We wrote a while ago about a new law that was supposed to unclog the loan rehabilitation logjam. Since then, the market has rebounded and according to guaranty agencies, there are now buyers for most rehabilitated loans. However, we are finding that borrowers that are only able to make relatively low “reasonable and affordable” payments are all too often denied relief. And the Department of Education has yet to exercise the authority granted in the new law to help these borrowers.
The lack of buyers is hardly the only problem with loan rehabilitation. We recently compiled a list of the most common “excuses” or justifications we hear from lenders about why they pressure borrowers into paying more than they can afford, including:
1. Borrowers must pay more to pay off the loan in a reasonable period of time.
Response: These borrowers should be able to use the income-based repayment program (IBR), which allows qualified borrowers to stretch payments over a longer period of time if necessary. Why should borrowers coming out of default be treated differently than other borrowers selecting IBR?
2. Borrowers must pay more so that the agencies can sell the loans.
Response: We have seen no evidence that prospective buyers place restrictions on loans based on the amount of monthly rehabilitation payments. If this is in fact true, shouldn’t the agencies be counseling borrowers about other options such as consolidation?
3. Borrowers with low payments are more likely to default.
Response: Once again, where’s the evidence? And even if this is true, it does not trump the borrower’s right to a reasonable and affordable rehabilitation plan. Further, borrowers that default after rehabilitation are not allowed to rehabilitate again in the future.
4. Higher payments demonstrate borrower commitment.
Response: This does not trump the borrower’s right to a reasonable and affordable rehabilitation plan. The key terms are “reasonable” and “affordable”, much different than a collector’s subjective feelings about the borrower’s level of commitment.
5. Borrowers with higher payments are better able to handle post-rehabilitation payment plans.
Response: This excuse is an agency favorite, but not usually accurate in the era of IBR. Borrowers should be given information to ease the transition to IBR so that there is no big bump in payments as they come out of rehabilitation.
6. Borrowers should pay more because they are probably hiding income and assets.
Response: Collectors have the right to ask the borrower to document income and expenses. If they think a borrower is hiding something, they should do their job and ask for verification, not deny rights.
We are very troubled by the failure of most collectors to discuss a range of options with borrowers in default. Collectors must counsel borrowers objectively so that they can weigh the pros and cons of various options such as rehabilitation and consolidation. Instead, many collectors highlight the options that benefit them the most. For example, many collectors inflate the credit reporting benefits of rehabilitation to encourage this option and discourage consolidation. We repeatedly hear from agencies that they try to avoid referring too many borrowers to consolidation because of a supposed limit on consolidation. This is wrong. There is no limit on the number of consolidations. Instead, the collectors are referring to the fact that they get less commission if they refer too many borrowers to consolidation. This is the reality—The collectors are following their own financial best interests rather than fairly counseling borrowers and fairly administering the complex rights available under the federal student loan programs.
