Life After Loan Default for Students and Schools

While October brings cooler temperatures and changing leaf colors, it’s also the time when Cohort Default Rates (CDR) are released and you learn which past students have defaulted on their student loans. Something unexpected, like an illness, family stress, or financial strain may have taken these students off track from graduation and employment. Whatever the situation these students are now experiencing default’s negative financial and emotional consequences. They may fear the problem is too deep to find a way out. There’s no better time than now to take these easy steps and share helpful resources with your students in default. Your extra support can empower them to know there's life after loan default.

Understand the Basics

There are 3 ways for students to resolve student loan default. It's important to know the details so you don't misrepresent the borrower's options.

Borrowers must make 9 voluntary payments during a period of 10 consecutive months. The on-time payments must be within 20 days of the due date, and they must be reasonable and affordable.

Reasonable and Affordable is defined as a payment amount that is equal to 15% of their annual discretionary income, divided by 12. Discretionary income is the amount of their adjusted gross income that exceeds 150% of the poverty guidelines for the borrower’s family size and state of residence. 

If the borrower cannot afford this payment, they can request an alternative payment based on their monthly income and reasonable monthly expenses. They must provide documentation of income and expenses and complete the Loan Rehabilitation: Income and Expense Information Form.

Additional Insight:

If the borrower’s payments are being collected through wage garnishment, they must make five consecutive and voluntary payments before the garnishment will end.

Once the loan is no longer in default, and unlike consolidation, the record of default will be removed from their credit report. Rehabilitation is the only option that will remove the default.

Borrowers are limited to rehabilitation only once as an option.

To consolidate a defaulted federal loan, borrowers must:  a) agree to repay the new Direct Consolidation Loan under an income-driven repayment plan or b) make three consecutive, voluntary, on-time, full monthly payments on the defaulted loan prior to consolidating.

If a borrower has defaulted on a Direct Consolidation Loan, they must include at least one other eligible loan in the consolidation in addition to meeting one of the payment requirements above.

Additional Insight:

If a borrower’s defaulted loan is being collected through wage garnishment or a judgment has been issued, they are not eligible for consolidation until the garnishment or judgment has been lifted.

Once the loan is no longer in default, the record of default and history of delinquency prior to default will remain on their credit report.

For most borrowers, paying back a loan in full isn’t an option unless they inherit money or win the lottery. But it is an option just the same.

The Good News

Once the defaulted loan has been consolidated, rehabilitated, or paid in full the borrower may be eligible for federal financial aid, deferments, forbearance, and loan forgiveness. And any tax offset will end.

Regained Student Benefits

*Additional details including credit history reporting information and limitations on choice of repayment plans are located on the U.S. Department of Education’s website.

A Lifeline

Sometimes a little direction is all a student needs. Consider emailing your defaulted students (or calling them) with information on how to resolve their situation. (See example.)

Hi John,

Having a defaulted student loan can feel overwhelming and stressful. Don't lose hope! Bringing your student loan debt back into good standing may be easier than you think despite the difficulties you may be facing at this time.

Entering into a loan rehabilitation agreement or going through a loan consolidation can get your account out of default and back in good standing. This will also help you regain eligibility for federal financial aid and any remaining deferment and forbearance benefits.

To learn more about the ways to resolve your default, visit the U.S. Department of Education’s website.

Life after Default for Schools

Not only does helping your defaulted borrowers help them, it can also make a difference in your CDR.

For example, let’s say a borrower enters repayment between October 1, 2017 and September 30, 2018. They default, but complete rehabilitation by September 30, 2020. Under this scenario they won’t be included in your FY 2018 CDR.

In other words, there’s still time to impact your FY 2018 and 2019 rates if you act quickly. Reach out to defaulted students with an email, letter, or phone call. Your communication may be the trigger that encourages them take action.

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