Getting out of default

Transcription

1 Comprehensive Student Loan Training Series Session Four of Four August 2014 Getting out of default 1) Repay the debt 2) Discharge the debt 3) Consolidate 4) Rehabilitate 1

2 Consolidation Review consolidation summary sheet carefully and contact the Department within ten days of the date of the letter, if the information is not correct While the consolidation is pending, the Department may ask for payment to cover the monthly interest. Borrowers who cannot afford this payment may request a forbearance while this is processing Collection costs will typically be added to the new loan balance but should be no more than 18.5% of the outstanding principal and interest. Borrowers defaulting on a FFEL consolidation loan may consolidate with the Direct Loan program if selecting IBR or ICR. But borrowers defaulting on a Direct consolidation loan cannot consolidate again unless adding new loans to the consolidation. Rehabilitation Renews eligibility for new loans and grants and eliminates the loan default Default removed from credit record (but other negative history remains until it gets too old to report). Requires the borrower to make nine monthly payments within 20 days of the due date during a period of 10 consecutive months. The 9 out of 10 rule basically allows a borrower to miss a payment one month, but still be eligible to rehabilitate. But to rehabilitate a Perkins loan, a borrower must make nine payments in a nine month period. Qualifying military service members may resume their rehabilitation payments after their service is completed. Renewed eligibility for financial aid following only six monthly reasonable and affordable payments. For FFEL loans, the guarantor must attempt to find a lender to purchase the loan after the borrower has made the required payments. Collection costs will be added to the new loan balance, but this should be no more than 18.5% of the unpaid principal and accrued interest at the time of the sale of the loan. Entitlement to get out of default through rehabilitation is limited to only once per loan. (Unless borrower rehabilitated before August 14, The new rehabilitation will be subject to the one-time limit.) 2

3 How to Rehabilitate Request rehabilitation from loan holder (collection agency) Get the agreement in writing Negotiate monthly payment. Loan holder offers a certain monthly payment amount. Borrower only has to pay what is reasonable and affordable. Loan holder asks for documentation of income and expenses - Financial Disclosure Form Read agreement carefully: You must make nine timely payments in a ten month period. You may be late one month and still qualify for rehabilitation. Carefully track when the rehabilitation period is over Loan is out of default and borrower is eligible for all repayment plans. Arrange for affordable payment (for example, Income-Based Repayment) Ask for the name of the new servicer as soon as possible If the lender can t sell the loan after rehabilitation: The borrower must keep making payments until a buyer is found, or Consolidate with the Direct Loan program. Rehabilitation Loan holders can continue to collect after the borrower has signed a rehabilitation agreement Get it in writing that the loan holder will stop all collection efforts other than routine billing while the borrower is current on the rehabilitation payments. There is NOT any minimum payment required for rehabilitation, no matter what the loan holder and private collector say Borrowers have the right to pay only what is reasonable and affordable. Provide detailed documentation of income and expenses Assert your knowledge that the rule is reasonable and affordable Contact the Department of Education ombudsman office and the Consumer Financial Protection Bureau Get a lawyer There is typically no right to rehabilitate defaulted private loans (Read the Promissory Note) 3

4 Referring clients for legal help Legal Services Corporation (LSC) LawHelp.org National Association of Consumer Advocates (NACA) The National Association of Consumer Bankruptcy Attorneys Checklist for helping financially distressed borrowers Remember that your borrower s options and best strategy always depend on loan type and status: Know the loan type (federal or private), and Check the loan status (default or not yet?) [don t rely on the borrower s report] No matter what, evaluate discharge and cancellation possibilities If the loan status is pre-default: Take action to avoid default Consider deferment or forbearance to postpone payments and stop collection efforts, and/or Income-driven repayment plan If the loan status is in default, forbearance, deferment, repayment plan options, and forgiveness programs are restricted: Remember that TIMING IS CRITICAL Consider challenges to collection actions For lawsuits, warn borrower to meet all court deadlines and evaluate whether borrower is collection proof For out-of-court collection efforts, file timely requests for administrative hearings Weigh options for curing default 4

5 Calculators, calculators, calculators AAMC Medloans Calculator New America Foundation VIN Foundation FinAid.org Department of Ed Repayment Estimator Learning objectives inventory and identify student loans evaluate forbearance, deferment, discharge, and cancellation identify when consolidation makes sense distinguish Standard, Extended, and Graduated repayment calculate the benefits of income-driven student loan repayment plans assess school-based, state, employer and profession specific Loan Repayment Assistance Programs define qualifying employment, eligible loans, qualifying repayment plans, and required documentation for Public Service Loan Forgiveness recognize tax considerations related to student loan programs understand the causes and consequences of student loan default explain options and procedures for curing student loan default 5

6 Checklist Analyze your client s circumstances Inventory the federal loans Inventory the private loans Identify the needs of your client Evaluating where his or her student loans fit into the bigger financial picture Establishing an affordable monthly payment Minimizing the total cost of debt over time Restoring eligibility for federal student aid Improving credit record Determine and explain your client s options Discharge and cancellation Consolidation Repayment options Curing default (if necessary) Potential for forgiveness Tax considerations Develop an appropriate strategy and establish next steps 6

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9 aamc.org reprinted with permission aamc.org reprinted with permission 9

10 The word of the day is: GRADUATE 10