Federal Loan Default and Delinquency Options
Federal loans offer more work out options for borrowers facing default and delinquency. A borrower is considered delinquent on a federal loan the first day after a missed payment. After nine months of missed payments a borrower is in default and the default will be reported to the credit agencies.
There is no time limit on collection of federal student loans. The statute of limitations was lifted in 1991. Collection tools include: tax refund offsets, administrative wage garnishment, and federal benefits offset. Collection fees can be charged to collect on these loans, creating larger debts.
For borrowers having difficulty making payments, deferment and forbearance plans are available. A deferment means no payments are made for a certain amount of time. This option is not available for borrowers who are in default. Under a forbearance, smaller or no payments are made for a short period of time. Interest does accrue during this time and this option is also only available for borrowers not in default.
If a borrower is in default (no payments made for nine months), there are options available to allow the borrower to resume making payments. These options are rehabilitation, consolidation, debt cancellation, death, disability, or working in public service.
Under a rehabilitation program, the borrower makes nine out of ten payments in an amount that is reasonable and affordable based on the borrower’s total financial circumstances. This options allows the default to be removed from credit reports. It is possible that the borrower’s payments may increase after a rehabilitation program.
A consolidation takes the loan out of default because it is paid in full and merged with other outstanding loans. Credit reports will indicate that the loan was paid in full. To be eligible for a consolidation, borrowers must have at least one loan that is a Direct Loan or FFEL. A borrower must either make three consecutive reasonable and affordable payments based on their total financial circumstances on the current loan or agree to select income based repayment or income contingent based repayment after consolidation. Consolidation allows for one monthly payment, reduces that monthly payment, and could result in lower interest rates. It also means higher overall costs because the borrower is paying less per month and extending the life of the loan.
A borrower may also be eligible for debt cancellation in the following circumstances: school related discharge, work in public service, death, and disability. In a school related discharge, if a school closes while a borrower is attending or withdraws within 120 days before it closes the debt can be eligible for cancellation. If the school has false certifications the debt can be cancelled and if the borrower went to school for less than 60% of the repayment period, a refund for the costs can be obtained effectively cancelling that portion of the debt.
A borrower working in public service is also eligible for debt cancellation. The borrower must work in public service for 10 years making 120 consecutive payments. After that time the remainder of the loans are forgiven. During this time the borrower must have consolidated the loans to a Direct Loan and income based repayment must be used to determine the monthly payment.
If a borrower dies, the debt is cancelled, but there may be tax consequences associated with the forgiveness. For parent Plus Loans, if one parent dies, the other is still responsible for the remainder of the debt.
A borrower who is determined to be disabled for at least five years may be eligible for debt cancellation. Veterans who are deemed unemployable will also qualify. Borrowers receiving social security disability or social security income are eligible. There is a three year monitoring period after the debt is cancelled, during which it can be reinstated if the borrower does go back to work.
Borrowers who have been making income based or income contingent repayments for 25 years may be able to cancel the loan balance. For borrowers in 2014, the period of time is 20 years.
The lawyers at Steve Harvey Law advise clients on student loan matters, including federal and private student loans, rehabilitation, consolidation, cancellation, public interest debt forgiveness, default, delinquency, and repayment options. They can help you understand your options, deal directly with your lenders, defend you in legal proceedings, and assert claims on your behalf. Contact us to discuss how we can help.