AS college campuses prepare for a new academic year, revised federal rules now in effect should make it easier to return student loans in default to good standing.
The new rules, which became official July 1, help define what is a “reasonable and affordable” monthly payment for borrowers working to get troubled loans back on track through a rehabilitation process. Under the rules, payments must be calculated in a way that takes into account a borrower’s income and expenses as well as family size.
Loan rehabilitation, which gives borrowers who have defaulted a chance to redeem themselves, isn’t a new option. But previously, loan servicers and debt collectors had different definitions of what an appropriate payment meant, leaving some students with payments that were still too high.
“Because it wasn’t defined, it varied,” said Betsy Mayotte, director of regulatory compliance at American Student Assistance, a nonprofit agency that works to help borrowers avoid defaulting on their student loans.
Federal student loans are typically considered in default after payments are past due for more than 270 days — about nine months. Once that happens, borrowers are no longer eligible for protections like loan deferments and may not be able to receive federal aid should they decide to return to school. Their wages are subject to garnishment — meaning that payments can be involuntarily deducted from their paychecks — and their credit will most likely be damaged.
Rehabilitation allows most borrowers with federal loans to get out of default by making at least nine full, on-time payments over a 10-month period. But if the payment amount is too high, they are less likely to complete the rehabilitation process.
That’s why the new rules borrow the definition of “affordable” from the federal government’s traditional income-based repayment, or I.B.R., program, which bases borrowers’ loan payments on a conservative estimate of their disposable income. The formula calculates a payment of 15 percent of income after subtracting 150 percent of the federal poverty level. This year, that adds up to $17,505 for an individual in every state but Alaska and Hawaii, which have higher poverty levels. So, for instance, if you’re single, with an annual income of $25,000, the formula reduces your income to $7,495 — and your payment would be about $94 a month, according to the American Student Assistance loan estimator tool.
Loan experts caution, however, that even though you’re making payments based on the I.B.R. formula while your loans are in rehabilitation, that doesn’t mean that you’re formally enrolled in the I.B.R. program. For instance, while you’re in loan rehabilitation, your payments don’t count toward the eventual forgiveness of your student debt, as they would if you were in I.B.R., Ms. Mayotte said. You must first must complete the rehabilitation program and bring your loans into good standing; then you can apply for the I.B.R. program and its full range of benefits.
What’s more, under I.B.R. your payment could actually be zero, while under the rehabilitation program, your payment can’t be less than $5, said Persis Yu, a lawyer with the National Consumer Law Center.
Keep in mind that only loans made or guaranteed by the federal government qualify for rehabilitation. Most private lenders don’t offer this option.
Here are some questions about student loan rehabilitation:
■ How can I apply for loan rehabilitation?
Contact the company that holds your loan. If you’re unsure who that is, you can look it up on the National Student Loan Data System.
■ What if the payment offered to me under the rehabilitation program is too high?
You can ask for a more detailed analysis of your income and expenses to see if that approach might result in a lower payment than the I.B.R. formula. You can then choose the lower of the two options.
■ What happens after I successfully complete loan rehabilitation?
Your loan will usually be moved to a new servicer, and you may then apply for I.B.R. or other income-driven payment options that can keep your monthly payments manageable.
■ Will garnishment of my paycheck stop once I enter a loan rehabilitation program?
Once you make five on-time payments under the rehabilitation program, the involuntary payments may be suspended, Ms. Yu said.
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