Nine Low Payments to Heal Student Loan Default
Beginning July 1st, graduates who defaulted on their Federal student loans will have a chance to redeem themselves, get back on track and even heal any damage already suffered on their credit report. It’s the best news – and the biggest change – in student loan programs since graduate’s trillion-dollar debt burden became headline news.
The “rehabilitation” program is based on present income, and can be as little as $5 a month. Borrowers must agree to make nine payments in a ten-month period. The monthly amount is calculated using the Federal loan program’s Income-Based Repayment formula already in place. After ten months of successfully meeting the program’s requirements, a request for reinstatement from default to repayment status can be submitted. Income documentation will be required for those requesting payments under the 15% rule. This will ease the pressure on borrowers whose negative credit report has threatened wage garnishment, or impacted their chances for government jobs and qualifying for graduate school loans, or prevented them from obtaining licenses in certain professional occupations.
The change comes about because the “reasonable and affordable” standard was simply not uniform across all loan guaranty agencies. Agencies were free to decide what “reasonable and affordable” meant to them. Borrowers were subjected to a program that at times seemed arbitrary and even predatory. One student who owed the same amount as another might pay $200 a month, while his or her friend paid just $95 a month.
Sometimes it’s difficult to avoid default in the first place. Those not already in default may be able to switch to a new extended payment plan or take an allowed break if experiencing a temporary hardship. Borrowers should check with loan servicers or with Federal loan agencies to get more information. For some student loan, changes in payments may not be available until December 2015. Once on the rehab plan they should be sure to renew it each year, as income-based payments can change. The new changes offer a new lease on life, as it were, giving graduates a better chance at building lives and careers.