You can renew eligibility for new loans and grants and eliminate the loan default by “rehabilitating” a defaulted loan. To qualify for FFEL or Direct Loan rehabilitation, you have to make nine monthly payments within 20 days of the due date during a period of 10 consecutive months. The 9 out of 10 rule basically allows you to miss your payment one month, but still be eligible to rehabilitate. The Perkins program has separate rules. To rehabilitate a Perkins loan, you must make nine payments in a nine month period.
An interruption in this consecutive period is allowed for qualifying military service members or affected civilians. These borrowers may resume their rehabilitation payments after their service is completed. See the special programs for military section of this site for information about other options for military service members and certain civilians affected by war or national emergencies.
If you are rehabilitating a FFEL loan, the guarantor must attempt to find a lender to purchase the loan after you have made the required payments. There is no resale requirement for Direct Loans. Once rehabilitation is complete, the loan is removed from default status and you are eligible for new loans and grants. The default notation should be removed from your credit record. In most cases, however, the other negative history will remain until it gets too old to report.
You can regain eligibility for federal assistance before you complete the rehabilitation as long as you make six monthly reasonable and affordable payments. However, you will need to complete the rehabilitation to get out of default.
Lenders will generally add collection costs to the new loan balance, but as of July 1, 2014, this should be no more than 16% of the unpaid principal and accrued interest at the time of the sale of the loan. The Department of Education says that it does not charge these fees to borrowers rehabilitating Direct Loans, but they can change this policy at their discretion. It is a good idea to ask about whether the government is going to add collection fees to your balance after rehabilitation.
You are entitled to get out of default through rehabilitation only once per loan. If you rehabilitated before August 14, 2008 and go back into default on that loan, you can still rehabilitate again. However, this new rehabilitation will be subject to the one-time limit.
How to Rehabilitate Your Loans
You will need to request rehabilitation from your loan holder. You may be dealing with a collection agency. Within 15 business days of the determination of the loan rehabilitation payment amount, the loan holder must give you a written rehabilitation agreement which includes the reasonable and affordable payment amount, a prominent statement that you may object orally or in writing to the reasonable and affordable payment amount with the method and time frame for raising an objection, a statement that the rehabilitation is null and void if you do not provide the documentation required to calculate the reasonable and affordable payment amount, and an explanation of any other terms and conditions. To accept the agreement, you must sign and return the agreement or accept the agreement electronically. Be sure and read everything before signing.
In the past, it was very common for collectors to tell you that you had to pay an unaffordable amount. This was wrong then and is still wrong. The law says that you only have to pay what is reasonable and affordable. There is no minimum amount that the loan holder must charge. The new regulations effective July 1, 2014 create a a system to help ensure that borrowers are paying only what is “reasonable and affordable” for them.
Here is how the system works under current law: The loan holder should discuss your options, including the pros and cons of loan rehabilitation and loan consolidation. If you decide on rehabilitation, the loan holder should start out with the amount you would pay under the IBR formula. This is the IBR formula for older loans, based on the borrower making student loan payments of 15% of disposable income. This does not mean that you are eligible for IBR while you are still in default. Instead, the loan holder will use the 15% IBR formula to determine a reasonable and affordable payment amount. If you successfully rehabilitate the loan, you can then request an income-driven repayment plan. The loan holder will ask for your adjusted gross income (AGI) to figure out your 15% IBR payment. If you do not file taxes or if your most recent tax return is no longer accurate, you will need to submit alternative documentation of information on this form.
If you object to the 15% IBR amount, you can negotiate a different payment, but you must use a standard form to provide additional income and expense information. The loan holder can ask you to provide documentation of income and expenses.
|Understanding the Rehabilitation System as of July 1, 2014
REHABILITATION TIPS AND FAQs
Q: Can my loan holder charge collection costs after I rehabilitate my loans?
A: Yes, but as of July 1, 2014, no more than 16% of the unpaid principal and accrued interest at the time of the sale of the loan.
Q: Can my loan holder continue to collect even after I have signed a rehabilitation agreement?
A: Yes, but only very limited contacts. Collection during the rehabilitation period is limited to collection activities that are required by law and to any communications that support the rehabilitation (for example, monthly statements with the amount your rehabilitation payment listed).
Q: Do I have the right to rehabilitate defaulted private loans?
A: Only if your private lender has a rehabilitation program. Most do not.
Q: What if my lender won’t agree to a rehabilitation payment amount that I find reasonable and affordable?
A: In the past, loan holders commonly told borrowers that minimum payments were required so that they could sell the loan at the end of the rehabilitation period. Private collectors almost always said this because they were paid a higher commission if they set up rehabilitation plans where borrowers paid certain minimum amounts. Despite these statements, borrowers have always been eligible to make reasonable and affordable payments. The July 2014 rules described above reinforce this requirement and set up a system where the collector must offer you a reasonable and affordable payment tied to the 15% IBR formula. The best way to deal with a collector insisting that you pay a higher amount or that you have to make a down payment is to tell the collector that you are aware of your right to a reasonable and affordable payment plan and to keep pushing until they give it to you. If you still don’t get anywhere, you should try contacting the Department of Education ombudsman office or one of the guaranty agency ombudsman offices. You should also consider filing a complaint. If you still can’t get anywhere, you might consider contacting a lawyer.
Q: What standard does the Department use to evaluate my expenses if I use the income and expense form instead of the 15% formula?
A: The Department uses the Internal Revenue Service (IRS) expense standards as guidelines for acceptable expenses. The Department says that it will not accept expenses in excess of limits set in the IRS standards. For expense categories that are not limited in the IRS standards, such as medical costs, the Department also does not set a limit.
Q: How is the payment set if I use the income and expense form?
A: The Department initially set the payment at 100% of the difference between household income and expenses. The Department says it has changed this policy so that the payment should be set at 15% of discretionary income,” defined as the difference between the borrower’s household income and household expenses (after some reported expenses are subjected to reasonability limits).