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STUDENT LOAN DEFAULT

The Student Loan Rehabilitation
Rehabilitation and the Higher Education Act- what you don't know may hurt!

Many students have rehabilitated their loans under the direct impression that rehabilitation will not only take them out of default but help to repair their damaged credit as a result of those defaulted loans. Seems simple enough doesn't it? The government will reward you for paying back your loans if you have been unfortunate enough to suffer money set backs and are struggling to repay your education. 

However the reality may be a grim one in some cases. Students in herds are finding that after they enter into a student loan rehabilitation, that the previous delinquency is not being expunged as promised in the student loan rehab section of the Higher Education Act (HEA).  Whether you rehabilitate or not, the loans are due and will follow you forever as the government has also made it increasing difficult to escape student loan debt. But is it fair to be under the impression that you will be able to repair your credit and rehabilitate the loans only to find no changes will be made to your credit records? If the Higher Education Act states such a promise, it should be upheld. 

Section 674.39 Loan Rehabilitation
REHABILITATION OF LOANS

(A) IN GENERAL- If the borrower of a loan made under this part who has defaulted on the loan makes 12 on time, consecutive, monthly payments of amounts owed on the loan, as determined by the institution, or by the Secretary in the case of a loan held by the Secretary, the loan shall be considered rehabilitated, and the institution that made that loan (or the Secretary, in the case of a loan held by the Secretary) shall request that any credit bureau organization or credit reporting agency to which the default was reported remove the default from the borrower's credit history.

(B) COMPARABLE CONDITIONS- As long as the borrower continues to make scheduled repayments on a loan rehabilitated under this paragraph, the rehabilitated loan shall be subject to the same terms and conditions, and qualify for the same benefits and privileges, as other loans made under this part.

(C) ADDITIONAL ASSISTANCE- The borrower of a rehabilitated loan shall not be precluded by section 484 from receiving additional grant, loan, or work assistance under this title (for which the borrower is otherwise eligible) on the basis of defaulting on the loan prior to such rehabilitation.

(D) LIMITATIONS- A borrower only once may obtain the benefit of this paragraph with respect to rehabilitating a loan under this part.

RESTORATION OF ELIGIBILITY- If the borrower of a loan made under this part who has defaulted on that loan makes 6 on time, consecutive, monthly payments of amounts owed on such loan, the borrower's eligibility for grant, loan, or work assistance under this title shall be restored to the extent that the borrower is otherwise eligible. A borrower only once may obtain the benefit of this paragraph with respect to restored eligibility.

The Higher Education Act of 1965 and the 1998 amendments clearly states the required statutes of this Act. Below is a portion of the importance to this statute. Those affected with improperly listed student loans should print that portion out and send a demand letter to both the previous lender who refuses to remove it and the dept. of education along with a copy to Gail McLarnon, Program Specialist, Program Development Division, Office of Student Financial Assistance, 400 Maryland Avenue, SW, ROB-3, Room 3045, Washington, D.C. 20202-5449.

Section 674.39 Loan Rehabilitation
We believe it is helpful to review the aspects of loan rehabilitation that relate to borrower benefits and institutional responsibilities that are required by law, and therefore cannot be changed. Under the 1998 Amendments, a defaulted loan is considered rehabilitated if the borrower of a loan made under this part who has defaulted on the loan'' makes the required 12 payments. Accordingly, loan rehabilitation is available to all defaulted borrowers with a loan.  If a borrower requests loan rehabilitation, the institution or its servicer must allow the borrower to rehabilitate his or her loan. This also applies to defaulted loans that an institution has placed with a collection agency. However, the borrower may only rehabilitate a defaulted loan once. Because the statute specifically refers to a stream of 12 payments as determined by the institution, the institution must work with the borrower to determine a payment amount that is appropriate.

The statute does not require a signed rehabilitation agreement. In accordance with the 1998 Amendments, once the loan is rehabilitated (after the 12th payment has been made), the institution or its servicer must request that any credit bureau to which the defaulted loan was reported remove the default from the borrower's credit history. The borrower is brought current and is no longer considered to be delinquent or in default. Removing the default is consistent with the requirements of the Fair Credit Reporting Act (FCRA), which requires that an institution correct and update the information it furnishes to a credit reporting agency. In this case, the institution would be updating the borrower's credit history to reflect the rehabilitation of the loan. The FCRA also requires credit reporting agencies to have reasonable procedures in place to accept updated or corrected information.

Once the loan is rehabilitated, the borrower is subject to the terms, conditions, benefits and privileges of the borrower's original promissory note. This includes eligibility for deferments, forbearance, cancellations, and flexible repayment options. The borrower is also subject to the same responsibilities under the note, which include, but are not limited to, making regular payments and informing the school or servicer of an address change or the need for flexible repayment arrangements. We sum up this status by saying the borrower is returned to regular repayment status in Sec. 674.39(b)(1) of the regulations. Finally, in accordance with the 1998 Amendments, a borrower who has rehabilitated his or her loan re-establishes eligibility for Title IV student financial assistance, as long as the borrower is otherwise eligible.

What is Loan Default?
If, for any reason, you don't make a scheduled payment on your loan for 270 days, you will be in default. Students who default on their loans are in for a world of trouble. Read on and see.

What Happens if I Default on My Loans?

You really do not want to default on your loans. But if you do, this is what may happen:

Credit bureaus may be notified, and your credit rating will suffer.

The U.S. Treasury may withhold your tax refunds toward repayment of your loan.

You may have to pay additional collection costs.

You may be subject to Administrative Wage Garnishment, whereby the Department of Education (or your lender) will require your employer to forward 10% to 15% of your disposable pay toward repayment of your loan.

Federal employees face the possibility of having 15% of their disposable pay offset by the Department toward repayment of their loan through the Federal Employee Salary Offset Program.

The Department of Education or your lender may take legal action to force you to repay the loan.

You will no longer be eligible for federal aid.

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