Coronavirus Response: Defaulted Student Loan Borrowers Have New Rehabilitation Options Under the CARES Act

Following the enactment of President Trump’s executive order on August 21, 2020, the United States Department of Education has outlined the rehabilitation benefits for those who had previously defaulted on student loans issued by the federal government.  The Department of Education has essentially extended the benefits offered by the CARES Act through December 31, 2020.

For more details, visit the Department of Education’s dedicated coronavirus webpage.

Borrowers can take advantage of the popular Student Loan Rehabilitation program to move their defaulted loans back into active status by filling out the necessary documents and successfully completing nine payments in a ten-month timespan. Of benefit to borrowers, payments now do not have to be made until January 2021, but credit will still be received as if payments were still made each month through the end of the year.  For example, a federal loan borrower who has just completed the necessary documentation will be credited for an initial payment in September 2020 with a set rehabilitation date in May of 2021. Credit for payments will be received for the last four months of this year (September-December) with payments to be deducted between January and May of 2021. Beginning in September, defaulted borrowers only need to make five total payments after receiving the credited payment benefits of the CARES Act between September and December.

It’s not widely known, but borrowers who have previously defaulted on federal student loans can call the Department of Education and request to participate in the program. After completing the required documentation, borrowers will receive payment credits for monthly loan payments until December of 2020.

Those borrowers who were in active rehabilitation status at the beginning of this year and those who took the initiative to contact lenders and submit rehabilitation documentation started to receive payment credits under the CARES Act from March 13, 2020. However, millions of defaulted loans are not currently enrolled in the program as they are serviced by collection agencies who cannot call borrowers to offer the benefits of rehabilitation.

Borrowers can enjoy many benefits by having a defaulted loan move back into active status. For example, they may see a boost in their credit score and be eligible for additional student loan funding again. They will also no longer see their income tax refunds be used to pay for defaulted loans, and the 17.92% collection fees will be removed once loans are rehabilitated. It’s not commonly known, but once a loan defaults, the Department of Education adds collection fees of 17.92% to the defaulted loan balance and starts a process to have the loan certified as part of the Treasury Offset Program. Once a loan is certified, any refunds that are received after filing federal income taxes will be offset and credited to loan accounts instead of issued back to the individual. Once defaulted loans are rehabilitated, they are moved back into active status and will no longer be offset.

According to Forbes, the 2018 graduating class holds an average student loan debt of around $29,000. If charged the 17.92% collection fee, borrowers would be paying an additional $5,232.641. Collection fees may be significant, especially if defaulted balances are high. Getting rid of these costs makes completing the loan rehabilitation program incredibly worthwhile to borrowers.

While there’s a lot of beneficial information out there about the CARES Act, we have not seen many articles that detail how the millions of defaulted federal loan borrowers can easily participate in the loan rehabilitation program. We should note that contacting a collection agency about rehabilitation should not be a painful process. They are restricted from demanding money when a borrower calls to simply ask about the rehabilitation process for defaulted loans. Know that the program can only be taken advantage of once, so not all defaulted loans may be eligible for participation. If a loan was already rehabilitated, that same loan cannot be rehabilitated again. Lenders should be able to answer any questions regarding program eligibility.

It’s best to take advantage of these CARES Act benefits sooner rather than later. For information on how to reach one of the various collections agencies, visit the Department of Education’s collections webpage. Otherwise, the Default Resolution Group at the Department of Education can be reached at 800-621-3115.

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Coronavirus Response: Student Loan Borrowers Rehabilitation Options Under the CARES Act

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