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New Rules for Debt Collectors: How They Could Affect Your Student Loan

Dec 17, 2013 Jennifer Williamson, Distance Columnist | 0 Comments

If you’re struggling to repay your student loan debt, you’re not alone. Student loan debt is notoriously difficult to discharge in bankruptcy, and it can also be a struggle for students to get out of default. In addition, debt collectors sometimes take advantage of student loan borrowers—and make it even more difficult for them to recover financially.

These debt collection agencies operate on commission, and there have been recent complaints that their practices have gone against federal law—leaving borrowers suffering as a result. To combat egregious practices by debt collectors, the Department of Education has recently introduced new rules designed to reduce their freedom to make borrowers’ financial lives more difficult. These rules are only applicable to federal student loans—not private loans.

If your loan is in default, you can rehabilitate it by making nine on-time payments in relatively low amounts that the Department of Education calls “reasonable and affordable.” Many borrowers must negotiate loan repayment through private debt collectors who work on the government’s behalf.

In the past, some of these private debt collectors have unscrupulously set rehabilitation payment amounts higher than they need to be—for their own benefit. Under the new rules, the Department of Education will require debt collectors to offer repayment options with amounts similar to those offered under an income-based repayment program administered by the federal government. These payments generally are capped at 15% of a borrower’s monthly income rate.

If you turn down the repayment offer based on an income-based rate, you can be offered a different repayment option—one that most likely will turn out to be higher.

Most students don’t realize that there are actually no minimum monthly payment rates required to rehabilitate a loan in default under federal student aid law. Technically, you can repay at a lower rate than the rate suggested—as long as you make your payments on time. In the past, debt collectors would sometimes insist on minimum payments despite this. The new rules forbid collectors to demand a minimum payment despite federal law.

In addition, students and graduates who have had their loans in default for at least nine months can ask for forbearance both orally and in writing. Under forbearance, you do not have to pay your loan on a monthly basis—although interest will continue to add up during this time. The downside of forbearance is that you will be further in debt after the period is up; however, it can give some cash-strapped borrowers breathing room to get into a better place financially to start repaying the loan.

In the past, borrowers were only allowed to request forbearance in writing. However, the rules only allow oral requests for forbearance periods of up to 120 days—and require that the debt collector provide information in writing about the forbearance terms and how to end it early. This is to prevent debt collectors from being able to pressure borrowers into a forbearance they might not want or that might not be appropriate for them.

These rules are set to go into effect on July 1, 2014. However, schools that offer federal loans are allowed to put some into effect sooner if they choose to. The federal government will randomly monitor its debt collection agencies to make sure they comply with the new rules; they are also considering changing the way these agencies are paid in order to de-incentivize abusive practices.

Repaying student loans from a traditional or accredited online college is rarely easy—especially for students who face unemployment, health problems, and other severe financial difficulties. Hopefully, with these new laws, debt collectors will no longer be able to provide borrowers in default with misleading information in order to get them to pay back more than they can afford.


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