As of early 2020, Americans owed over $1.5 trillion in student loan debt. That’s more than the amount of outstanding credit card or auto loan debt.
44.2 million Americans have student loan debt – more than ever before. Delinquency rates remain high, with around 11% of these loans being seriously delinquent (90 days or more behind in payments). Clearly, this is a major issue for lots of us.
If you fail to make required minimum payments for an extended period of time, your student loan is considered to be in default. Specifically, after 9 months of not making required payments on your loans, the loan is placed in default status.
Consequences Of Defaulting On A Student Loan
When this happens, you can face a variety of severe negative consequences. The entire balance of your loan becomes due (this is known as an “acceleration” clause). Your wages can be garnished, that is, your employer can be required to withhold a portion of your earnings, and send that money to the loan holder, to help repay your loan.
Money can also be deducted from your tax refund (known as a tax offset), as well as your Social Security benefits, and applied towards payment of your student loan. What’s more, none of this requires a court order. While you’re allowed to request a hearing, after you learn of wage garnishment or other actions, your options here are far more limited.
Your credit score will also be severely damaged. Defaulting on a student loan can drop your credit score by well over 100 points. What’s more, many lenders (especially for mortgages, if you’re looking to buy a home) will not approve a loan if you’re in default on a student loan.
However, if you do end up defaulting on your loans, you do have a powerful tool to help you recover: loan rehabilitation. Rehabilitation is a means of bringing your loan current again, by making a series of payments on time.
How Much You’ll Pay Under Loan Rehabilitation
The first step in rehabilitating your loan is to contact your loan holder. Your loan holder will decide a reasonable monthly payment amount, equal to 15% of your discretionary income, divided by 12. Let’s understand how this works.
Discretionary income is calculated by taking several numbers into account. First, a lender/loan servicer will look at your adjusted gross income (that is, how much money you earn each year, before taxes).
Next, they’ll take a look at federal poverty guidelines for your household size, and the state where you live. The federal poverty line measures how much money a household would have to earn each year, to be living in poverty. In all states but Hawaii and Alaska, for a household size of 1 (i.e. you are single, with no children), the federal poverty line is $12,490..
Now, the loan servicer calculates your annual discretionary income, by subtracting 150% of the federal poverty line, from your adjusted gross income. The lender will then take 15% of this number, and divide it by 12, to calculate your monthly payment.
Let’s try a real-life example. Suppose your adjusted gross income (again, that’s income before taxes), is $23,000. Now, 150% of your federal poverty line number of $12,490, is $18,735. The lender will subtract $18,735 from $23,000, for a sum of $4,265. This is your annual discretionary income.
We aren’t quite done yet. We have to take 15% of your annual discretionary income, and divide it by 12, in order to calculate your monthly payment amount. This comes out to approximately $53.31. You’ll have to pay this amount each month. If all of this sounds a bit complicated, don’t worry. There are plenty of online calculators, to help you figure out the exact numbers.
What if you can’t afford this payment amount, perhaps due to your monthly expenses? You can provide proof of your monthly expenses, fill out some paperwork, and ask for a different monthly payment amount, after some portion of your expenses have been subtracted. If this amount is approved (or you decided to go with the original payment amount), you’ll now be able to
The Loan Rehabilitation Payment Process
Once your monthly payment amount has been approved, you’ll now begin the loan rehabilitation process. Basically, you’ll have to pay the agreed-upon amount, 9 times during a 10 month period.
After that, your loan will no longer be in default. Negative remarks on your credit reports (i.e. the late payments which led to the default), will typically be removed from your credit reports, which will improve your credit scores considerably.
Payments can usually be made online, by mail, or over the phone. We suggest paying online, both for maximum speed, and to easily maintain records.
If you fail to make at least 9 out of these 10 payments, you’ll be removed from rehabilitation. Remember, you only get one shot at the loan rehabilitation process. If you fail, your loan remains in default, and collections efforts will continue.
What’s more, you’ll never be allowed to enter a rehabilitation program on this loan again. For this reason, it is very important that you meet your payment obligations.
Life After Rehabilitation
Once you complete the rehabilitation process, there are a few . You could enter into some sort of income-driven repayment plan, when you repay your student loans based on how much you earn.
If you’re eligible, you might go back into deferment or forbearance on your loans, and not make payments for some period of time. Or, if your economic circumstances have improved, you can simply enter into a standard repayment plan, and continue making payments as per the original loan agreement.
The Final Word
Education affords us tremendous opportunities, to improve as individuals, and more our lives forward. At the same time, when we’re paying for education through debt, and we fall behind on those obligations, we face severe financial consequences. Rehabilitation truly offers a second chance. Make sure that you take advantage of it.
