• Introduction
• Federal Direct Consolidation Loan
• Repayment Information Tables
• Renewal of Eligibility
• Discharges
• Deferments
• Forbearance

Introduction

Congress made a number of changes in the laws regarding student loans since l992, including adding new ways for debtors to get relief from student loans. These informational materials will discuss these and other options for taking care of a defaulted student loan. These materials do not review every way that you might be able to take care of a defaulted student loan. Some of this information is complex. If you feel you need more information, call Northwest Justice Project or a lawyer.

We will address three things you may do if you have a defaulted student loan:

1. You can try to renew or consolidate the loan into a new loan;

2. You can try to discharge it; or

3. You can try to temporarily stop making payments.

The best option, if available, is to discharge the student loan because you will no longer have an obligation to pay it. In addition to paying a loan off, it can be discharged if:

• The borrower was unable to complete the educational program due to the school's closure;

• The school falsely certified the borrower was able to benefit from its program;

• The school failed to pay the borrower a refund it owed him or her;

• The borrower dies or is permanently and totally disabled; or

• Bankruptcy law applies.

If you are unable to discharge a loan, you can renew or consolidate your loan in many ways. We will be addressing two:

• Federal Direct Consolidation Loan

• Renewal of Eligibility

Finally, if you cannot currently afford to make payments on the loan, you can be temporarily excused from making payments. There are two ways to do this:

• Deferment

• Forbearance

It is often very important to take care of a student loan default. As you may already know, while you have a loan in default you are ineligible for other student loans and grants that would help you get the training or education you need to make a livable wage. Further, a default damages your credit rating, and can lead to interception of your earned income tax credit, wage garnishment, aggressive collection efforts, and assessment of high collection fees.

You should review all the options carefully to decide which is the best for you in your situation. We will not be addressing payment in full, about which there is little to say other than it would lead to complete discharge. Unfortunately, many of the options are hard to qualify for, so they may not be open to you. Many people will find that the two best methods available to them are the Federal Direct Consolidation Loan and Renewal of Eligibility. Both of these allow you to avoid default through payment plans tied to income, with the possibility of zero or next-to-zero payment plans if your income is low enough. Another option open to some is bankruptcy, although it is no longer easy to discharge a student loan this way. Bankruptcy has disadvantages, so you may not want to pursue it unless you have a considerable amount of debt and are working and/or have a significant number of assets. You should request the informational materials on bankruptcy if you are interested in this option.

Keep in mind that some of the types of relief are relatively new, and collection agencies may not know about them or understand them. Be prepared to insist that your rights be respected.

Federal Direct Consolidation Loan

The Federal Direct Student Loan (FDSL) Consolidation program is designed for those who cannot afford to repay their existing student loans. Borrowers make monthly payments based on yearly family incomes. Borrowers with yearly family incomes of less than $900 above the poverty line need not make payment on an FDSC loan. See the tables at the end of this section for more information.

Once you get the loan, the old loans disappear. You will be eligible for new loans, grants, and deferments. You will no longer be listed as in default on credit records, and will not be subject to tax intercepts, garnishments, or other collection efforts.

There is no charge to apply for a loan. You can get a loan application and a fact sheet by calling 1-800-557-7392 or TTY (800) 557-7395. You may also download the forms from their web site at http://loanconsolidation.ed.gov/. You will need to fill out informa-tion regarding your old loan. You will need to know the name and address of the guarantor, the type of loan, the account number and the current balance. If your loan is held by the Department of Education, you may call 1-800-621-3115 to get current information off a computer. If your loan is held by a guaranty agency, you will need to call it directly.

Can I consolidate a defaulted loan?

Yes. If your loan is in default, you must either make three reasonable and affordable payments based on your total financial circumstances (sometimes set as low as $5.00 per month), or agree to accept an Income Contingent Repayment Plan (ICRP) and consent to the IRS disclosing to the Department of Education certain tax return information for the purposes of calculating a monthly repayment amount.

A borrower may even be able to consolidate a defaulted loan that has been reduced to judgment. However, the borrower must obtain the approval of the Secretary of Education. The Secretary is currently giving approval only when the judgment holder agrees to the purchase and the Secretary determines that the consolidation is in the federal fiscal interest.

What is a Federal Family Education Loan and what do I need to know about it?

You cannot obtain a Direct Consolidation Loan unless you certify that you either could not obtain a Federal Family Education Loan (FFEL) or could not get one with a repayment plan satisfactory to you. You will have to certify to this just to obtain an application form over the phone. It is not necessary for you to apply for an FFEL loan. In fact, an application could delay or even prevent you from getting a Direct Consolidation loan, since Direct Consolidation applicants must certify that no other application to consolidate the borrower's loans are pending with any other lender. You need only certify that you cannot get an FFEL loan with income sensitive repayment plan (ISRP) terms that are acceptable to you. You will need to call lending institutions to get information and ask if they offer FFEL loans, and if so, what ISRP terms they offer, compare these to the Direct Loan Consolidation terms, and then decide which type of loan is better for you. Most borrowers will not be able to find an FFEL loan with as favorable terms as the Direct Loan terms. FFELs require, at a minimum, payments that equal all interest as it accrues, while Direct Loans can go as low as zero payment amounts.

