Last week, we published a blog discussing the rising rates of defaulted student loans. The blog mentioned former protections afforded to borrowers with defaulted Federal Family Education Loans (FFEL loans). Under the Obama administration, some borrowers with FFEL loans could avoid collection agency fees by enrolling in the Education Department’s loan rehabilitation program within 60 days of defaulting. Student loan collection agencies could charge up to 16 percent of the principal balance and accrued interest unless defaulted FFEL borrowers entered this program within the 60-day timeframe.
Two weeks ago, the Education Department rolled back those policies. Collection agencies can once again charge these fees to borrowers with defaulted FFEL loans even if they do rehabilitate their debts. Despite these unfortunate changes, loan rehabilitation is still an attractive option for defaulted borrowers.
Borrowers who are in default cannot enjoy the benefits of income-based repayment programs. In addition, borrowers cannot defer their loans or enter forbearance while experiencing economic hardship. They may also have their wages garnished.
Can You Rehabilitate Defaulted Student Loans?
Borrowers must meet the following conditions to qualify for the Education Department’s loan rehabilitation program:
- Have Direct Loans or FFEL loans (federal loans)
- Agree in writing to make nine monthly payments, each one within 20 days of the due date
- Agree in writing to make payments for ten consecutive months
- Must not have already failed to complete the rehabilitation program
During this time, monthly loan payments may equal 15 percent of your discretionary income. After you have finished making payments, your loans are considered rehabilitated. While this will not get rid of excessive fees tacked on by collection agencies, it does mean defaulted borrowers can take advantage of income-based plans, forbearance and deferred payments. It also means they might qualify for the Public Service Loan Forgiveness (PSLF) program.
You can also rehabilitate Perkins loans, but the conditions for repayment are different. We encourage you to review a recent newsletter we wrote on the subject.
Some borrowers may be able to discharge student loans through bankruptcy. Although it is difficult to receive an undue hardships discharge, it is not impossible.
The Kansas City bankruptcy attorneys at The Sader Law Firm can help struggling student loan borrowers look at options for managing their debts.