For many consumers, student loan debt is a giant, and seemingly never-ending burden. Most consumers have federal student loans, which provide a variety of statutory rights that do not apply to private student loans.
One of the most important rights is called rehabilitation: the right to make nine reasonable and affordable payments to restore federal loans into good standing.
Rehab payments are based on the borrower’s income
Under the previous formula for rehabilitation, payments were based on a percentage of the amount owed. Even at 1%, that could result in huge payments. For example, a consumer with over $100,000 in student loans could end up paying nearly $1,000/month.
The new rehabilitation guidelines are based on the Income Based Repayment Plan (IBR)—which focuses more on what a borrower earns, instead of what they owe. Using that formula for rehabilitation, a borrower will not be required to pay more than 15% of their discretionary income towards a rehabilitation payment plan. It’s possible that amount could be be zero, but the new regulations require that the minimum payment is $5/month. See 34 CFR 682.405(b) and 685.211(f).
Notably, the new regulations specify that the rehabilitation payment cannot be a payment based on the total amount due, or based on criteria that are unrelated to the borrower’s overall financial situation. Although the rehabilitation payments are based on the IBR formula, a borrower is not required to qualify for the IBR repayment plan in order to obtain rehabilitation payments based on the IBR formula. If the borrower agrees to the new proposed amount, they will have submit documentation that corroborates their AGI (adjusted gross income).
If the quoted amount is not acceptable, a borrower can object and provide documentation of their income and expenses using this form.
It is also important to understand that a borrower is not automatically enrolled in the IBR repayment plan. Once a loan is successfully rehabilitated, a borrower is then able to choose and negotiate a new payment plan. If a borrower does not qualify for the IBR plan after rehabilitation, it is very likely that their monthly payments will be higher than what they were during rehabilitation.
The rehabilitation agreement must be provided in writing within 15 days
Once the borrower has reached an agreement for rehabilitation payments (it usually occurs over the phone), they must be provided the agreement in writing within 15 days.
The written agreement must state the amount of the payment, along with a comprehensive description of the borrower’s rights, the terms and conditions of the payments, the effects of loan rehabilitation, and, for a FFEL borrower, the treatment of unpaid collection costs. See 34 CFR 682.405(b) and 685.211(f).
That means a borrower should receive a letter stating the amount, how rehabilitation works in terms of number of payments and timing, along with credit reporting issues, and what happens once the loan is successfully rehabilitated.
Limited communications from debt collectors
The Department of Education appeared to recognize that consumers do not enjoy being contacted by debt collectors, especially after they enter a rehabilitation agreement.
As a result, during the rehabilitation process, the Department of Education and guaranty agency “will limit contact with the borrower to collection activities required by law or regulation and communications that support the rehabilitation.” See 34 CFR 682.405(b) and 685.211(f).
Although that appears to be rather broad, it should stop certain actions by debt collectors. For example, debt collectors should refrain from asking consumers to setup payment arrangements for when the rehabilitation is complete. That’s not how rehabilitation works. Once the loan is rehabilitated, the loan is either transferred back to the Department of Education, or a loan servicer. The debt collector plays no further role in the process.
Wage garnishment stops after five payments
Under the old rules, wage garnishment could continue during the entire rehabilitation process. That generally resulted in a double whammy for consumers in the form of double payments.
Under the new rules, wage garnishment stops after the borrower makes five rehabilitation payments. See 34 CFR 682.405(a) and 685.211(f). Unfortunately, the new rules also state that wage garnishment should not be ceased until after the fifth rehabilitation payment has been made, unless the agency or Secretary of Education is “otherwise required to do so.”
It is not entirely clear what that means. As a result, if you are facing administrative wage garnishment and are attempting to enter into a rehabilitation agreement, it certainly does not hurt to request that wage garnishment is ceased upon the first payment, rather than the fifth.
More rights to challenge wage garnishment
Borrowers had, and still have due process rights in regards to wage garnishment: prior notice and an opportunity to be heard.
The new rules have been revised to better reflect borrower rights. For example, a borrower has the right to request a hearing to contest administrative wage garnishment if it would cause financial hardship to the borrower. The rules also more clearly define the process for wage garnishment, requesting a hearing, and what happens if a borrower makes an untimely request for a hearing. See generally 34 CFR 682.410(b)(9).
Contact an attorney for questions about your loans
If you have questions about rehabilitation process or your student loans, contact an attorney in your state. If you are in Minnesota, feel free to contact me.