Student Loan Delinquency, Default, and Rehabilitation for Adult Learners

When Loans Are in Trouble

Students must begin managing their education debt very shortly after they graduate, withdraw from classes, or drop below half-time status, so knowledge of loan repayment at the right time is key. Schools provide entrance and exit interviews with information about the importance of federal loan repayment, yet many borrowers feel lost in the repayment process.

Borrowers’ financial future is at stake, so this is the critical time to help them down the path of financial Wellness (see Terms to Know at right).

After students sign an MPN (see Terms to Know at right), which legally promises that they will pay back their loans, the students’ school certifies the loan amounts. Then, depending on the type of loan, the loan can either stay with the school, or, more commonly, be serviced by a particular lender or bank.

Most lenders contract with a company known as a servicer to handle communications with the borrower after disbursement and the processing of borrowers’ payments. That means borrowers may receive loan bills from companies that are different from the ones with whom they signed MPNs. Sometimes students’ servicers and lenders (or banks) are the same, which eliminates some confusion for them.

– Loan Repayment Fast Facts for Student Loan Borrowers
– Payment Options
– Postponing Payments
– Information for Students About Default and Recovery
– Defaulted Loan Rehabilitation Program
– Benefits of Rehabilitation
– How the Defaulted Loan Rehabilitation Program Works

Loan Repayment Fast Facts for Student Loan Borrowers

– It’s important for borrowers to know when their grace period (see Terms to Know at right) ends. The length of the grace period depends of the types of loans they have borrowed. The end of the grace period is the beginning of their repayment schedule and when their first loan payment is due.
– Borrowers’ lenders or servicers should contact them during the grace period with information about repayment. However, if borrowers are not contacted by their lenders or servicers for each of their loans, borrowers need to take responsibility for contacting the lenders. The responsibility for repayment rests on the borrowers.
– Borrowers’ payment plans will automatically be set to a Standard Repayment schedule. However, borrowers are entitled to contact their lenders or servicers to change payment schedules once a year.
– Borrowers are expected to make payments to lenders or servicers—whoever sends a bill for their loan payment—on time, every month. Making late payments, or missing payments, can cause borrowers’ loans to go into default, which can lead to payments being automatically withdrawn from their tax refunds or paychecks (wage garnishment), as well as damaged credit.
– Not paying their student loans will adversely affect students’ lives and credit for many years. If a loan receives no payment in over 270 days, it defaults. Default means that a loan has left repayment status and is now due in full when the servicer or lender requests. New collection costs are now added onto the loan’s balance, and the loan becomes drastically more expensive than before. Students who wish to return to school can not qualify for federal aid until satisfactory payment arrangements are made on the defaulted loan or the loan is rehabilitated, a process that can take as long as a full year of on-time payments.

You can help prevent borrowers from defaulting on their education loans. Several options, such as changing their payment schedules and seeking a forbearance or deferment, can keep borrowers on the right track.

Payment Options

Students have several options for repayment:

Standard Repayment

Standard Repayment is the normal schedule for all loans. The standard repayment period for each loan lasts up to 10 years, depending on the amount of the loan. Payments must be at least $50 a month.

Extended Repayment

Extended Repayment stretches the repayment period to 25 years. This option is available to borrowers whose oldest loan was originated on or after October 7, 1998. On the positive side, this schedule lowers borrowers’ monthly payments. However, it’s important to note that the Extended Repayment schedule increases the total amount of interest that borrowers pay over the life of the loan.

Graduated Repayment

Graduated Repayment is designed for borrowers who anticipate making increasing financial progress over time. This schedule will reduce borrowers’ monthly payments by giving them smaller payments, as low as interest-only, upfront for up to 4 years. Payments then increase gradually so that the loan is repaid in the same amount of time as under Standard Repayment. The Graduated Repayment schedule increases the total amount of interest borrowers pay over the life of the loan.

Income-Sensitive Repayment

If a borrower’s income is low, he or she may want to choose Income-Sensitive Repayment, which arranges a monthly payment between 4% and 25% of borrowers’ gross monthly income. Borrowers may be able to use this option for up to 5 years, though it may extend loans’ repayment term for up to 15 years. Income-Sensitive Repayment reduces borrowers’ monthly payment amount; however it increases the total amount of interest paid over the life of the loan.

Consolidation

Consolidation is a popular repayment option that allows borrowers to combine multiple loans into 1, extend the repayment term, and, in some cases, lower the monthly payment. In most cases, you may only consolidate once, but you may obtain a subsequent consolidation loan under the Direct Loan program if you wish to participate in the Public Service Loan Forgiveness program.

Postponing Payments

When borrowers face situations where they feel they can’t make their loan payments, they may be able to temporarily postpone the payments with a deferment or forbearance. Some situations that might apply include unemployment or an economic hardship.

