Prior to COVID-19, student loan borrowers across the country were struggling to repay their loans, with many going into default. According to the Brookings Institute, nearly 40 percent of borrowers may default on their student loans by 2023. Federal student loan borrowers do not have to make any payments on their loans until January 2021. This is why now is the perfect time to rehabilitate your student loans before December 31, 2020.
The CARES Act also applies to borrowers who are currently in default. Yes, there is a ribbon in the sky (we’re channeling our inner Stevie Wonder). The pandemic has presented a “financial silver lining” for many, which is why the ideal time to rehab your loans is now.
Let’s face it. COVID-19 has reshaped and in some ways forever changed the way we live, play, work, attend school and manage our personal finances. It also highlighted the fact that many Americans are unprepared financially to handle unexpected emergencies. This also raised additional awareness to the student loan debt crisis impacting the lives and finances of so many borrowers, many of whom are in default.
The first question one may ask is: how do student loans go into default? Well, the moment a borrower is past due on their student loan payment, the account becomes “delinquent”. After 90 days (3 months) of a non-payment, the delinquent account is reported to the credit bureaus. Once a borrower is 270 days (9 months) past due, the account goes into “default” status.
The defaulted account is then transferred to an assigned collection agency working on behalf of the Department of Education. Did you know that the Department of Education and collection agencies can charge borrowers who default as much as 25 percent of principal and interest while interest continues to accrue on the loan?
To get your student loans out of default, you will need to either consolidate or rehabilitate them. Below are the differences between the two options as it related to a default:
Option #1: Consolidation. To consolidate a defaulted Federal student loan into a new Direct Consolidation Loan, the borrower must either:
Agree to repay the new Direct Consolidation Loan under an income-driven repayment plan, or
Make three consecutive, voluntary, on-time, full monthly payments on the defaulted loan before it can be consolidated.
Unfortunately, you cannot re-consolidate a Direct Consolidation Loan unless you have “new” loans that are eligible based on the qualifications listed above. To state this bluntly, you can only rehabilitate your Federal student loans into a Direct Consolidation Loan once. Imagine this: you’re at the free throw line and the shot clock is counting down. You’ve got one shot to make the basket. What are you going to do?
I know this can feel like you’re on a hamster wheel just spinning in place. Our goal is to help you gracefully exit that wheel, and help you get your student loans out of default.
Option #2: Rehabilitation. A borrower must agree to making 9 on-time payments over 10 consecutive months. After nine successful payments have been made, the loan is taken out of default. The account is transferred from collections over to a regular loan servicer. Rehabilitation is a one-time opportunity. It doesn’t come around twice.
Why does all this matter right now? What’s in it for me? How does this help my student loans in default? Great question! The student loan provisions within the CARES Act, which was set to expire September 30, 2020 has been extended. Here’s 3 reasons why now is the time to begin rehabilitating your student loans if you are in default.
1. Borrowers do not have to make any payments on their student loans while in automatic forbearance. Now is the time to consolidate your student loans if you have not yet done so. By consolidating, you would have one single payment and paid off your defaulted loans. Because of CARES, no payment would be due after the consolidation is complete until January 2021. The ball is in your court, what are you going to do?
2. Automatic forbearance under CARES still counts suspended payments as “payments made”. If you were in rehabilitation prior to the CARES Act, your suspended payments count towards your 9 on-time consecutive payments to get out of default status. This means 9 of your 9 qualifying payments still count towards getting out of default (that’s assuming you entered into your rehabilitation agreement in March). Now is the time to rehab your student loans.
3. You may qualify for payments as low as $0 after you rehabilitate your defaulted loans. Once you complete the rehabilitation process, you can enroll in an income based repayment plan. Depending on your current financial status you may qualify for $0 monthly payments. Your payment amount is based on 15% of your discretionary income.
Unfortunately due to the current pandemic, many borrowers have either lost their jobs or experienced a reduction in income, which has changed the amount of discretionary income they have. If your financial situation has changed now would be the time to resubmit for an adjustment to your income based repayment plan. You could qualify for payments as low as $0. What are you waiting for?
Fortunately, collection activities have been suspended through December 31, 2020 for loans that are currently in default. This also includes active wage garnishment and collection calls. With payments deferred and no interest accruing, now is the time to get your loans out of default.
Do you need help with the process? Are you unsure what to do or how to navigate the student loan repayment waters? Leave your worries behind and schedule a free consultation with us today, so we can get you back on track with your student loans.
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