Please make sure that you educate yourself on the correct student loan rehabilitation process in order for this not to throw you off your track. Everyone deserves a second chance.
If you have any questions regarding student loan rehabilitation please contact Jeff. You can also refer to our student loan FAQ.
