Let’s get the bad news out of the way, none of this good news in this article applies to private student loans. When it comes to private student loans my advice remains the same as it has been, avoid them like the plague.
But for federal student loan holders as of July 1, 2014 a big change is being made in the regulations around loan rehabilitations and administrative wage garnishments.
The rehabilitation change is huge. Currently people struggling with federal student loan payments can either make a tough to afford payment for nine months to get their loan out of default and their defaulted status will be removed from their credit report. It’s basically legal credit repair.
The current payment is typically 1% of the outstanding balance. If you owe $100,000 that’s $1,000 a month. Just the other day I answered a reader question for someone who was a kindergarten teacher making little money but had about $1000,000 in student loans. Under this new change, her payment would be substantially different.
Many people in default find they just can’t afford the current rehabilitation loan payments. But as of July 1, 2014 the formula for calculating the rehabilitation payments is changing to make them more consistent and affordable for consumers.
Here is what the new regulation says:
…once the rehabilitation discussion has begun, initially considers a borrower’s reasonable and affordable loan rehabilitation payment amount to equal 15 percent of the amount by which the borrower’s Adjusted Gross Income (AGI) exceeds 150 percent of the poverty guideline amount applicable to the borrower’s family size and State, divided by 12. If the amount determined using this calculation is less than $5, the borrower’s monthly rehabilitation payment is $5. – Source
And the use of the AGI is important as well. Your AGI is calculated as your income minus allowances for exemptions or itemized deductions. It can be a number much lower than your income.
Let’s look at an example student loan holder.
If their AGI (Adjusted Gross Income) is $30,000, the poverty guideline for a single person is $11,490. That means their student loan payment would be 30,000 – 17,235 = 12,765. The payment would be $159 per month regardless of the magnitude of their federal student loan balance.
It appears that under this new regulation if the loan holder made five qualifying monthly payments they would get all the benefits of the rehabilitation program. That’s a big positive change for struggling consumers.
The Department of Education says the change is being made to “reduce the burden on defaulted borrowers who are attempting to rehabilitate their loans.” They hope this will possibly increase the percentage of defaulted borrowers that complete the rehabilitation process and fully repay their loans.
One of these changes is the reduction of contact by collection agencies for those who engage in a rehabilitation repayment program. Collection activity will cease except for “collection activities required by law or regulation and communications that support the rehabilitation.”
Administrative Wage Garnishment rules are changing as well. Federal student loans can garnish wages without having to take the student to court. This has created an issue in the past where people may have objected to the defaulted amount but wound up with a wage garnishment anyway.
Under the new rules, also starting July 1, 2014, borrowers will have a greater right to challenge the amount alleged to be owed and request a hearing prior to a wage garnishment.
Borrowers who object to the proposed AWG have an appropriate opportunity to challenge the existence or amount of the debt or to demonstrate that the withholding would cause financial hardship.
Borrowers who would struggle financially under a wage garnishment will be able to appeal or request a reduced payment.
Additionally, the wage garnishment will now stop after five payments made under the new rehabilitation process.
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Ann wrote in for information on how to stop a student loan wage garnishment.
“Please let me know where I can find a lawyer quickly who specializes in stopping student loan wage garnishment. I have called the NC Bar Association several times and looked online, and the bar assn. does not have that specialty in their list. I am very well informed and don’t wish to declare bankruptcy. I need someone who can help stop this garnishment, due to proceed in a very short time, and negotiate a reasonable payment. I also need someone who has specific experience stopping wage garnishments. I have serious health problems and cannot deal with the stress of trying to work with these idiot creditors directly. Help!”
If these are federal loans the rehabilitation program described in this article will do the trick.
I attempted to respond to the gal who was in deep **** with Sallie Mae and considering bankruptcy. My response was lost in cyberspace and I’m going to try once again!
My problems with Sallie Mae began when my son started his sophomore year of college. However, since bankruptcy is such a big life experience that sticks with you for many years, I feel that all other avenues should be exhausted first. I took a rather unconventional path with Sallie Mae, but my loans were not student loans they were Parent PLUS FFELP with a much higher interest rate. Parents get no breaks.
So, I took a good look at the two loans I had and decided that the one NOT serviced by Sallie Mae also was much more willing to work with debtors. I wrote them with a proposal requesting the discount interest rate [compromise in place] and requested a deferred payment for seven years [they agreed to five years]. With the five year space there, I went to work with Sallie Mae to try to make a deal. They are very difficult when it comes to this sort of thing. I asked for income sensitive payments [no deal], forbearance to pay interest only for six months [no deal] and deferment while my son finishes graduate school next June [no go].
They sent me a pile of paperwork to fill out and a list of documents they want in return to prove everything I say on each form. I have no idea what I will end up with, but I can concentrate on the payments for this one loan for five years.
Then there is the possibility of consolidating several Sallie Mae loans into a single debt with a lower interest rate. Once you can see the result of all these actions combined, it will be easier for you to make a decision about your situation. If it still looks bad, talk to a person who specializes in bankruptcy. From what I understand, student loans are not usually discharged in a bankruptcy proceeding. By attempting every avenue avenue available to you, it is easier to prove that you have done as much as possible to deal with this debt. You might have an easier time with a bankruptcy under those conditions. Maybe the Trustee will be willing to dicker with the powers that be – and turn them into powers that were!
This is great news
I thought that borrowers in default were currently eligible for a reasonable and affordable rehabilitation payment. To me, the biggest innovation in this proposed regulation is allowing a hearing before wage garnishment — that is such a huge win for borrowers! Some people have their wages garnished and they never even took out the loan in the first place, but it’s a mistaken identity or forgery situation.
The new payment calculation is more favorable to struggling borrowers.