Get Out of Debt Guy

Changes Coming for Struggling Student Loan Borrowers

Posted October 31, 2013

Let's get the bad news out of the way, none of this good news in this article applies to private student loans. When it comes to private student loans my advice remains the same as it has been, avoid them like the plague.

But for federal student loan holders as of July 1, 2014 a big change is being made in the regulations around loan rehabilitations and administrative wage garnishments.

The rehabilitation change is huge. Currently people struggling with federal student loan payments can either make a tough to afford payment for nine months to get their loan out of default and their defaulted status will be removed from their credit report. It's basically legal credit repair.

The current payment is typically 1% of the outstanding balance. If you owe $100,000 that's $1,000 a month. Just the other day I answered a reader question for someone who was a kindergarten teacher making little money but had about $1000,000 in student loans. Under this new change, her payment would be substantially different.

Many people in default find they just can't afford the current rehabilitation loan payments. But as of July 1, 2014 the formula for calculating the rehabilitation payments is changing to make them more consistent and affordable for consumers.

Here is what the new regulation says:

"...once the rehabilitation discussion has begun, initially considers a borrower’s reasonable and affordable loan rehabilitation payment amount to equal 15 percent of the amount by which the borrower’s Adjusted Gross Income (AGI) exceeds 150 percent of the poverty guideline amount applicable to the borrower’s family size and State, divided by 12. If the amount determined using this calculation is less than $5, the borrower’s monthly rehabilitation payment is $5."

And the use of the AGI is important as well. Your AGI is calculated as your income minus allowances for exemptions or itemized deductions. It can be a number much lower than your income.

Let's look at an example student loan holder.

If their AGI (Adjusted Gross Income) is $30,000, the poverty guideline for a single person is $11,490. That means their student loan payment would be 30,000 - 17,235 = 12,765. The payment would be $159 per month regardless of the magnitude of their federal student loan balance.

It appears that under this new regulation if the loan holder made the new monthly payment for the same nine months they would get all the benefits of the rehabilitation program. That's a big positive change for struggling consumers.

The Department of Education says the change is being made to "reduce the burden on defaulted borrowers who are attempting to rehabilitate their loans." They hope this will possibly increase the percentage of defaulted borrowers that complete the rehabilitation process and fully repay their loans.

One of these changes is the reduction of contact by collection agencies for those who engage in a rehabilitation repayment program. Collection activity will cease except for "collection activities required by law or regulation and communications that support the rehabilitation."

Administrative Wage Garnishment rules are changing as well. Federal student loans can garnish wages without having to take the student to court. This has created an issue in the past where people may have objected to the defaulted amount but wound up with a wage garnishment anyway.

Under the new rules, also starting July 1, 2014, borrowers will have a greater right to challenge the amount alleged to be owed and request a hearing prior to a wage garnishment.

Borrowers who object to the proposed AWG have an appropriate opportunity to challenge the existence or amount of the debt or to demonstrate that the withholding would cause financial hardship.

Borrowers who would struggle financially under a wage garnishment will be able to appeal or request a reduced payment.

Additionally, the wage garnishment will now stop after five payments made under the new rehabilitation process.

Some help is on the way.

Steve Rhode
WRAL Get Out of Debt Guy

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About this Blog:

Steve Rhode has had careers in opthalmology, real estate and as the head of a nonprofit debt counseling firm. On his blog, he offers hard-won, free advice about getting out of debt, consolidation and making the right choices as you manage your money.