Collector - August 2018 - 30
Loan Consolidation and Rehabilitation:
A Second Chance
Federal student loan borrowers have the option of refinancing all their debt
obligations into a new consolidation loan that can provide them with as
many as 25 years to repay their debt.
Loan consolidations for federal student loans are largely handled through
the U.S. Department of Education, which allows borrowers to work with their
contractors to apply for this new loan, even if their existing loans are in a default
status (except when a judgment has been entered against the consumer).
Loan consolidation is a valuable tool for both borrowers and third-party
collectors because it allows for full payment of existing defaulted loans,
including most collection costs and fees, and creates a single new loan with
the ability to exercise income-based repayment options. However, borrowers
who work in certain careers where forgiveness or
cancellation benefits are available could lose their
entitlements if they use this option to consolidate
their existing loan debts.
Non-federal or private student loan debt cannot
be consolidated under the federal Direct Loan
consolidation program, though there are several
lenders and financial entities that offer consolidation
options for both federal and private loans.
Another option available for many federal
student loan borrowers is loan rehabilitation, which
entails making a preset number of payments
in a prescribed period, usually nine months.
These payments are not necessarily equal to the
consumer's regular monthly installments.
Under a rehabilitation process, which borrowers
can request and attempt multiple times, the student
loan can be reset to a current status with up to
10 years to fully pay the remaining balance. More
importantly for consumers, the negative credit
rating for the defaulted student loan will be adjusted
by credit reporting agencies, allowing a "second
chance" for the consumer's credit.
Once borrowers have successfully
rehabilitated their defaulted loan, they can no
longer use this benefit.
Many students and parents are also forced
to take out additional loans from banks and
other financial institutions to help pay for
their college tuition bills. Although private
loans require some level of creditworthiness
or an approved co-signer, unlike most
federal student loans, these obligations often
have less favorable terms and conditions for
repayment and may lack some of the benefits
offered through the federal programs.
Besides a real financial inability to repay
their loans due to unemployment or monthly
payments that exceed their budgets, student
loan defaulters-commonly on the move
after leaving school-often fail to maintain
current contact information. This presents
a significant communication challenge for
lenders and third-party collection agencies.
Plus, even with the electronic counseling
required before and after students are
enrolled in school, many borrowers still
have a limited understanding of their loan
obligations, including who lent them the
money or where they should send payments.
While more colleges and universities are
providing personal loan summaries or "debt
letters" to students (something now required
in at least four states), many borrowers are
still overwhelmed by how much debt has
been incurred and lack clear insight about
how they will pay off their obligations.
The non-dischargability of most student
loans, unless consumers can demonstrate
extreme hardship, remains intact, although
legislation has been proposed to exclude
private student loans from the exemption
under the Bankruptcy Act. Other forms
of educational debt, however, have been
deemed dischargeable in most jurisdictions.
In addition to student loans, the unpaid
college and university tuition debt offers
many recovery opportunities for third
parties on initial and secondary referrals.
Agencies, however, must be cognizant about
account aging to avoid situations where
debts are outside the statute of limitations.
Educational institutions, which will
withhold services such as transcript issuance
and registration for future classes, set their
own policies and procedures for account
handling, which may vary widely. A growing