Student Aid Bill of Rights

Before you stop making your student loan payments like the Corinthians, you may want to consider the fact that the federal government has the power to garnish your wages and/or to intercept your tax refund or offset your social security benefits and grants some of those abilities to private student loan collection agencies without a need for a court order.

So now you’re thinking about loan forgiveness as an option, but if you haven’t made your payment in months your federal student loan could be in default and you will have to clear some hurdles before you can get a new loan servicer and apply for an income based or income contingent type repayment plan in order to finally get forgiveness.  One place to start is known as loan rehabilitation.

Loan rehabilitation is an effort get back in good graces with the servicer/collector of your loan in order to sell your loan to another lender after you make 9 agreed upon payments.  The payments should be affordable and could be much less than your regular monthly payment.

By pursuing loan rehabilitation, the default status would likely be removed from your credit history when a new loan servicer begins to handle your loan.  Wage garnishments (and tax interceptions) can potentially be stopped after making the first 5 of 9 payments under a plan for rehabilitation.

If you can, try to get a written legal agreement from the collection agency that collection efforts will cease through your participation in a rehabilitation program.  If you don’t, they may move forward with efforts to intercept your tax refund and/or go after your wages through garnishment because those rehabilitation payments will likely be less than your normal payment or they may have already begun a wage garnishment action.

Because you were in default, there is a fee that will likely be added to your principal balance for collection costs.  The fee cannot be more than 18.5 percent of the principal balance and accrued interest before the loan is sold to a new lender. Basically, the principal balance of your loan goes up while the collection agencies revenue increases.

The private collection agency’s commission for loan rehabilitation can be up to 13 percent as opposed to a 2.75 percent commission to convince borrowers to just resume making payments (as reported by the Washington Post), borrowers may have been encouraged to rehabilitate their loan rather than consolidating out of default when they were able to do so from the beginning.

Also, encouraging borrowers to make less than their monthly payment without advising them of the effect on possible wage garnishment or tax refund interception (or even on their credit) could be a violation of the Fair Debt Collection Practices Act.

Five collection agencies were recently let go by the Federal Government with three taking their gripe to court while a fourth (Sallie Mae) is approaching the issue through the sanctity of the Governmental Accountability Office, perhaps in order to keep from being strapped to the titanic.

One wonders if they didn’t mention that a consolidated loan can show the old defaulted loan paid in full on your credit report because consolidation creates an entirely new loan (and pays off the old one).  Or perhaps they encouraged borrowers to rehabilitate their loans and then consolidate their loans so that both types of commissions would be earned.  Perhaps they didn’t mention that you can only rehabilitate a loan once or that you can rehabilitate a consolidated loan (or even re-consolidate that loan), if necessary.

Other borrowers may not have been properly advised about income based and income contingent repayment plans, while some others (it can be guessed) may not have been told about possible loan forgiveness programs as well.

Beyond rehabilitation, default consolidation, cancellation, settlement, or some other option (read herein), another worthwhile option could be a ‘reasonable and affordable’ repayment plan which is a short term repayment plan which may make you eligible again for federal student loan aid including loans and grants.

President Obama’s proposed Student Aid Bill of Rights may end the era of private federal loan collections and move those jobs (and businesses) into the hands to federal employees.  But if it passes, Ed (the Department of Education) is not bound by the Fair Debt Collection Practices Act and Ed would therefore not be bound by the very same accountability with which its private sector predecessors may have failed to comply.