There are a number of important changes, including very significant improvements to the loan rehabilitation program.
These new rehabilitation rules are for both FFEL and Direct Loans. The Department’s Direct Loan collection agencies were already implementing these changes to some extent, but the “roll out” has been inconsistent. We hope the situation will improve as of July 1 once the new rules are officially effective.
There are a number of important changes, including:
1. Direct Loan rehabilitation now requires a written agreement (this was true of FFEL before, but not Direct Loans)
2. There is a specified method for calculating reasonable and affordable payments using the 15% income based repayment (IBR) formula.
Here is how this should work: Once you request rehabilitation, the collector should then ask you for your most recent adjusted gross income (AGI) or other income (e.g. public assistance). The collection agency will use the IBR calculator (based on the 15% IBR formula) to come up with a preliminary rehabilitation payment. If you agree to this amount, you will then need to submit documentation either of AGI or alternative documentation of income.
You can object to this amount, but then you must provide documentation of your income and expenses using a new form. However, be advised that your payment will likely increase after the rehabilitation period if you choose this route. At that point, you can request deferment if you qualify or forbearance if you cannot afford the regular IBR payments, but these are time limited options. You should think carefully about whether it is a good time to rehabilitate if you don’t think you will be able to afford IBR payments after the rehabilitation is completed.
Under the new system, despite what the collection agencies may say, you do not have to be eligible for IBR in order to make the 15% IBR calculated payments during the rehabilitation period. Collectors will be using the 15% IBR formula (and the IBR calculator) as a proxy to determine reasonable and affordable payments. It is important to understand that this is not the same as applying for the IBR program. And if you have a parent PLUS loan or are otherwise not eligible for IBR, you should understand that even though the collector will use the 15% IBR formula to determine your payments during your rehabilitation, your payments will likely go up after rehabilitation is completed.
The loan holder may tell you that you have to make a “good faith” payment while they are waiting for you to submit documentation of your income. This is your choice. You do not have to make this payment. However, you may want to do this so that you can get started with the nine month rehabilitation period. Be advised that these payments will count toward the nine months only as long as the final rehabilitation payment amount is not higher than the amount you are paying as a “good faith” payment.
If you are having your wages garnished, you have a one time right to have the garnishment suspended if you make five required rehabilitation payments
Once the payment is established, the collection agency sends a written rehabilitation letter and the rehabilitation plan begins. You still have to make nine payments within a ten month period in order to complete the rehabilitation period and get out of default.
The new rules and new commission system should help address the common problem of collectors claiming that higher payments are required in order to rehabilitate. This is wrong. The law has always said that borrowers only have to pay reasonable and affordable amounts. There is no minimum amount that the loan holder must charge. Too often, the collectors have simply ignored the law in order to maximize their profits. The new rules should be an improvement.