New rules on student loan rehabilitation

On July 1, 2014, a number of important changes to the Federal Student Loan program went into effect.

New rules on student loan rehabilitation

Loan rehabilitation is a one-time opportunity to bring a student loan that has gone into default up-to-date. A student loan typically goes into default after a borrower misses nine monthly payments. At this point, the federal government turns the loan over to a private debt collection agency. The borrower will work with this agency to apply for rehabilitation. What needs to be done to rehabilitate a student loan is to make at least nine “reasonable and affordable” on-time monthly payments within a ten-month span. Once this payment schedule is successfully completed, a borrower is able to enter into an affordable payment program offered by the federal government.

One of the biggest changes with the rule involves the definition of “reasonable and affordable.” Prior to the changes, debt collection agencies could require a payment amount of at least one percent of the total balance of the loan. Under the new regulations, the loan rehabilitation payment must be calculated using the formula for the Income Based Repayment program.

Another goal with the updated regulations is to prevent defaults. Borrowers who are nine months behind on their payments can now request forbearance for up to four months on their loans with just a phone call. During this period the borrower has the option to submit paperwork to extend forbearance for a full year.

Under federal law, the government has the power to garnish wages to repay the delinquent student loan without taking the borrower to court. Under the new regulations, wage garnishment will be suspended after five of the nine required rehabilitation payments are made on time. Also the collection agencies are not allowed to contact and harass you for more money while you are in the rehabilitation process.

The new law only applies to federal student loan rehabilitation and not to private loans.

Michigan State University Extension offers financial management and home ownership education classes. To find classes in your area, visit MI Money Health. If you are wondering about your financial health, take a financial health survey from MI Money Health to get your financial health score! It is confidential and your answers never connect back to your name. This survey can help you evaluate your current financial situation, provide ideas on how you may improve your financial health and connect you to resources in your local community.

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