Former Students With Defaulted Federal Loans Are Missing Out on a Key Cares Act Benefit

The US Department of Education (ED) in implementing the President’s executive order of August 21, 2020, has clarified the rehabilitation benefits for former student borrowers who have defaulted on a federal student loan.  Essentially, ED has extended the CARES Act benefits through December 31^st.

For more information, see https://studentaid.gov/announcements-events/coronavirus

Student Loan Rehabilitation is by far the most popular program allowing borrowers with eligible defaulted loans to complete the required documents, make nine payments in ten months and their loans move back to a current status once all these requirements are complete.  However, now borrowers do not have to make payments until January 2021 and still receive credit as if they made a payment each month through December 2020.  For example, a borrower completing the required documentation would receive credit for making their first payment in September of 2020 can rehabilitate in May 2021.  They would receive payment credit for four months (September – December) and then make payments from January through May. Borrowers starting in September would only have to make five payments having received the CARES Act payment benefit for four months.   

A little-known part of this benefit is that borrowers with defaulted loans who initiate a call can request participation in the program, submit all documentation and receive the payment waiver benefit for the monthly payments through December 2020.

Borrowers who were already in the rehabilitation program and the few who have taken the initiative to call and submitted their documentation have been receiving credit for payments as if they were made as early as March 13, 2020.  Millions of these loans currently not in the program. These loans are being serviced by collection agencies who are prohibited from outbound calling to offer this voluntary program. 

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Rehabilitating a defaulted loan may have several benefits including a possible increase in an individual’s credit score, eligibility for additional student aid, no longer having income tax refunds offset to pay a defaulted loan and removing the remaining collection costs of 17.92% at the time of rehabilitation. When a loan defaults, ED adds 17.92% collection costs to the balance and initiates the process to certify the loan for the Treasury Offset Program. Income tax refunds can then be offset and applied to the balance of their account. Any tax return submitted after the rehabilitation is successfully completed and the loan is moved back to a current status would not be eligible for offset on the rehabilitated debt.

Forbes reports the average student loan debt for the 2018 graduating class is $29,200. Adding collection costs on this amount of 17.92% is $5,232.64.(1)  Depending upon the current balance at the time of rehabilitation, the waiver of collection costs may be significant and is reason alone to complete the rehabilitation program.

While much has been published about the CARES Act benefits, to our knowledge there has been no specific article addressing how these millions of borrowers can simply call and request participation in the rehabilitation program.  It should be noted that calling a collection agency will not result in any demands for money, they are restricted to addressing questions and facilitating the process to rehabilitate defaulted loans.  Additionally, not all loans are rehabilitation eligible as this program can only be used one time. If a borrower rehabilitated a loan previously, that loan may not be rehabilitated a second time.  Any questions about eligibility can be answered if a borrower simply inquires.

Time is of the essence to take advantage of these benefits. This web page https://studentaid.gov/manage-loans/default/collections lists all the contact information for the collection agencies or you may telephone ED’s Default Resolution Group at 1-800-621-3115.

1 https://www.forbes.com/sites/zackfriedman/2020/02/03/student-loan-debt-statistics/#17dcd04c281f