November 9, 2013
New Student Loan Rules Add Protections for Borrowers
If you are a former student having trouble paying back college debt, you may be relieved to hear that the Education Department has created new rules that will bolster borrower protections for federal education loans.
The new regulations will make it easier for distressed borrowers to get out of default and repay their loans, said Pauline Abernathy, vice president of the nonprofit Institute for College Access and Success, which supported the changes.
More than 600,000 federal student loan borrowers who began repaying their debts in 2010 defaulted on their loans by 2012, according to federal data. Almost half — 46 percent — attended for-profit colleges, which also had higher average default rates than other schools. For-profit schools had an average default rate of almost 22 percent, compared with about 15 percent for borrowers across all colleges.
Under federal law, those who are in default on federal student loans may “rehabilitate” them by making nine on-time payments in amounts that are “reasonable and affordable.” Rehabilitation lets the borrower get out of default and become eligible for further federal student aid.
Some private debt collectors under contract with the government, however, were failing to offer payments that former students could afford, instead offering payments based, for instance, on a percentage of the borrower’s total debt. Such payments increased the commissions paid to collection agencies, but were often unworkable for borrowers. The collectors, Ms. Abernathy said, “were not appropriately counseling borrowers on how to get out of default.”
“They were payments based on what was most profitable for the collector,” she said.
In its final rules, the Education Department requires that borrowers who want to rehabilitate loans must first be offered a payment amount similar to what would be offered under the federal income-based repayment program. That option, meant to help borrowers who have high debt in relation to income, caps a borrower’s monthly payments at 15 percent of his or her monthly income.
The department earlier had proposed allowing borrowers to be offered an income-based plan only after they first were offered, but then rejected, a different payment amount calculated by loan servicers and based on completion of a long, complex form.
Now, borrowers can get the income-based offer first, and move on to the more complex form if they reject the income-based offer for some reason.
In addition, some debt collectors had demanded minimum monthly payments without disclosing more affordable alternatives, even though federal student aid law does not require minimum payments. The rules specify that payments in rehabilitation must not be a required minimum amount.
The new rules also allow borrowers who have been delinquent at least nine months to request “forbearance” on their loans orally, rather than in writing. When a loan is in forbearance, borrowers do not have to make monthly payments, but interest continues to accrue and is added to the loan balance, leaving them further in debt.
To help make sure that borrowers are not pressured into forbearances that they do not want, however, the rules limit forbearances based on oral requests to 120 days and require that a borrower also receive written information about the forbearance agreement and how to get out of forbearance status, as well as repayment alternatives.
Here are some additional questions to consider about the new rules:
When do the new rules go into effect?
Most take effect July 1 of next year. But lenders and schools may carry out some of the rules, like the one on forbearances, right away if they choose.
Do these rules apply to private student loans?
No. They apply to loans made or guaranteed by the federal government.
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