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Get Rehabilitated Loans Back on Track
The global credit crunch is not denying access to federal student loans, but it is making life difficult for thousands of borrowers who are trying to get out of default. As several higher education trade publications have reported, continuing financial market turbulence has made it nearly impossible for defaulted borrowers to rehabilitate their loans -- leaving them with tarnished credit records and denying them the benefits of being in repayment. Fortunately, there are easy steps Congress can take to fix this problem. Lawmakers just have to be sure not to devise a solution that creates a new cash cow for student loan guaranty agencies.
Here's how loan rehabilitation works in the Federal Family Education Loan (FFEL) program. When a borrower defaults on a loan, its title is transferred to the guaranty agency that administered the loan. Guarantors then work with the borrower to create a repayment plan. Once an agreement is reached, borrowers are expected to make nine payments on the loan over a 10-month period. Once this requirement is met, the loan is considered ready to be rehabilitated. The only remaining hurdle is that the guarantor must sell the loan to an eligible lender.
This is where the credit crunch is gumming up the process. Guaranty agencies cannot find any lenders to purchase loan titles. And without a sale the defaulted loan cannot re-enter repayment.
The inability to sell these loans means borrowers are denied rehabilitation benefits. For example, rehabilitated borrowers have their default history expunged from their credit records -- improving their chances of buying or renting a house or obtaining other types of loans that have credit checks. Rehabilitating a loan also makes borrowers eligible for additional federal student assistance -- a benefit not available to anyone holding defaulted federal debt. Finally, rehabilitated borrowers become eligible for benefits available in the FFEL program like loan forgiveness.
There is an obvious candidate to purchase these loans: the U.S. Department of Education. Ever since Congress approved the Ensuring Continued Access to Student Loans Act (ECASLA) last spring, the Department has been forging agreements with lenders to purchase outright or backstop groups of student loans. While none of these ECASLA programs involve a direct arrangement with guaranty agencies, it makes sense to expand these programs to include them.
Allowing the Department to purchase rehabilitated loans, however, has legal and policy roadblocks. ECASLA authorizes the Department to purchase only loans disbursed on or after Oct. 1, 2003 -- excluding all rehabilitation-eligible borrowers with older loans. Moreover, loan purchase authority applies when "there is an inadequate availability of loan capital to meet the demands for loans." The programs are thus used to ensure new borrowers have access to loans, not provide help to existing borrowers. This suggests the Department would need a legislative change to expand its purchasing authority.
(While Congress works on that change, we recommend that states follow the lead of Illinois' General Assembly, which introduced legislation in both chambers to offer new bonds that would be used to buy rehabilitation-ready loans. We would also urge guarantors to inform borrowers who are trying to get out of default that they can do so by refinancing their loans in the Direct Loan program, allowing them to take advantage of the income-contingent repayment program. This isn't a perfect solution because it does not clear up a borrower's past credit record, but that may be an acceptable trade-off for at least some borrowers who are stuck in limbo).
But any legislative fix should raise two policy questions: how should guaranty agencies be compensated, and what should be done about borrower collection costs?
Making the Department a buyer of rehabilitation-eligible loans without changing how guarantors are compensated could lead to a windfall for guaranty agencies. Currently, these agencies keep at least 22.5 percent of a rehabilitated loan's sale price (the rest is returned to the Department).[1] Presumably this is done to reward the guarantor both for the work it did in getting the borrower to make on-time payments and also for the difficulty of finding a buyer for the loan.
But having the Department buy rehabilitation-eligible loans reduces the work needed by guaranty agencies. As a result, the agencies should receive less compensation. To address this, Congress could institute a "buyer of last resort" provision that pays guaranty agencies a flat-rate rehabilitation fee for loans purchased by the Department. In contrast to the current percentage-based one, this new fee could be modeled on the Lender of Last Resort program that guaranty agencies currently administer for students who cannot obtain federal loans from conventional lenders.
Here's how it would work: If a guaranty agency is denied twice by lenders when trying to sell a rehabilitated loan, it would have to sell the loan to the Department. In return, the guarantor would receive a flat per-loan fee that reflects the costs of getting borrowers to make on-time payments. A flat fee ensures that guaranty agencies have no incentive to inflate the loan sale price because their compensation is the same regardless.
