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AwardYear: 1998-1999 EnterChapterNo: 10 EnterChapterTitle: Federal Family Education Loan Program SectionNumber: 7 SectionTitle: Delinquency and Default PageNumbers: 71-76 Most borrowers repay their loans on time, but some do fall behind on their payments for a variety of reasons. A financial aid administrator should advise a student to maintain contact with the lender or loan servicer to avoid delinquency and default if the borrower has repayment problems. When a scheduled payment on a Federal Stafford Loan, Federal Supplemental Loans for Students (SLS) loan, or Federal PLUS Loan is not made on time, the loan becomes delinquent. To prevent defaults, a lender is required to repeatedly attempt to contact a delinquent borrower by phone and mail, to use skip-tracing techniques to locate the borrower if his or her whereabouts become unknown, and to request the guaranty agency's assistance to resolve repayment problems. If a borrower is late in making a payment, the lender may require the borrower to pay a late charge. The borrower will also be required to pay collection costs, such as collection agency fees, attorney's fees and court costs, if required in the borrower's promissory note. For loans that enter delinquency on or after April 7, 1986, default occurs when a loan repayable in monthly installments becomes 180 days delinquent. For a loan repayable in less frequent installments, default occurs when the loan becomes 240 days delinquent. CONSEQUENCES OF DEFAULT -------------------------- If the borrower's delinquency persists, the lender must accelerate the loan; that is, the lender must demand--using a "final demand" letter- -the entire balance of the loan in one payment. The lender must also file a default claim with the guaranty agency on a seriously delinquent account that is more than 180 days delinquent (or 240 days delinquent for a loan repayable in installments less frequent than monthly). The guaranty agency reviews the lender's collection efforts before paying the lender's default claim. If the guaranty agency pays the default claim, the agency must continue collection efforts. Before reporting the default to a national credit bureau or assessing collection costs, the guaranty agency will provide the borrower with - a written notice of its proposed actions, - an opportunity to enter into a repayment agreement, and - an opportunity for an administrative review of the status of the loan. [[Credit bureau notification]] Once a guaranty agency notifies a credit bureau of a borrower's default, the credit bureau may provide inquirers with that information for up to seven years from the date the loan is first reported as a default; for up to seven years from the date the guaranty agency pays the default claim; or, for a borrower who enters repayment after default and again allows the loan to default, up to seven years from the date the loan enters default the second time. [[Required loan collection efforts--34 CFR 682.411]] Collection efforts by the guaranty agency include a series of letters and phone calls to persuade the borrower to enter repayment on the defaulted loan and may also include mandatory assessment of collection costs, garnishing up to 10% of the defaulter's disposable pay, withholding ("offsetting") part or all of a defaulter's federal and/or state income tax refund and other payments that the federal government might otherwise make to the borrower, and filing suit against the borrower. A guaranty agency must provide counseling and consumer information to a borrower by the 10th working day after the agency receives a request from the lender for preclaims assistance (preclaims assistance is the collection assistance the guarantor makes available to the lender no later than the 90th day of delinquency). As part of the counseling, the guaranty agency must inform the borrower of preventive measures to avoid default, such as income-sensitive or graduated repayment, deferment, forbearance, and consolidation of delinquent loans under the FFEL Program or the Federal Direct Consolidation Loan Program. [[Limit on collection costs when defaulted loan is consolidated-- 34 CFR 682.401]] A guaranty agency may add collection costs in an amount not to exceed 18.5% of the outstanding principal and interest to a defaulted FFEL that is included in a Federal Consolidation Loan or Direct Consolidation Loan. A guaranty agency must initiate administrative wage garnishment action not later than 225 days after it pays a default claim. If the borrower has insufficient income to garnish but does have assets from which the debt can be satisfied, the borrower's loan account must be assigned to the U.S. Department of Education for litigation. All guaranty agency administrative wage garnishments must be performed in accordance with the procedures described in Section 488A of the Higher Education Act of 1965 (HEA), as amended, 34 CFR 682.410(b)(10), and specific guidance the Department has issued. If the defaulter is sued, wage garnishment may be included in the court's ruling. The Higher Education Technical Amendments of 1991 (P.L. 102-26) provided for continuation of garnishment, offset action, or a lawsuit regardless of any federal or state statutes of limitation that might otherwise have applied to such collection efforts. The Higher Education Amendments of 1992 permanently abolished statutes of limitation that might otherwise have applied. The abolition applies to all pending cases and outstanding debts, as well as to current cases. [[Ineligibility for additional SFA funds]] A student with a defaulted loan is rendered ineligible for all Student Financial Assistance (SFA) funds at the time the default occurs (that is, once the loan reaches 180 days of delinquency for loans repayable monthly and 240 days for loans repayable less frequently). Even if a defaulted borrower's debt has been determined to be totally uncollectible and was closed out (written off) with the principal amount being reported to the Internal Revenue Service as taxable income, the borrower is still considered to be in default and is ineligible for federal student aid. If a borrower who is in default on an SFA loan held by the Department or by a guaranty agency applies for federal student aid, the resulting Student Aid Report (SAR) will indicate that the borrower is in default and, thus, not eligible for aid under the SFA Programs. [[Ineligibility for deferment]] Once a guaranty agency pays a lender's default claim, the borrower is ineligible for any type of deferment on the loan, and he or she will not be able to receive any federal financial aid until the obligation is discharged or until the borrower