Forbearances
During forbearance, the lender allows you to postpone
or reduce your payments, but the interest charges continue
to accrue. The federal government does not pay the interest charges on
the loan during the forbearance period.
You must continue paying the
interest charges during the forbearance period.
Note also that there are limits on the length of forbearance.
Forbearances are typically granted in 12-month intervals for up to
three years.
Forbearances are not granted automatically. You must submit an
application and provide documentation to support your request for a
deferment.
Forbearances are granted at the lender's discretion, usually in
cases of extreme financial hardship or other unusual circumstances
when the borrower does not qualify for a deferment.
Do not stop making payments on your student loans until
after you are notified that your forbearance has been granted.
Getting Out of Default
To get out of default, you need to make arrangements with your
servicer or lender to repay the loan. Once you have made six
consecutive full voluntary on-time
payments, you will be eligible for additional Title IV aid.
On-time is defined as within 15 days of the due date. Voluntary
excludes payments made by garnishment or other offsets.
After you
have made 9 of 10 consecutive payments within 20 days of the
due date and applied for and received
"rehabilitation", you will no longer be considered in default.
At this
time record of the default will be removed from the reports to credit
reporting bureaus.
For
loan rehabilitation, the
payments must be "reasonable and affordable". This is determined by
the guarantee agency, and will consider the borrower's (and his/her
spouse's) disposable income and financial circumstances. It can be
below the required minimum payment of $50 or the interest that
accrues, whichever is greater, if the guarantee agency
determines that a smaller amount is reasonable and affordable based on
the borrower's financial circumstances.
Also, if you are seeking rehabilitation and your wages are subject to
a garnishment order, sometimes the guarantee agency will be willing to
accept the higher of the rehabilitation amount or the wage
garnishment, as opposed to the sum.
Also, if the default is very recent, the lender may not yet have
reported the default to a guarantee agency. Lenders do not need to
file a default claim until 90 days after the default occurs. If the
borrower brings the delinquency under 270 days (the definition of
default) within the 90-day period, before the lender has filed a
default claim, they can cure the default.
It may also be possible to
cure the default by consolidating the delinquent loan before the
lender has filed for a default claim. Since the consolidation loan is
a new loan and it pays off the deliquent loans, it effectively wipes
the slate clean.
While lenders have very powerful options for collecting defaulted
debt, and so don't need to negotiate, they will often prefer to get
the borrower into a voluntary payment plan than have to take the
borrower to court. A good rule of thumb is a payment
plan where you pay about 1% of the total amount owed per month.
For information about your options, contact the servicer of
the loan and/or the original lender or the current holder of the loan. The financial aid office at your
school should be able to tell you the name, address and telephone
number of your lender and can also provide you with help and advice
about repayment problems. You can also talk to the Default Resolution
Group at the US Department of Education by calling 1-800-621-3115.
See also the chart listing options for relief.
Collection Agencies
If you default on your student loans, the lender or guarantor may
use a collection agency to collect the
loan. The collection agency's costs are added to the amount due, and
the borrower is required to repay them in addition to the
amount due on the loan.
Federal regulations state that a borrower who has defaulted on his or
her student loans may be required to pay reasonable collection
costs in addition to other charges, such as late payment fees.
What constitutes reasonable is not very well defined.
Federal regulations concerning campus-based loan programs, such as
the Perkins Loan, suggest that collection costs may not reasonably
exceed 30% of the principal, interest and late charges
collected on the loan, plus any court costs, for first collection
efforts. For second collection efforts, the percentage increases to 40%.
For Perkins loans made from 1981 through 1986, many promissory notes
limited collection costs to 25% of the outstanding principal and
interest due on the loan. Since then, however, promissory notes have
had no such restriction.
For loans held by the US Department of Education (e.g., Federal Direct
Stafford Loans),
the department assesses collection costs at a rate of 25% of the
outstanding principal and interest due on the loan (or 20% of the payment).
FFELP lenders are limited to a similar amount.
For an analysis of the impact of these collection costs, see FinAid's
Loan Default Calculator
and Collection Cost Impact Chart.