Congress would also have to decide what to do with the collection costs charged to borrowers if guaranty agencies sell the rehabilitation-eligible loans to the Department. Currently guarantors are allowed to charge borrowers a collection fee of up to 18.5 percent of the unpaid principal and interest at the time of the loan sale. This money is then capitalized and added to a borrower's principal balance. These collection costs cover expenses incurred by the guarantor when it rehabilitates and sells the loan. But if the Department acts as a guaranteed loan purchaser, why should the Department increase the balance owed on its newly acquired loans, when doing so increases the likelihood borrowers will default again? Instead, when a rehabilitated loan is purchased by the Department, the guarantor should be reimbursed for an amount that reflects the collection costs involved with returning the loan to repayment. That cost should be passed on to borrowers, but in such a way that it is kept separate from their unpaid principal, meaning it does not compound with interest.
Congress has willingly taken quick action to buttress lenders to guarantee access to federal student loans. Financial conditions now require it do the same for the struggling borrowers who are trying to repay their defaulted loans, while fiscal prudence demands that it do so in such a way that does not result in unnecessary payments to guaranty agencies or excessive charges to borrowers. It's time to end the rehabilitation treadmill so borrowers can get themselves back on the right track.
[1] The actual percentage amount retained is equal to 100 minus (81.5 multiplied by the guaranty agency's reinsurance rate). Since most guaranty agencies are reinsured at a rate of 95 percent, this works out to 100 - (81.5 * 0.95), or 22.5 percent. If their reinsurance rate is 85 percent, then guarantors would keep 30.1 percent, while a 75 percent reinsurance rate would result in the agency retaining 38.9 percent of a loan sale.
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Fixing the Rehab. System
We support this suggestion (and there may be others as well) to help borrowers already in the rehabilitation pipeline. In the meantime, we believe that the GAs should agree to stop certifying these borrowers' accounts for offset or any other type of collection. Borrowers can keep making payments and the GAs can keep sending monthly statements if necessary, but punitive collection should stop. After all, these borrowers have done what they were supposed to do and are stuck in limbo only because there are currently no buyers for their loans.
It is also critical that GAs and other collectors honestly and objectively counsel borrowers about their options. Let the borrower decide whether he wants to wait and see whether a market for rehabilitated loans opens up or instead choose to consolidate with Direct Loans. Yes, there are some benefits to rehabilitation that are not available with consolidation. Some borrowers will care a lot about this, some won't. The point is to let them decide.
We must also consider longer-term improvements to the rehabilitation process. For example, is resale really a prerequisite to a successful rehabiltiation? The statute says only that after the payments are made, the loan should then be sold IF PRACTICABLE. Clearly, this envisions situations where borrowers can get the benefits of rehabilitation without a sale. When and why did this become a requirement that places borrowers who have done the right thing at the mercy of an unpredictable market?
Iowa's guarantee agency has
Iowa's guarantee agency has been charging this rehabilitation fee for nearly three years, after boldly patting itself on the back for years for not adding the fee to loans when they were rehabilitated. Interestingly, when the Iowa Commission voted to join the plethora of other guaranty agencies across the country and charge the fee on rehab loans, it did so to raise $1 million in revenue annually. It wasn't clear why the state agency needed the extra revenue, but it was clear who the fee would hurt — students and minority students in particular. In short, it is the students who can least afford it who get to shoulder that extra million dollars for the agency, which is supposed to be dedicated to helping students.
These rehab fees are scandalous and particularly inappropriate in today's economic environment. Shame on the state agency guarantors such as Iowa's that line their coffers to the detriment of struggling students. And by the way, it's not the only fees guaranty agencies are charging. They also charge hefty collection fees in addition to the rehabilitation fee.
The message seems clear: if you're a student having trouble paying back your student loan, the guaranty agencies make it just that much more difficult.
Student Loan Rehabilitation
The entire student loan industry is a huge scam, including so-called loan rehab. If we truly want to stimulate the economy, we can start by reforming the student loan industry.
Student loans are the only form of consumer debt lacking standard consumer protections. In 1997, student loan companies such as Sallie Mae successfully lobbied Congress to amend the Higher Education Act and remove consumer protections, making defaulted student loans among the most lucrative and easy debts to collect.
The loan companies actually have a vested interest in debtors defaulting on their loans and have great leeway to collect on those loans.
Harvard Professor Elizabeth Warren was quoted in a Wall Street Journal article as saying that “student loan debt collectors have power that would make a mobster envious.”
The student loan companies can garnish or seize Social Security and disability payments, and even raid personal bank accounts without a court order. A number of people have actually been driven to suicide by their collection tactics.
The only people benefiting from this situation are the CEOs and corporate officers of companies like Sallie Mae. The outrageous profits they make would be better off circulating in local economies instead. Reform is badly needed.
