Does rehabbing a student loan require a fee?
Beware of collectors asking for upfront costs to start a repayment plan
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
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Dear Opening Credits,
I read your piece
about "reasonable" payments for rehabbing a defaulted student loan. I
was wondering if the collection agency has the right to charge an upfront fee
such as 5 percent to 15 percent in order to secure the rehabilitation
agreement. In my case, they want either $784 or $2,354 upfront in order to make
a payment plan. They know I do not have any money at the moment and therefore I
am stuck. Any help is appreciated. Thank you. -- Dan
It's clear from your
letter that the defaulted student loan you are trying to rehabilitate is
federally guaranteed. If it's were private, the "reasonable and affordable"
repayment plan wouldn't even be an option.
There are two types of federal student
loans, and I don't know which you have. For you to get further assistance, you'll need to find out which it is. Federal Family Education Loans (FFELs) are issued
by private lenders but guaranteed by private nonprofit agencies that work on
behalf of the U.S. Department of Education, and the U.S. Department of
Education issues Direct Loans. If you have a FFEL, contact the loan's original
guarantee agency, and if you have a Direct Loan, contact the Education
Before you make a bunch
of phone calls, it's a good idea to know how you are protected by law against
overeager collectors. The Fair Debt Collection Practices Act outlines how a collection agency must behave
when trying to get you to pay.
You do have a right to
make good on your bad loans by using the reasonable and affordable repayment plan payment process, but you are also dealing with a collection
agency. Some of these companies are unfamiliar with the plan, and a few even
choose to deliberately mislead the debtor about what they are entitled to. This
is why it's so important to know the facts when it comes to putting a federal
student loan back on track.
Defaulted student loans
can be a bear to deal with, so it's vital to go by the book. Unfortunately, the
book isn't always so easy to read or understand -- for laypeople, it's full of
all sorts of gobbledygook. To gain clarity, I spoke with the professionals over
at American Student Assistance (ASA) a nonprofit organization dedicated to helping people with
student loan problems regarding your situation. Here's what they assured me:
First, the collection agency cannot charge a lump sum fee of
any amount for you to begin the rehabilitation program. That would violate
federal regulations. What they can do, however, is ask you to pay the loan off
or come up with a down payment to lower the outstanding balance and reduce the
monthly payment amount. You don't have to comply, but they can ask.
The definition of rehabilitation is
as follows. Note there is no mention or room in the language allowing them to
demand a fee. A loan is considered to be rehabilitated after:
- The borrower has made (and the collector
has received) nine of the 10 payments required under a monthly repayment
Each of the payments must be made voluntarily, in the full amount
required, and received within 20 days of the due date
for the payment.
- All nine payments are received within a
10-month period that begins with the month in which the first required due date
falls and ends with the ninth consecutive calendar month following that month.
- The loan has been sold to an eligible lender.
rehabilitated the loan, you are no longer in default. Then, you'll be back on
the standard 10-year payment plan. And rather than being stuck, you'll be free.
Well, free to pay your loans as you should: on time and in full.
See related: Can I go back to college if student loans are in default?, Student loans in default: What are your options?
Erica Sandberg is a nationally renowned personal finance authority. She’s host of several financial web shows, and a frequent guest for media outlets such as Fox, Forbes, Nightly Business Report and NPR. Erica previously was affiliated with Consumer Credit Counseling Service and was KRON-TV’s on-air credit expert. Her book, "Expecting Money: The Essential Financial Plan for New and Growing Families," was published in 2008 by Kaplan Press.
Send your question to Erica.
Published: June 27, 2012
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