1. Loan Rehabilitation: A Second Chance for Borrowers

2. The Distress of Loan Default
More than 40% of Americans with federal student loans are behind in their payments or aren’t making them at all.
More than 40% of Americans with federal student loans are behind in their payments or aren’t making them at all. The data comes from a quarterly snapshot of the government’s $1.2 trillion student-loan portfolio put out by the Department of Education. That means only 12.5 million Americans are current on their federal loan repayments of the 22 million who are out of school and took out loans.
It’s a slight improvement from last year, when the Education Department reported a non-payment rate of 46%, but much of the difference is due to more borrowers entering programs that lower their monthly obligations by tying them to borrowers’ incomes. The number of borrowers in these programs jumped nearly 50% over the past year.
Of the group that is behind on their student debt, 3.6 million haven’t made payments in over a year, placing them in default. Another 3 million are at least a month behind.
Fortune, 2016

3. The Distress of Loan Default
Unlike other types of installment loans, borrowers have an option to redeem themselves if they default on their federal student loans
Proactively, there are many measures and practices that can be implemented to prevent borrowers from becoming delinquent and ultimately defaulting such as expanded exit counseling and outreach during their grace period and at the beginning or repayment. Even financial literacy training given to them throughout their academic year has been proven to make an impact on borrowing and repayment but what do you for those who fall behind in their payments and default. The damage is already done, right? Well, right and wrong.
Unlike other types of installment loans, borrowers have an opportunity to redeem themselves if they default on their federal student loans through loan rehabilitation.

4. Agenda 1 2 3 4 5 Share what happens when a loan defaults
Walk through the nuts and bolts of loan rehabilitation 3
Discuss whether loan rehabilitation is the best option 4
Share ways you can help your defaulted borrowers 5
Provide resources

5. What Happens When Borrowers Default
We tell borrowers that their loan defaults once they become 270 delinquent but it’s much more complicated that than. The road to default, depends on the loan program (FFELP or Direct) and it goes through different stages before it’s actually considered defaulted.

6. The Unfortunate Road to Default
Borrower enters repayment
Loan is delinquent the first day after a payment is missed
Loan is in technical default at day 270 of delinquency
Loan servicer reports delinquency once account is at least 60 days to the three major credit reporting agencies
This chart shows that unfortunate road a borrower could travel. It begins with the borrower entering repayment…
The loan is delinquent the first day after a payment is missed however….the Department of Education strongly encourages loan holders to wait until a borrower is at least 60 days delinquent to report the late payment status to the credit reporting agencies.
The loan is considered in technical default at day 270 of delinquency and for Direct loans, they are reported to NSLDS at this time.

7. The Unfortunate Road to Default
FFEL loans:
Typically, lender files claim up to 60 days after technical default (270 days)
Direct loans:
After 360 days of delinquency, loan is sent to the Debt Management Collections System
FFEL loans:
Claim can be paid 90 days after it is filed
For Direct loans…the loan is in default after day 360 of delinquency and that’s when loans are sent to the Debt Management Collection Systems (DMCS). So from the day of technical default…day 270…to day 360…the borrower can still be saved from default. They can either make a payment or request a forbearance to resolve the delinquency. This important to note because even though you may see the loan status as DF in NSLDS, the borrower still has a chance. However, once the loan has been sent to DMCS, it is now in default and forbearance is not an option.
For FFELP loans, the lender has up to 60 days after technical default to file a claim. Most do around day 330 of delinquency. The loan is in default after the claim has been paid which is usually around 60 days later.

