Historically, students or graduates on the verge of federal student loan default had little in the way of assistance to get them back on track. If they already exhausted their forbearance (or didn’t know that was an option), then they might have just stopped paying altogether. However, that’s all about to change thanks to new rules instituted by the Department of Education.
While the debate about whether or not to include student loans in bankruptcy rages on, these new rules (set for July 1) offer a newfound flexibility for defaulted federal student loans. This flexibility means defaulted borrowers can find a plan that they can afford without having to resort to extreme measures with long-standing consequences, such as bankruptcy or wage garnishment. Read on to learn more about these new rules and how to prevent default if you’re on the verge.
New Rules for Defaulted Federal Student Loans
Defaulting on a loan is scary – the repercussions could lead to an annihilation of your credit and, perhaps worse, a fear that there’s nothing you can do to remedy the situation. Now you can take back control and create a plan that works within your means.
The Department of Education’s new rules require that when a borrower who has defaulted on their loan approaches a debt collector about rehabilitating their loan, the debt collector must offer the borrower a payment plan that caps monthly payments at 15% of their monthly income. This is important, because previously debt collectors could demand rehabilitation plans that had higher payments than the borrower could realistically afford. This new rule should alleviate the fears of those who want to rehabilitate a defaulted loan but worry the rehabilitation plan would be beyond their means.
Another new option for borrowers in default is to orally request forbearance – if they’ve been delinquent for a minimum of nine months. Since the process of applying for forbearance can be complex, being able to achieve this by spoken request allows the borrower to get their account back in good standing more quickly.
It’s important to note that using the monthly cap on payments – which is essentially the Income Based Repayment Plan – or going into forbearance are not requirements if you’re in default. If you’re ready to get out of default, then you can also explore moving forward with loan repayment, loan rehabilitation, or loan consolidation.
How to Prevent Going into Default on Federal Student Loans
If you’re not yet in default but fear you could be headed in that direction, then these rules are a nice assurance that you will have options should that happen. However, if you’re in a position to prevent default then by all means explore those options first. Your finances and credit score will thank you.
Here are a few options available to prevent you from default:
Student loan deferment is a specific time period in which you can stop making payments on your student loans. If you have subsidized student loans, then the government pays the interest on your loans while they’re in deferment. If you have unsubsidized student loans, then the interest will continue to accrue.
Things that could make you eligible for deferment include unemployment, economic hardship, and active duty military service. To request a deferment, contact your loan servicer.
Forbearance is an option for those who don’t qualify for deferment. Forbearance is also a period during which you can suspend your student loan payments and it lasts for up to one year. Your interest will continue to accrue during this period, whether your loans are subsidized or unsubsidized. Like deferment, you would request forbearance by contacting your loan servicer.
There are two types of forbearance: discretionary and mandatory. Discretionary means your loan servicer can choose whether or not they want to grant this to you and your reasons could include financial hardship or illness. Mandatory means your loan servicer has to grant you the forbearance. Those eligible could be those in a variety of fields or those whose payments make up 20% or more of their total monthly gross income.
Student loan forgiveness is a process in which you no longer have to repay your student loans. There are a variety of programs that offer forgiveness, including Teacher Loan Forgiveness, Public Service Loan Forgiveness, and forgiveness of loans that have been paid on consecutively for ten years under the Income Based Repayment Program. There are also a variety of reasons your loans could be discharged, as seen in this chart.
No matter how dire the financial situation, there are always ways for you to regain control. There are many programs available to assist borrowers in paying back their student loans, although many are poorly publicized. By spending a few minutes perusing The Department of Education’s website and reading up on new laws that are passed through blogs and resource centers like ours and other financial websites, you can be sure to have the power to maintain the balance of your finances.
Image Credit David H-W (Extrajection)