What is the student loan rehabilitation program?

It is a part of the federal student loan program that allows defaulted borrowers to remove the federal default from their credit record and regain eligibility for federal student aid. After a federal student loan defaults, the loan’s guarantor, such as ASA, takes ownership of the loan and is responsible for collecting payment from the borrower. With rehabilitation, after a borrower makes 9 consecutive on-time payments to the guarantor, the loan is sold back to a traditional lender, the loan is no longer in default, and normal payment resumes between the borrower and the new holder of the loan.

Does rehabilitation offer borrowers other benefits?

Many FFELP guarantors like ASA used rehabilitation as a “teachable moment”—a time to introduce borrowers to the principles of financial literacy. When borrowers are facing the tough consequences of student loan default, they tend to be open to learning debt management skills that can keep them out of trouble in the future.

Why have many guarantors’ rehabilitation programs been suspended?

Due to the lack of liquidity in the credit market, few lenders are willing to purchase these rehabilitated loans. Under current interpretation of the Ensuring Continued Access to Student Loans Act, rehabilitated loans cannot be included in the “Participation” or “Put” Agreements with the Department of Education. These agreements allow the Department to purchase existing student loans from lenders. Without a way to sell rehabilitated loans, lenders are unwilling to purchase them from guarantors.

I don’t understand. None of my students have had any difficulty obtaining a regular Stafford Loan. Why are rehabilitation loans different?

Rehabilitation loans are the latest victim of the credit crunch. Previously, many student loan lenders made loans and then sold them in the asset-backed securities market. With the dissolution of that market, lenders had no way of selling existing loans and obtaining capital to make new loans. The government remedied the situation with ECASLA, which allows lenders to sell existing student loans to the federal government. This gave private lenders enough liquidity to ensure continued access to new Federal Stafford and PLUS Loans. But ECASLA doesn’t authorize the Department of Education to purchase loans pre-dating 2003, which is the case for most rehabilitation loans.

What are the implications of this situation for my students?

The implication for your adult learners is loss of access to higher education. Many students who withdraw from school without finishing their degree ultimately default on their student loans. In order to return to school, these students often must rely on federal student aid—but they are ineligible for this assistance because of their defaults. Rehabilitation offers these students a permanent solution to regain eligibility for federal aid and complete their educations. In the meantime, they have the debt but not the degree.

Other borrowers default for a variety of reasons, including job loss and other forms of economic hardship. They may be hoping to rehabilitate their loans in order to get their life back in order and buy a home or renegotiate their mortgage terms.

When it is available, rehabilitation serves an important way for these borrowers to remove a federal default from their credit record; recognize their financial responsibilities; learn practical debt management skills; and turn their student loans into a worthy investment in their future.

I’m working with a borrower who has already begun participating in ASA’s rehabilitation program. What should I advise him to do while it has been suspended?

It’s important for the borrower to keep making on-time payments. ASA is working through several channels to get its rehabilitation program up and running once again. When that occurs, ASA will contact the borrower about completing the rehabilitation process. Borrowers can contact one of ASA’s Payment Advisors for more information, including other possible alternatives, such as the Direct Loan Consolidation program, which may be appropriate for some borrowers.

If you are working with a borrower in a rehabilitation program that is not through ASA, have the borrower contact the loan’s guarantor immediately for instructions.