8. The High Cost of Default
Once a borrower defaults, they face numerous consequences
1│ Loss of Title IV eligibility
2│ Inability to receive a deferment or forbearance
3│ Default is reported to the credit report agencies
There are numerous consequences once that happens. Such as:
Loss of Title IV eligibility
Inability to receive a deferment or forbearance
Default is reported to the credit reporting agencies
Possible collection costs
4│Possible collection costs

9. The High Cost of Default
Once a borrower defaults, they face numerous consequences
6│ Department of Treasury may offset federal, state
tax refunds, and/or social security benefits
7│ May be subject to Administrative Wage
Garnishment
Department of Treasury may offset federal and/or state tax refunds
They may be subject to Administrative Wage Garnishment (also called AWG)
And the Department may take legal action
8│ Department may take legal action

10. Lose Eligibility Borrowers will lose eligibility for
Federal financial aid
Deferment
Forbearance
Repayment plans
Once a borrower defaults, they will lose eligibility for
Federal financial aid
Deferments and forbearance
And repayment plans such as IBR or Pay as You Earn because defaulted loans are not eligible
I do want to mention that once you see the DF in NSLDS, the borrower loses eligibility for Title IV aid, even though the loan is in technical default and they can still be saved. They are eligible for a deferment or forbearance, as I mentioned before up to day 360 (for direct loans). If they resolve the default before day 360, you can award Title IV aid again.

11. Negative Credit History
Loan default remains on the borrower’s credit report for seven years
Will report as a collection account
Could impact the borrower’s ability to:
The defaulted loan is reported to the credit reporting agencies, which will hurt the borrower’s credit score. It will remain on the borrower’s credit report for7 years from the date when the account becomes 60 days past due.
It will be reported it as a 'collection account’ and will be listed in the Collections part of the person’s credit report. And it also reports that a 'claim has been filed with government’ in the status field and the comments section may report that the account was paid by government claim.
The default status could impact the borrower’s ability to obtain loan and credit card approvals, receive lower interest rates, rent apartments, or obtain employment (since many employers will review a person’s credit report before extending a job offer…they use credit as one way to determine a person’s character, honesty, or integrity.)
Receive loan and credit card approvals
Receive lower interest rates
Rent apartments
Secure employment

12. Negative Credit History
GREAT LAKES
Address:
2401 International Ln
Madison, WI
800-xxx-xxxx
Account Number:
Address Identification Number:
Status: Claim filed with federal government
Date Opened:
06/2008
Type:
Education Loan
Credit Limit/Original Amount:
$22,000
Reported Since:
09/2013
Terms:
N/A
High Balance:
Date of Status:
01/2014
Monthly Payment: $0
Recent Balance:
Last Reported:
Responsibility:
Individual
Recent Payment:

13. Collection Fees
Department may charge the borrower a collection fee up to 25% more than the principal and interest
The Department may charge the borrower up to 25 percent more than the principal and interest in collection cost. This amount that is charged is to cover the cost to collect the loan from the collection agencies.

14. Offset Tax Refunds
Department can request that Treasury arrange an offset to collect any defaulted student loan debt
Federal tax refunds payable to joint filing couples are subject to offset
Federal law requires the Department to give borrowers prior notice of the proposed offset and an opportunity to review loan records
The U.S. Department of the Treasury, at ED’s request, can withhold money from the borrower’s federal income tax refunds, Social Security payments, and other federal payments to collect their defaulted federal student loan. This withholding is called Treasury Offset program.
Federal law requires the Department to give borrowers prior notice of the proposed offset and an opportunity to review loan records, to demonstrate why the loan is not in default or is not enforceable, and to avoid offset by arranging to repay the loan.

15. Garnished Social Security Payments
Social Security benefits can be garnished
Number of Americans who had their Social Security checks garnished because of default federal loans
2013
156,000
2009
85,000
Social security benefits can also be garnished if the borrower has a unpaid defaulted loan. In 2013, the Treasury collected $150 million through Social Security garnishments. Among the baby boomers struggling with student loans are three main types: those who have gone back to school later in life; those who have opted for smaller monthly repayments and longer extensions on the loans; and those who have at some point in their life defaulted on their federal loans.
2006
47,000
Source: CNN, 2014

