Borrowers in default can return their loans to good standing through rehabilitation, in which they make nine on-time payments based on their incomes within 10 consecutive months. Borrowers who cannot afford these payments may be able to make, at the discretion of the debt collector, lower alternative monthly reasonable and affordable payments that take expenses as well as income into account. Rehabilitation can typically be used only once.
When loans are successfully rehabilitated, the defaults are resolved on the borrowers’ credit histories, although the delinquencies remain, and payday loans Maine the loans transfer back from the debt collector to a servicer and regain eligibility for income-driven plans. However, for some borrowers, the reasonable and affordable payment made while in rehabilitation might be less than the income-driven payment offered when they return to good standing, which could lead to confusion and potentially further delinquency.
This process allows borrowers to roll their existing federal student loans into a new loan, which they are then responsible for repaying. To consolidate a defaulted loan, borrowers must either make three on-time monthly payments on the defaulted loan or enroll in an income-driven repayment plan. Borrowers generally can consolidate loans only once, and the default remains on their credit histories.
Borrowers may either voluntarily repay all or a portion of their defaulted loans or be compelled to do so through a variety of mechanisms. For instance, the Department of Education can direct the Department of the Treasury to withhold money from various federal payments, such as the borrower’s federal income tax refunds, including the refundable portion of tax credits, and Social Security to offset a defaulted student loan. Similarly-and sometimes simultaneously-the entity collecting a loan can garnish up to 15 percent of the borrower’s wages.
Like borrowers who consolidate or rehabilitate their loans, those who are subject to wage garnishment or federal offsets also may incur collection fees. Researchers have noted that differences in fees across collection methods can create confusion for borrowers and that collections can damage family financial security.
In some circumstances-including death; disability; school closure; or certain misconduct, misrepresentation, or deception on the part of a school-the government may also release the borrower from the obligation to repay a defaulted loan. Unlike most other types of debt, federal student loans can rarely be discharged in bankruptcy.
Higher education is among the most effective strategies available to bolster families’ economic security. A focus on the significant challenges facing current borrowers and improvements to the student loan repayment system to help them avoid default are critical.
Pew research points to three actions that the Department of Education and Congress could take to boost repayment success among struggling borrowers:
- Identify at-risk borrowers before they are in distress-in particular, by using risk indicators such as borrowers missing payments early, repeatedly suspending payments, and having previously defaulted.
- Provide loan servicers with resources and comprehensive guidance on how to prioritize interactions and engagement with high-risk borrowers.
- Continue to eliminate barriers to enrollment in affordable repayment plans to build upon the Fostering Undergraduate Talent by Unlocking Resources for Education (FUTURE) Act. The act authorizes data sharing between the Internal Revenue Service and the Department of Education to streamline burdensome and duplicative income verification requirements for enrolling in income-driven plans. If effectively implemented, the act is a step in the right direction, but policymakers can do more to restructure the student loan repayment system, such as simplifying the process for direct and targeted outreach to those borrowers most at risk for-or already facing problems with-delinquency and default.
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