Wolf in Sheep's Clothing
To the uneducated eye this rehabilitation object might sound like a fair instrument of relief for those who have stumbled out of the block and into the bottomless abyss of student loan default. However, the only benefactor of this wolf in sheep's clothing are the loan originators, collectors ( sharks or shylocks), and guarantors who devised this vehicle of financial servitude to begin with. Infact, the only reason anyone in their right mind would voluntarily agree to one of these so called rehabilitation loans is desparation or ignorance.
Do some simple math. I borrowed @ $38,000 to finance my social work education. Due to family hardships, illness and low paying entry level jobs, I unfortunately wound up in default. I hung on, however, and in just a few years got back on my feet. When I went back to begin to try and resolve my debts, most were cooperative. All except the student loan folks. My balance had exploded with interest and incredible penalties. Nobody was interested in even discussing a term by which I could live a modest life and make any kind of meaningful progress toward the principle of what I borrowed. Enter the loan rehab. Today it is claimed that the balance on my loan is @ $105,000. For me to sign a 20 year note for rehab on this amount would be ludicrous. I am 50 years old. I am a social worker. Even if I went on a 30 year term, the payments could be $600-$800 a month and I would be 80 years old by the time I finished paying between $216,000 and $288,000 on an original note of $38,000. I don't think I need to explain this any further.
Return standard consumer protections to these loans and I assure you that the many thousands of us in this boat will find the leverage to finally negotiate terms to retire these debts. Moreover, finally negotiate terms that will mean that money we do pay may be applied to the principles therefore returning the money to the rightful people. The taxpayers.
Had you taken advantage of
Had you taken advantage of the many deferment and forebearnace options available to you during your 'hardship' you would not be in your situation at all. To blame the industry for you not following through on a finacial obligation is ludicrous. If you miss a credit card payment, you are assessed a late fee which becomes a part of your new loan amount along with interest. Why should student loans be any different? Student loans, in contrast, offer you many options to put off your payments in one form or another when you are not able to pay. A LUXURY you are not afforded when you have a car loan, credit card debt, etc. You should have worked with your student loan lender/guarantor PRIOR to defaulting as that is when they could have saved you. But since you defaulted (which menas you did not make any payment or request a deferment or forebearance for at least 6 months), a collection agency was hired to collect your debt and YOU pay their fee, rightfully so. Or do you suppose the taxpayers should incur that fee for you? You also pay all the compounded late fees, capitalized interest, etc. But the bottom line is that the whole situation was preventable by you in the first place. While I agree the your loan amount is now astronomical, it is nobody's fault but your own.
Poor Comparison
Melissa, Their are laws limitting the penalties and interst that can be charged to those who default on virtually all forms of consumer debt with the exception of student loans. They exist for good reason. They protect borrowers from being exploited in the event they are unable to meet the terms of their obligations for any reason. Moreover, other creditors were willing and eager to negotiate payment terms, in all cases forgoing penalties and in most cases reducing interest and principle.
One may argue that it is their perogative as they are protecting their own interests not that of the taxpayer. That of course begs the question, "If my loan balance has exploded beyond the point that I can ever pay it at all, then who is looking out for the taxpayer?" We both know that whtever I can manage to pay between now and the end of my working life will go toward penalties and interest first. It is unlikely that any money will ever go toward the principle.
What I find even more interesting, however, is the ease with which you conclude that I never made any effort to use defferment or forbearance. You appear supremely confident when you speak of my failure to work with my student loan lender/guarantor.
Firstly, let's dispell the myth that individuals who may not have excersised every available option deserve to be punished. Furthermore, let's disniss the notion that all folks who 'may" have slacked under less than honorable circumstance deserve to be banished to the deepest recesses of debtor pergatory. Neither of these notions serve anyone. Nor do they apply to debtors of any other kind of consumer debt. Double standards are just so imature.
Lastly, while you so confidently account for my actions, or lack their of, let's hope that you would not be referencing to any inside priveledged and confidential information about me that you may have access to. We have laws against that as well.
Ms. Martin, do you have any
Ms. Martin, do you have any idea how many Student Loan company representatives flat out lie, cheat or otherwise use bad ethics to deny borrowers the deferment and forbearance options to which the borrowers have legal rights? The answer is quite a few and that the extent to which some of them go would make back alley loan sharks blush.
My loan ended up in default because I asked for a deferment and the loan company refused to even send the paperwork. So I asked about forbearance and again, they refused to send the paperwork - this time bothering to tell me that they were quite convinced that the problem was purely a matter of that I "didn't want to pay" no matter what my circumstances were at the time. I begged and pleaded and they stuck to their "didn't want to pay" story even when I explained my story - I was on state disability, my husband was on workman's compensation and his ex-wife had decided that was a good time to send both teenage kids to live with us. So what did the loan company do? They STILL didn't send any paperwork. What they DID do was call my father, who was NOT a legal party to the loan, and make a payment arrangement with HIM that slightly more than doubled the monthly payments and then considered ME legally obligated to follow said "arrangement". When I wouldn't - because I couldn't - they put me into default.