16. Administrative Wage Garnishment
Under the Higher Education Act, the Department and guarantor may require employers deduct 15% of the borrower's disposable pay
Garnishment may continue until entire loan balance is paid
AWG is only used for borrowers who refuse to voluntarily repay
Under the Higher Education Act, the Department and guaranty agencies may require employers who employ individuals who have defaulted on the repayment of a student loan to deduct 15% of the borrower's disposable pay, per pay period, toward the repayment of their debt. In addition, the Debt Collection Improvement Act of 1996 permits the Department to garnish up to 15% of disposable pay. Garnishment may continue until the entire balance of the outstanding loan is paid. Wage garnishment is used only for borrowers who refuse to voluntarily repay their defaulted loan and is not used with those borrowers who continue to make regular and timely monthly payments.
Borrower can not be discharged from employment, refused employment, or subject to disciplinary action due to the garnishment. They can seek redress in federal or state court if such action occurs.

17. Legal Action
Borrowers who refuse to voluntarily pay may be sued in State or Federal District Court for the outstanding balance plus attorney's fees and court costs
Borrowers who refuse to voluntarily pay, may be sued by the Department in State or Federal District Court for the outstanding balance plus attorney's fees and court costs. Law suits are not very common, however the number of loan defaults that the Education Department has referred to Justice Department lawyers for possible legal action has risen dramatically since before the recession and nearly doubled a couple of years ago.
Suing to collect the debt is a "last resort step but if a borrower ignores a court order to pay money, their house and other assets can be seized.

18. Getting Out of Default

19. Loan Rehabilitation
Loan Rehabilitation is designed to give borrowers a second chance
Once they demonstrate their ability to make monthly payments, the default status is removed from their loan
Loan Rehabilitation is a federally authorized program designed to give borrowers a second chance--it allows them to reserve all of the negative consequences.

20. Requirements
Borrower must make at least nine full payments over a ten-month period
Payments must be
Made voluntarily
For the full amount required
Received within 20 days of due date; and
Reasonable and affordable
The Final Rules released in November 2013 brought about changes to Loan Rehabilitation. These changes became effective July 1st, 2014.
Payments made under a loan rehabilitation agreement must be:
Made voluntarily
For the full amount required
Received within 20 days of due date; and
And…payments must be “Reasonable and affordable”.

21. Requirements
Borrowers whose loans are being collected through AWG can enter rehabilitation but they must make five simultaneous payments before AWG will end
May suspend AWG while attempting to rehabilitate only once
If a borrower’s defaulted loan is being collected by AWG while the borrower is also making loan rehabilitation payments, the guarantor or ED is required to continue collecting the loan by AWG until the borrower makes five qualifying monthly payments under the rehabilitation agreement. After the borrower makes the fifth qualifying monthly payment, the guarantor or ED must, unless otherwise directed by the borrower, suspend collecting the loan by AWG. A borrower may suspend AWG while also attempting to rehabilitate a defaulted loan only once.

22. Reasonable and Affordable Payment Standard
Borrower’s payment must initially be:
Amount equal to 15% of amount by which borrower’s AGI exceeds 150% of poverty guideline, divided by 12
Referred to as 15% formula
There is now a Reasonable and Affordable Payment Standard.
The payment is an amount equal to 15% of amount by which borrower’s AGI exceeds 150% of poverty guideline, divided by 12.

23. Reasonable and Affordable Payment Standard
Unlike IBR, the borrower does not need to demonstrate a partial financial hardship
Borrower may provide AGI and family size orally but will need to provide documentation or rehabilitation agreement will become null and void
The Department or guarantor may calculate the payment amount based on information provided orally by the borrower (or borrower’s representative) and provide the borrower with a rehabilitation agreement using that amount. The guarantor must request and ED will require documentation from the borrower to confirm the borrower’s AGI and family size. If the borrower does not provide ED with any documentation requested to calculate or confirm the reasonable and affordable payment amount, within a reasonable timeframe set by ED or the guarantor, the rehabilitation agreement provided is null and void.

