Anyone who borrows—whether for a flat screen TV or a college education—has a moral obligation to pay all debts in full. And taxpayers naturally want all who took out federal student or parent loans to pay back every penny they owe. The government enforces the sanctity of student debt obligations with comparatively draconian laws. Unlike most other loans, federal student loans have no statute of limitations, are extremely difficult to discharge in bankruptcy, and can be collected even from debtors’ Social Security payments after they retire.
So what is a recent graduate who can’t find a good job in this lousy economy supposed to do when big student loan bills come due? Besides following these 11 steps to getting relief, debtors who have fallen behind on their federal student loans can learn what to expect from a collections manual that was temporarily posted in a public section of the Department of Education’s website.
The manual, a 292-page document dated September 2009, reveals opportunities for relief that some debtors may not have known about. For example, collectors can waive all collection fees and reduce defaulted borrowers’ total debt by up to 10 percent if the borrower makes a good faith agreement to repay the loan.
The manual was removed from the department's public website, but is posted on the Student Lending Analytics blog, run by Tim Ranzetta, whose company analyzes lenders for colleges.
The manual tells private collection agencies (PCAs) hired by the Education Department (ED) to collect on defaulted education loans how to handle many of the most common requests by borrowers, including:
1. Negotiating a smaller debt: The manual allows collectors to agree to one of three "standard compromises" to settle a federal student loan debt:
• Waiver of Collection Costs.
• Principal and half interest
• 90% principal and interest
Anything less than that requires borrowers to provide lots of documentation and to receive approval from the Department of Education.
Deanne Loonin, director of the Student Loan Borrower Assistance Project for the National Consumer Law Center, says that while collectors have the option of agreeing to such settlements, they have financial incentives for collecting more, so rarely agree to big discounts. Borrowers who can pay the entire debt off in a lump sum have had the most success in getting discounts, she says.
2. Stopping collectors from contacting you: Collectors are allowed only one final chance to contact borrowers who request in writing that collectors "cease all collection activity." Borrowers must word their requests carefully. "A request to discontinue phone calls to the employer, or a request to discontinue phone calls to the home telephone number is not considered a request to cease collection activities," the manual notes. In addition, while the phone calls may cease, the collection efforts won’t. The collector can still attempt to collect the loan, typically by garnishing the borrower’s wages or filing suit.
3. Rehabilitating a defaulted loan and your credit: Borrowers can get out of default and improve their credit if they make nine "reasonable and affordable" payments within a 10-month period. There's often dispute over what is "reasonable and affordable." Each kind of loan has different rules. The minimum monthly payment is usually at least $50, or a small fraction (generally less than 1.3 percent), of the total debt. The manual gives this example of collectors' incentives: "If the borrower owes $10,000 at the time of rehabilitation, his monthly payments must have been at least $114 in order to be automatically considered "reasonable and affordable" and for the PCA to earn a commission."
An interesting note:, the manual warns collectors of a glitch. The government's Debt Management and Collections System (DMCS) "currently calculates projected collection costs incorrectly. The system calculates collection costs on any existing fee balances in addition to principle and interest. However, ED requires PCAs to calculate projected collection costs based only on outstanding principal and interest."
Justin Hamilton, a spokesman for the Department of Education, said that section describes a computer program problem that was discovered in 2004, and has since been addressed by, for example, telling PCAs of the glitch and telling them to calculate fees correctly. In an E-mailed statement, he said: "While there have been problems with the way collection costs were calculated in years past, the department has a system in place to avoid overcharges. If you have defaulted on your student loan and have a question about how much you owe, contact Federal Student Aid at 1-800-4-FED-AID."
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