As others have mentioned, there's long been a profit motive to put people into default if the loan companies can find a way or an excuse to do so.
Rehabilitation is a win-win for borrower and government
Ben, thanks for bringing attention to this important issue. People who have defaulted, and have made a good faith effort to repay, deserve a chance to start fresh with their student loans. However, I do want to make two points. First, the rehabilitation fees guarantors collect are for more than just the expenses incurred when they rehabilitate and sell the loan. The most recent reauthorization of the Higher Education Act mandates that guarantors must provide ongoing support to rehabbed borrowers in the form of debt management and financial literacy programs post-rehab. So even after rehabilitation occurs, guarantors are still providing services. Second, what’s missing from this discussion is any mention of the fact that rehabilitation is a win-win for both the borrower and the government/taxpayer. When lenders provide private capital to purchase rehabbed loans, it both removes default from the borrower’s record and returns capital to the government at a more expedient pace. Rehabilitation is the best way to balance the rights of both borrowers and taxpayers.
It is too bad that the
It is too bad that the "benefits of being in repayment" have nothing to do with reality. People are so destitute as a result of their ever-increasing student loan debt (and yes, it increases whether you default or rehabilitate or not) that they are not making it; they cannot pay because the debt has exploded and they have not received the promised increased salary or wondrous employment as a result of their college education! We need bankruptcy protections to be reinstated for student loans, we need the credit report to stop being an obstacle to people exercising their human rights to employment and housing.
Wrong Model for Education Finance
It will be interesting to see how this is resolved since what are basically unsecured signature loans to people who are not creditworthy are unmarketable.
Title IV student loans in higher education only require that the borrower is vertical, breathing, and enrolled.
Only in education finance can students, who are typically kids without established credit, jobs, and assets, have the ability and opportunity to borrow hundreds of thousands of dollars without any demonstration that they can repay the loans.
First, we need to acknowledge that student loans, as they are now structured, are an aberration and certainly not in keeping with any known business model or traditional lending requirements. We must get education finance out of the hands of big business. Using this business model for education finance has been a disaster.
Secondly, students, "invest" in an education; they do not "buy" an education. When education finance was the responsibility of government, return on investment (R.O.I.) was shared between the government and the student borrower. Now, the student borrower's R.O.I. has been transferred to the lenders, leaving student borrowers deeply in debt with no hope of ever repaying some of these loans.
Thirdly, government providing free secondary education: grades 1 – 12 reflects an outdated model of the industrial revolution, when manufacturing opportunities were plentiful and a high school diploma assured one of a job. Today, at less than 11 percent manufacturing, the U.S. no longer has enough jobs for high school graduates. Education and job training beyond high school is required for workers to be self-supporting.
It is estimated that it would cost the government $50 billion to pay tuition for all qualified students at public universities. Compare this cost with the $43 billion Americans spend on their pets each year. What does this say about our priorities?
Rehabilatation,Default, Deferment and Forebearnace
I would like to comment on what Ms. Martin posted
First off, who are we kidding, certain private lenders do not allow you to go into deferment or forebearnace!I wont even talk about how a certain company took away the option to consolidate. From personal experience when I asked to go into defer/forbearance I was told that I could only do that for ONE MONTH for a fee! How exactly does that help us get out of our present "hardship"? And if you are thinking that I have all ready taken advantage of my all my chances to go into forbearance/defer you're wrong. These companies DO NOT try to work with you, they actually want you to default and then possibly end up in rehabilatation. What better way to add more interest and hidden fees to your current debt? If we were unable to pay our current debt what makes them think that we will be able to pay our new LARGER DEBT?
If these companies truly wanted to work with us they would accept the fact that "certain" borrowers simply can't afford the monthly payments they are asking for even though they have 2 jobs. Why dont they investigate and see for themselves that our pay cheque is not enough to put food on our table, pay rent etc.. and pay the full amount they are asking for. I have pleaded with my private lender to temporarily accept a certain amount until I'm able to make bigger payments and their answer was "NO".As of next month I will be in default and the next step is to be threatened to have my wages garnished which will only make it impossible to provide clothing and food for my family.
For all of those out there thinking that we want a free "Get Out Of Debt Card" you're wrong. We simply want a fair chance to be able to pay off our student loan debt but without being treated as slaves. We are being thrown from one owner(guaranted agency) to another and we have no say in all of this.