has made satisfactory payment arrangements with the lender, the guarantor, or the Department. A lender or guarantor may grant forbearance to a borrower whose loan is delinquent or in default. Even after a borrower makes satisfactory repayment arrangements to repay the defaulted loan in order to regain eligibility for SFA funds, the borrower must continue to make scheduled payments on the defaulted loan. If the borrower is unable to do so while attending school, he or she should request forbearance on the loan. If, after a borrower has defaulted, he or she receives a loan discharge under the bankruptcy, total and permanent disability, closed school, or false certification discharge provision, the loan is no longer considered to be in default, and the borrower is eligible for further federal student aid. REINSTATEMENT OF ELIGIBILITY AFTER DEFAULT ------------------------------------------------ If a borrower and guaranty agency reach a compromise agreement to settle the debt for less than the total amount due, the borrower may be eligible for additional federal student aid once the compromised amount of the debt is paid. If the borrower chooses to reaffirm his or her defaulted loan obligation and makes satisfactory payment arrangements to repay the debt (six on-time, reasonable and affordable, consecutive, voluntary monthly payments), he or she may regain eligibility for SFA funds. A student who resolves a default by consolidating a defaulted FFEL also regains eligibility once the defaulted loan has been paid in full by the Consolidation Loan or Direct Consolidation Loan. See Section 8 of this chapter for more information on consolidating defaulted FFELs. A guaranty agency must inform a defaulted borrower who has made six payments as described above of the possibility of loan rehabilitation (after the borrower makes six more payments). Reinstatement of eligibility does not bring a loan out of default, and the borrower is not eligible for deferment; however, loan rehabilitation accomplishes both. If a student regains eligibility during an enrollment period (if the sixth payment under a satisfactory repayment arrangement is made after the start of an enrollment period, for example), the student regains eligibility for the entire period of enrollment (usually an academic year) in which he or she regained eligibility status. If a borrower has made satisfactory repayment arrangements to repay a defaulted loan, his or her SAR will indicate that the borrower is eligible but will include a warning that if scheduled payments are not made on the loan, future federal student aid will be denied. The financial aid administrator may reconcile the SAR with official paperwork from the lender stating that the default has been satisfied. This documentation must be kept in the student's file. The financial aid administrator may then determine the student's eligibility for a loan. LOAN REHABILITATION ---------------------- Loan rehabilitation is available to a borrower who has defaulted on a FFEL and who meets certain conditions. The law requires a guaranty agency to provide a loan rehabilitation program that will allow a defaulter the opportunity to make 12 "reasonable and affordable" consecutive monthly payments on a defaulted FFEL. The Department expects each guaranty agency to determine what constitutes a reasonable and affordable payment amount on a case- by-case basis, after examining the borrower's financial information. When establishing a reasonable and affordable payment amount, a guarantor may not require a set minimum monthly payment amount. A guarantor is required to document its determination of the appropriate payment amount only if the payment is less than $50. Each borrower must receive a written statement specifying what the reasonable and affordable payment amount is as determined by the agency and must be granted an opportunity to object to the terms. After a borrower makes 12 consecutive monthly payments (which may include the six consecutive monthly payments necessary to regain SFA eligibility) on the defaulted loan, the guaranty agency (or the Department, if the Department is holding the loan) will decide if the borrower is a good candidate for loan rehabilitation. If so, the loan holder will try to sell the loan to an eligible FFEL lender. A borrower who has made more than 12 consecutive, voluntary monthly payments at the time he or she requests rehabilitation is immediately eligible for consideration, if those payments were determined to be reasonable and affordable and if they were made on time. Payments secured from a borrower on an involuntary basis, through means such as wage garnishment, cannot be counted towards the borrower's required 12 consecutive monthly payments. Once eligible for rehabilitation, the debtor must continue to make payments while the guaranty agency transfers the loan to a lender. Because of loan processing procedures, the borrower may have to submit more than 12 payments before the loan is rehabilitated. Once a loan is rehabilitated, the borrower regains eligibility for any remaining deferment benefits. For example, if a borrower who has a loan that is eligible for up to three years of unemployment deferment receives two years of this deferment, later defaults, then rehabilitates the loan, he or she is eligible for one more year (not another full three) of unemployment deferment after rehabilitation. The holder of the rehabilitated loan must promptly notify at least one credit bureau of the loan's rehabilitated status. The notification of credit bureaus is an important benefit to borrowers, because the borrower's record of default is removed from his or her credit history. A borrower with questions about loan rehabilitation should contact the agency holding the defaulted loan. A borrower who wishes to rehabilitate or consolidate a loan on which a court judgment has been secured must sign a new promissory note prior to the sale of the loan to an eligible lender. (The Department has previously provided guidance stating that a guaranty agency may not exclude borrowers with judgment accounts from consolidating their defaulted loans.) Because a judgment is not always repaid under the original terms and conditions of the FFEL promissory note, the judgment is not viewed as an eligible FFEL. Therefore, rehabilitation or consolidation of a loan on which a court judgment has been secured requires the guaranty agency to vacate the judgment and to convert the judgment debt into an eligible FFEL. This conversion takes place when the borrower makes a new promise to repay the debt by signing a FFEL promissory note on the amount due on the judgment.

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