When consolidating a defaulted loan, collection costs of up to 18.5% of the
outstanding principal and interest may be included in the amount
consolidated. So a collection agency might be willing to reduce its
fees to 18.5% if the student consolidates his or her loans. But the
collection agency is under no obligation to do so. So if the student
consolidates his or her loans and the collection agency does not reduce its
fees, the student must pay the amount in excess of 18.5%.
If you work out a payment schedule within 60 days of default, some
collection agencies will waive or reduce the collection fee.
Overall, it appears that collection costs can legally be as high as 40%,
perhaps even higher.
If you think the collection costs are excessive, you can ask the
collection agency to provide a detailed itemization of the actual
costs incurred in collecting the loan. Although federal regulations
are murky on this point, it appears that the costs must be based on
either the actual costs incurred in collecting the loan or the average
costs incurred for similar actions taken to collect loans in similar
stages of delinquency.
While state guarantee agencies are exempt from the
Fair Debt Collection Practices Act
(see also other FTC links about FDCPA
and the Fair Debt Collection Fact Sheet),
the for-profit collection agencies they hire are not and must comply
with the law. So be aware of the
legal and illegal debt collection practices
and your rights under the law. In particular, you may be able to stop
the phone calls and letters by writing a letter to the collection
agency and telling them to stop contacting you. The collection agency
may then only contact you to tell you about specific actions they are
taking, such as garnisheeing your wages. Note that you are still
obligated to repay the debt even if the collection agency stops
contacting you about it. In particular, interest will continue to
accrue even if unpaid, often significantly increasing the size of the
debt.
If your income tax refunds have been attached and your filing status
was married filing joint, you should ask for a hearing and fight it
using the innocent spouse defense. While the government has the right
to your income tax refunds, they do not have the right to your
spouse's share of the income tax refunds. (That is, unless he/she has
also defaulted on his/her student loans.)
Default Rates
The US Department of Education uses three different definitions when
calculating default rates:
- Cohort Default Rate. The cohort default rate is the
percentage of federal education loan borrowers who enter
repayment in one federal fiscal year and default before the end of the
next fiscal year. This short-term measure of defaults is used
to determine a college's eligibility to participate in federal student
aid programs. If a college has at least 30 borrowers entering
repayment and its cohort default rate is more than 40% in a single
year or more than 25% for three years in a row, it loses
eligibility. The cohort default rate is also used to determine whether
a college is eligible for an exception to certain rules. For example,
the requirements for a 30-day delay for first time borrowers and
multiple disbursements are waived for colleges with cohort default
rates of less than 10%.
The cohort default rate is a very weak measure of defaults. Given
that a default does not occur until a payment is more than 270 days
late, lenders have 90 days to file a claim on a default, and Stafford
loans do not enter repayment until the end of the 6 month grace
period, the cohort default rate is mainly a measure of the percentage
of borrowers who never begin making payments on their loans or stop
making payments within the first year of graduation.
The US Department of Education publishes official cohort default rates
for
schools
and
lenders and guarantee agencies
on an annual basis.
The cohort default rates tend to correspond to the interest rates on
education loans.
- Budget Lifetime Default Rates. The Budget Lifetime
Default Rate is a projection of the percentage of federal education
loan dollars entering repayment in a federal fiscal year that
will default within the next 20 years. These default rates are
reported in the President's budget. The default rates can change
significantly from one year to the next (especially the differences
between estimated projected rates and "actual" projected rates). It is
unclear whether these changes are due to the sensitivity of the model
to inflation and other economic factors, changes in the model from one
year to the next, or political considerations.
- Cumulative Lifetime Default Rates. The cumulative
lifetime default rate is the percentage
of federal education loans that enter repayment in
a particular federal fiscal year and default before the end of the
current fiscal year. These default rates increase as the
number of years of data increase.
All of these default rates are based on the federal fiscal year, which
runs from October 1 to September 30. The federal fiscal year is offset
relative to the academic year, which runs from July 1 to June 30.
It is worth noting that these definitions of default rates differ on
several factors:
- Basis: Borrowers, Loan Dollars, Loans
- Time Frame: 2 years, 20 years, from repayment inception
- Institutional Category: different definitions based on
institutional level (< 2 year, 2 year or 4 year) and control (public, private,
proprietary, foreign) and borrower year in school (freshman/sophomore,
junior/senior, graduate student)
These default rates are published annually in late November. For
example, the 
