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 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 this should be no more than 18.5% of the unpaid principal and accrued interest at the time of the sale of the loan.
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. Regardless of who you are dealing with, you should insist on getting the agreement in writing. Be sure and read everything before signing.
The main item to negotiate is how much you will have to pay every month. Your loan holder may tell you that you have to pay an amount beyond what you can afford. This is 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. New regulations going into effect on July 1, 2014 create a new system to help ensure that borrowers are paying only what is “reasonable and affordable” for them. Some collection agencies have already begun processing rehabilitation applications under this new system.
Here is how the new system should work: 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 does not mean that you are eligible for IBR while you are still in default. Instead, the loan holder should use the 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.
If you object to this amount, you can negotiate a different payment, but you must use a standard form to provide additional income and expense information. Until the new standard form is available, the loan holder will most likely ask you to fill out this form or something similar to determine the monthly reasonable and affordable payment amount. (Alert: If the on-line form is not available, you should contact your loan holder and request a financial disclosure form).
|Common Rehabilitation Problems
REHABILITATION TIPS AND FAQs
Q: Can my loan holder charge collection costs after I rehabilitate my loans?
A: Yes, but no more than 18.5% 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. To avoid this problem, you should insist that the loan holder agree in writing to stop all collection efforts other than routine billing while you are current on your rehabilitation payments. The new rules effective July 1, 2014, put new limits on collection during the rehabilitation period.
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: The lender will probably say that minimum payments are required so that the lender can sell your loan at the end of the rehabilitation period. In the past, private collectors almost always told you this because they were paid a higher commission if they set up rehabilitation plans where borrowers paid certain minimum amounts. Despite what they tell you, you have the right to pay only what is reasonable and affordable. The new rules described above reinforce this requirement and set up a new system where the collector must offer you a reasonable and affordable payment tied to the IBR formula. Even though the new rules do not go into effect until July 1, many collectors have already changed their practices. 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.