All of our consumer rights have been taken away from us and I ask you "Why?What crime have we committed"? Are we not told how important it is to get an education? All we ever wanted was to get educated hoping to find a high paying job, later have a family , buy a house and live the AMERICAN DREAM. That dream will never be possible for us as we will be repaying this debt until the day we die and most likely our kids will have this debt carried on to them!
The mental anguish these comapnies put us through is unbearable. Anyone who simply didn't want to pay them off would eventually give in. As for the ones who haven't it's because we don't have the means to.For those out there still thinking we want the easy way out, Think Again!
So Ms. Martin the bottom line is that it was not preventable as you claimed. Rehabilatation is not a win/win situation for us borrowers.We pay our taxes as good citizens it's time we are treated with respect. Return our consumer rights to us just like every other debtor has.
Student Loans and Society
Miller's comment on "The global credit crunch is not denying access to federal student loans, but it is making life difficult for thousands of borrowers who are trying to get out of default. As several higher education trade publications have reported, continuing financial market turbulence has made it nearly impossible for defaulted borrowers to rehabilitate their loans -- leaving them with tarnished credit records and denying them the benefits of being in repayment. Fortunately, there are easy steps Congress can take to fix this problem. Lawmakers just have to be sure not to devise a solution that creates a new cash cow for student loan guaranty agencies." was very true and pertinent to Nottinghams comment,
"Title IV student loans in higher education only require that the borrower is vertical, breathing, and enrolled.
Only in education finance can students, who are typically kids without established credit, jobs, and assets, have the ability and opportunity to borrow hundreds of thousands of dollars without any demonstration that they can repay the loans.
First, we need to acknowledge that student loans, as they are now structured, are an aberration and certainly not in keeping with any known business model or traditional lending requirements. We must get education finance out of the hands of big business. Using this business model for education finance has been a disaster."
This is so pertinent to today's students and all the different distraction "opportunities" they have. Students need to be made aware of the options for better loans and better education so they do not fall for the bad loan or education options that will tax our system. A valuable tool I believe for students today is through http://www.youtube.com/watch?v=NDfew0YcDToe for students to find available good opportunities to broaden horizons and better themselves.
Azahar (EducationDynamics)
I am glad I found this
I am glad I found this article. Today it has been 9 months that we have been paying my husband's student loans that he defaulted on a decade ago (it was a stupid mistake he made at the time because he was young and didn't have the money to pay so he didn't and thought the problem would go away, instead the loan amount doubled). I found out about his loans being in default 2 years ago and the value of it last July which is when we made the agreement to start repaying them. We made a rehabilation agree that if we made 9 payments on time, the loan would be taken out of default, the info that it was ever in default would be wiped off his credit report, and the collection fees ($12 thosand) would be taken off. Even though they made a monthly agreement higher then we could afford we agreed because in 9 months it would be out of default and 12 thousand dollars less. Will we paid the 9 months, phoned the collection agency today only to be told that the loan is going to remain in default until there is a buyer. I asked what that meant and was told because of the credit crunch there are no buyers. So basically even though we held up our end of the agreement and tried to do the right thing to get this loan taken care of we are screwed and it is still in default until the government decides to do something about it. I find it funny how people can rack up credit card debt and have it forgiven by filing bankruptcy, but nothing can be done for a student loan that my husband took to try to better himself (by the way his degree isn't helping him one bit and the job he is in only requires a highschool diploma which would never pay his loan).
student loan
Well I just graduated from college a year ago! I was able to put my student loans into deferment..I thought it was fine until I called to check on my loans and one of the loans was not in deferment! I dont understand how in the hell this loan was not deferred it was a middle loan at that! All the loans before and after were deferred except this one! I called the agency that has my loan and they told me I could not work out any payment plan I had to pay the loan in its entirety! I dont know what I am gonna do because its a private loan and due to the default the loan is at 29,000. My grandmother is a cosigner and I tried to get it clear up! I dont want her to be penalized and I am willing to pay an amount biweekly! They wont help me at all and I am soo afraid seeing as I just started life after college in mid 2008 when the economy sucks! I cant even find a damn job to use my degree! I am in need of suggestions is anyone has any!
I am a Vet in Desert Storm.
I am a Vet in Desert Storm. I got out of the service in 1993 went to a automotive school in 1995. When applying for my GI Bill (at the time) to pay for the schooling, midway through schooling I was told that the military would not pay for the schooling. Here it is in 2009 I am still fighting with this student loan that is about to garnish my wages because I can't keepp up with payment with all the other economy and personal problem people has. How can you fight for your country and still get screw and on something you work for and deserve.