24. Borrower Objections
Borrower may object to payment calculated based on 15% formula
If they object, ED (or guarantor) must recalculate payment based solely on information provided on ED-approved form and, if requested, supporting documentation from borrower and other sources
Financial Disclosure for Reasonable and Affordable Rehabilitation Payments form
The borrower has the right to object to the monthly amount determined under the 15% formula.
If they object to that amount, ED (or guarantor) must recalculate payment based solely on information provided on ED-approved form and, if requested, supporting documentation from borrower and other sources. At that time the loan holder must consider the borrower and spouse’s current disposable income, family size, and reasonable and necessary expenses such as food, housing, utilities and so on.

25. Borrower Objections ED (or guarantor) must consider:
Borrower’s and spouse’s current disposable income
Family size (as defined in income-based regulations)
ED (or guarantor) must consider:
The borrower's, and if applicable, the spouse's current disposable income, including public assistance payments, and other income received by the borrower and the spouse, such as welfare benefits, Social Security benefits, Supplemental Security Income, and Worker’s Compensation. Spousal income is not considered if the spouse does not contribute to the borrower’s household income.
Family size as defined in the income-based regulations

26. Borrower Objections
ED (or guarantor) must also consider reasonable and necessary expenses, which include:
Food
Housing
Utilities
Basic communication expenses
Necessary medical and dental costs
Necessary insurance costs
Transportation costs
Dependent care and other work-related expenses
Legally required child and spousal support
Other title IV and non-title IV student loan payments
Other expenses approved by ED
They must also consider reasonable and necessary expenses, which include –
(1) Food,
(2) Housing,
(3) Utilities,
(4) Basic communication expenses,
(5) Necessary medical and dental costs,
(6) Necessary insurance costs,
(7) Transportation costs,
(8) Dependent care and other work-related expenses,
(9) Legally required child and spousal support,
(10) Other title IV and non-title IV student loan payments, and
(11) Other expenses approved by ED
ED (or guarantor) will provide the borrower with a new written agreement confirming the borrower’s recalculated
reasonable and affordable payment amount. To accept the agreement, the borrower must sign and return the agreement.

27. Completion of Loan Rehabilitation
Once borrower has made required payments:
Direct loans will be returned to loan servicing
FFELP loans will be purchased by eligible lender
They can choose a repayment plan (unless they had one with DMCS)
Once a borrower has successfully completed rehabilitation;
Their Direct loans will be returned to loan servicing
If they have FFELP loans, they will be purchased by eligible lender
They can chose a repayment plan

28. Completion of Loan Rehabilitation
Once borrower has made required payments:
Title IV eligibility will be restored
The loan will no longer be in default
The default status will be removed from their credit report
Tax offset will end
Once a borrower has successfully rehabilitated their loan:
Their Title IV eligibility will be restored
Loan will no longer be in default AND
Default status will be removed from credit report.
Tax offset will end

29. Completion of Loan Rehabilitation
Borrowers are only able to complete rehabilitation once
The guarantor can charge a 16% collection fee for rehabilitation
25% default collection fee is removed
Loan rehabilitation is a one-time opportunity. If the borrower re-defaults on their loan, they will not be able to rehabilitate again. Also, if a judgment has been issued on the defaulted loan, the borrower is not eligible.
For FFELP borrowers, the guarantor can charge 16% collection fee for rehabbing the loan but if they do, they will waive the up to 25% that was assessed when the loan first defaulted.

30. Is Loan Rehabilitation the Best Option?

31. Second Chance Options for Borrowers
Loan Rehabilitation
Direct Consolidation Loan
Borrowers actually have two ways to get out of default – rehabilitation and consolidation. Each option has advantages and disadvantages.

