Tim Ranzetta at Student Lending Analytics wrote recently about curing student loan defaults and rehabilitation. We have a few responses to this useful article based on our experiences representing and working with borrowers.
1. Reasonable and Affordable Repayment
Borrowers seeking rehabilitation are required to pay no more than what is reasonable and affordable for them. The student loan regulations go even further by prohibiting minimum payments.
Unfortunately, it is very difficult to get a reasonable and affordable payment. This problem occurs in part because of a system established by the Department of Education which provides compensation to collectors for setting up rehabilitation plans only if the plans require borrowers to make certain minimum payments.
The tips in the CreditCard.com article are often not enough. In many years of representing borrowers, I have never had a case, regardless of the loan holder, where a borrower was correctly informed at the outset that she had the right to pay only what is reasonable and affordable. Never. We can usually get to this place after negotiation, but this is a difficult process. It is especially difficult for the majority of borrowers who do not have legal representation.
This roadblock occurs even when borrowers provide the requested documentation. It is a huge problem that makes rehabilitation significantly less attractive than consolidation for many borrowers.
2. Transition to Affordable Repayment after Rehabilitation
Our clients are consistently told that their payments will likely be higher after a successful rehabilitation. This doesn’t make sense. Once a borrower successfully rehabilitates a loan, she is then eligible for all of the pre-default repayment options, including the IBR option. It is critical to inform borrowers of these options as soon as possible so that they do not go back into default because they cannot afford the monthly payment.
We are unfortunately finding that many servicers are not ready to process IBR applications. The other problem is that a borrower’s post-rehabilitation payments will be sent to a different servicer. The current loan holder usually doesn’t know who the new servicer will be. Many borrowers want to be prepared and apply for IBR toward the end of their rehabilitation period, but they don’t even know who to talk to.
In order to make rehabilitation work well, the current loan holders have to figure out a way to manage this transition period so that a borrower making relatively low reasonable and affordable payments doesn’t end up with a huge increase in payments after resale of the loan.
3. No Prepayment Requirement for Consolidation
In evaluating the pros and cons of rehabilitation vs. consolidation, borrowers should know that there is no requirement that they make three reasonable and affordable payments in order to consolidate. If you are in default and consolidating with Direct Loans, you must either make three reasonable and affordable payments OR agree to repay using the Income Contingent Repayment Plan (ICRP) or the Income-Based Repayment Plan (IBR).
4. Finding Buyers for Rehabilitated Loans
We share the concerns expressed by Tim Fitzgibbon of NCEHLP in response to the SLA piece about the lack of action at the Department of Education to help with the backlog of rehabilitation loans. More on this in another article!