A deferment (see Terms to Know at right) allows borrowers to temporarily suspend their loan payments. Conditions such as unemployment, extreme economic hardship, enrollment in school at least half-time, or being on active duty with the military will qualify borrowers for a deferment. Visit our forms page for a complete listing of deferment types and criteria. During a deferment, the federal government pays the interest on borrowers’ subsidized loans (see Terms to Know at right) so that the amount borrowed does not increase during the deferment. However, unsubsidized loans (see Terms to Know at right) accrue interest during a deferment.

In order to get a deferment, borrowers must complete an application and submit it to their lender or servicer for processing. Borrowers must request deferments, as they cannot automatically be granted by a lender. A lender can grant a deferment to a borrower who is already being deferred for the same reason and time period with another lender. FFELP lenders can use information obtained from another FFELP loan lender, the Secretary of Education (for Direct Loans), or an authoritative electronic database maintained or authorized by the Secretary of Education.

If the borrower is currently serving in the Armed Forces and unable to request a military deferment personally, a representative can complete this process on behalf of the borrower. Some deferments, such as an Economic Hardship deferment, require supporting documentation. The lender will review the application, and if the borrower has met the criteria for deferment and has not exhausted the maximum total time the deferment may apply, the lender is required to grant the deferment. Borrowers should continue to make their monthly loan payments until their lenders send formal notification that they have approved the deferment.

When borrowers don’t meet the criteria for a deferment and have explored other options such as a change in payment schedule, they may qualify for forbearance (see Terms to Know at right). Forbearances are usually reserved for cases of financial hardship or illness. They are granted at the discretion of the lender or servicer.

Like a deferment, forbearance is a temporary suspension of a borrower’s payments. However, unlike a deferment, borrowers’ subsidized loans continue to accrue interest that may be capitalized, or added to the principal balance of the loan, at the end of the forbearance period. That means that after the forbearance period, the amount a borrower owes will be greater than before the forbearance period. For this reason, it is strongly recommended that borrowers attempt to change their repayment schedule to lower their monthly payments or qualify for a deferment prior to applying for forbearance.

Borrowers must request to be granted forbearance by contacting their lender or servicer by phone, mail, or e-mail. A written application or supporting documentation may be necessary. In some instances, lenders and services may offer verbal forbearances over the phone. Borrowers should continue making monthly loan payments until their lender or servicer notifies them that forbearance has been granted.

Information for Students about Default and Recovery

Student loan default occurs when a borrower fails to make monthly payments for 270 days (9 months). Upon default, the entire loan balance is due in full. New collection costs are added onto the loan’s balance, which makes it drastically more expensive than before.

Default carries serious consequences for borrowers:

– Up to 15% of wages may be garnished (see Terms to Know at right) until the debt is repaid
– Borrowers’ entire federal tax refunds may be seized to repay their defaulted student loans. State tax refunds may be seized as well
– Employers frequently check applicants’ credit, and may rescind job offers based on a poor credit report due to default
– Defaulted borrowers may be turned down for car loans, apartment leases, or other types of credit. Defaulted loans make receiving approval for a home mortgage extremely difficult
– Borrowers are ineligible for any federal financial aid until satisfactory repayment arrangements are made

Defaulted Loan Rehabilitation Program

Rehabilitation is a federally mandated program that gives federal student loan borrowers a way to bring their loans out of default. Rehabilitation can reverse the many negative consequences of defaulting on a student loan, and participation is one of the rights granted to a federal education loan borrower.

Benefits of Rehabilitation

– Borrowers again become eligible for financial aid, allowing them to pursue their higher education goals.
– The loan is no longer considered to be in default, so wage garnishment and seizure of tax refunds ceases.
– The student regains eligibility to apply for any deferment or forbearance benefits not exhausted prior to default.
– The entire outstanding balance of the defaulted loan is no longer due in full.

How the Defaulted Loan Rehabilitation Program Works

– Borrowers make at least 9 qualifying on-time payments.
– All payments are made within 20 days of the due date. If borrowers fail to make any payments within that time frame, they must begin the repayment schedule all over again.
– Once the required payments have been made, the borrowers’ guarantor will send borrowers a Rehabilitation Agreement. Borrowers fill out the agreement completely, sign it, and return it in order to complete the loan rehabilitation program.
– Borrowers continue making payments to their guarantor until they receive notification to do otherwise. Ceasing to make qualifying monthly payments could cause borrowers to lose their eligibility for rehabilitation.
– After borrowers return the completed agreement, the borrowers’ guarantor transfers the loan to a lender and servicer. At that point, the loan is out of default and back into repayment.
– Borrowers then make on-time monthly payments to their new servicers—and get back on the path to healthy debt management!