32. Rehabilitation vs. Consolidation
Loan Rehabilitation
Direct Consolidation
Payment arrangement required
Yes
Title IV eligibility restored
Tax offset stopped
AWG stopped
Default status removed
Default notation from credit report removed No
History of delinquency from credit report removed

33. Helping Your Defaulted Borrowers

34. Benefits of Outreach
By educating your defaulted borrowers on their options it could:
Help them restore their credit
Give them an opportunity to return to school and receive federal financial aid
Enable them to apply for an FHA or VA loan
Possibly stops wage garnishments and tax offset
By educating your defaulted borrowers on their options it could:
Help them restore their credit
Give them an opportunity to return to school and receive federal financial aid
Enable them to apply for an FHA or VA loan. Borrowers who have defaulted on their loans are not eligible for FHA or VA loans.
Possibly stops wage garnishments and tax offset

35. Benefits of Outreach
By educating your defaulted borrowers on their options it could also help lower your cohort default rate
If the borrower rehabilitates the loan before the end of the cohort default period, the borrower is not included in the numerator because the borrower is no longer considered to be in default
There are benefits for your school as well…
If the borrower rehabilitates the loan before the end of the cohort default period, the borrower is not included in the numerator because the borrower is no longer considered to be in default. Keep in mind though that it must be within the cohort period in which the loan is included in the denominator, not any subsequent cohort period.
This option was not doable with a 2-year cohort default period because there really wasn’t enough time for a borrower to default, make 9 payment and have their loan either repurchased (if it was a FFELP loan) or transfer back to servicing (if it’s a Direct loan). Now with an additional year, there is more time so if they successfully rehabilitate, they could possibly be removed from your cohort default rate.
There is more information is the Cohort Default Rate Guide on loan rehabilitation and CDR’s

36. Cohort Default Rate
The Numerator is the number of Stafford loan borrowers from the denominator who default within a cohort period
The Denominator is the number of Stafford loan borrowers who enter repayment within a cohort period
So let’s look at the Cohort Default Rate calculation a bit closer to better understand how this works.
A cohort is a group of Stafford loan borrowers—and that includes both FFELP and Direct loan borrowers—who enter repayment during a specific federal fiscal year. So for schools, those borrowers that graduate, withdraw, or drop below half-time enrollment and complete their six-month grace period by September 30th of a given fiscal year are considered to be in that year’s cohort of borrowers for CDR purposes. PLUS loans are not included in the CDR calculation.
A school’s cohort default rate is the percentage of a school’s Stafford loan borrowers who enter repayment within the cohort fiscal year (denominator) and defaulted within that cohort period (numerator) .

37. What is a Cohort Default Period?
3-year CDR FY2015
3-year CDR
FY2016
Borrowers who entered repayment between 10/01/2014 and 9/30/2015 and who defaulted between 10/01/2014 and 9/30/2017
Borrowers who entered repayment between 10/01/2015 and 9/30/2016 and who defaulted between 10/01/2015 and 9/30/2018
Borrowers who entered repayment between 10/01/2014 and 9/30/2015
Borrowers who entered repayment between 10/01/2015 and 9/30/2016
There is time remaining in the FY2015 year and even more time to impact the FY2016 CDR.

38. Outreach Strategies Send letters to defaulted borrowers to include:
Details of loan rehabilitation and consolidation
Benefits of resolving default
Outreach strategies such as letters can let borrowers know about their options to remove their loans from default. In your letters include:
Details of loan rehabilitation and consolidation
Benefits of resolving default – such as improving their credit and stopping the tax offset so they can receive their refund.
And where to go for help – who they should contact to consolidation and/or rehabilitation their loans
Contact of where to go for help

39. Outreach Strategies Get the borrower’s attention
Highlight what you want them to know most in bold or color
Sign letters by hand
Colored envelopes
School’s logo or mascot
Hand write envelopes
Use stamps

40. Conclusion and Resources

41. Conclusion
Implement effective default prevention measures to facilitate successful repayment
Reach out to defaulted borrowers to let them know how to resolve default

42. Resources NSLDS Borrowers in Default Summary Report
Federal servicer’s reports

43. Resources Studentaid.ed.gov/repay-loans/default Myeddebt.ed.gov
Consumerfinance.gov

44. 2016 ILASFAA Annual Conference
Thanks for Attending
Bill Henderson
Senior Marketing Associate  (CHI-IL, WI)  Phone: (877)
Doug Hess
Senior Marketing Associate  (IN, IL)  Phone: (800)
2016 ILASFAA Annual Conference