The Direct Consolidation Loan has many advantages over the FFEL. First, in order to qualify for an FFEL a borrower must make three payments. In contrast, a borrower can get consolidation immediately, if s/he agrees to an ICRP and gives IRS permission to share information with the Department of Education (ED). Second, the Direct Consolidation Loan offers lower payments than a FFEL ISRP. Third, those with Direct Consolidation Loans may be in a better position than those with FFELs when seeking a deferment. Lastly, borrowers will often find that a Direct Loan will offer somewhat lower interest rates over the life of the loan than does a FFEL.

What happens to the loan obligation if I make minimal payments on a Federal Direct Consolidation Loan?

Some borrowers may be making no or very low payments that do not cover accrued interest. The amount due is increased to include the unpaid interest, and after interest is charged on the accrued interest, the loan balance can increase significantly. Fortunately, the Direct Consolidation Loan program has some positive features that offset the negative effects of no or minimal payments. First, borrowers can seek loan deferments during which period the United States pays accrued interest. Deferments are discussed later in these materials. Second, a cap is put on interest to keep it under control. Third, after twenty-five years of payments (even if payments were zero over the entire period) the loan is forgiven. However, periods of deferment or forbearance, during which a borrower was excused from making payments, are not counted. Note that when the loan is forgiven, the amount of the loan has to be counted as income on your tax return. However, this does not happen for twenty-five years.

Are there disadvantages to applying for a Federal Direct Consolidation Loan?

There are a few possible disadvantages to getting a Federal Direct Consolidation loan. You may lose some defenses to the loan through consolidation. If you believe you may be going into court to fight against a loan, or are considering bankruptcy, you should consult a lawyer before applying for consolidation.

Another disadvantage is that while you cure a default by consolidating the loan, your credit report will continue to show that at one point you were in default. If you rehabilitate a loan instead, any reference to default is removed. However, it is much more difficult to rehabilitate than to consolidate. You must make twelve consecutive reasonable and affordable payments to the party holding the loan, and then a lender would have to purchase the loan.

You should also be aware that when a borrower in default consolidates a loan 18.5% is currently added to the amount due for collection fees. This may be preferable to existing collection fees that may be as high as 43%. However, students at least have a hope of getting collection fees waived. After consolidation, the fees became part of the loan principal.

Finally, borrowers may have more opportunity to compromise the amount owed on an old loan than on a consolidation loan. That means that you negotiate repayment of a lower amount than the total owed. However, this usually requires a lump sum payment of a significant portion of the loan, something that most low-income people cannot manage.

Repayment Plan Tables

FEDERAL DIRECT CONSOLIDATION LOANS INCOME CONTINGENT REPAYMENT INFORMATION

Income	$2,500	$5,000	$7,500	$10,000
Less than $10,725	$0	$0	$0	$0
$12,500	$26	$41	$41	$41
$15,500	$26	$53	$66	$73
$17,500	$26	$53	$77	$85
$20,000	$26	$53	$79	$97

Renewal of Eligibility

Congress has now given students in default another opportunity to renew eligibility for new loans and grants. Guaranty agencies and the Department of Education are required to establish programs which allow students in default to renew eligibility for loans and grants upon the student's payment of six consecutive monthly payments in an amount that is "reasonable and affordable based upon the borrower's total financial circumstances." If your circumstances justify it, the payments can be as low as $5.00. However, you will have only one opportunity to renew eligibility. If you become delinquent you will forfeit the right to renew eligibility through a new repayment agreement at a later date. You must make six consecutive, full monthly payments within 15 days of the due dates.

How do I apply for a reasonable and affordable repayment agreement?

1. You need to determine who is servicing the loan. Since this right only applies to loans in default, the entity is almost always a state guaranty agency or a collection agency hired by the Department of Education.

2. Contact the party servicing the loan to seek a reasonable and affordable repayment plan. The regulations do not give any guidance as to what is a reasonable and affordable plan. The loan holder is to consider the borrower and spouse's disposable income in setting the repayment plan. The holder must also consider the borrower and spouse's necessary expenses. You should supply documentation of income, expenses and the amount owed on all student loans.

In the past, guaranty agencies have insisted on a minimum payment for borrowers, such as $50.00. This is no longer permitted. No formula is specified, and the amount must be less than $50.00 if that is what is determined to be reasonable and affordable based on the student's total financial circumstances. However, if the guarantor sets an amount less than $50.00, it must maintain supporting documentation in the student's file.

What if the loan holder is not acting reasonably in setting the repayment plan?

Postal mail:

U.S. Department of Education
FSA Ombudsman
830 First Street, NE
Fourth Floor
Washington, DC 20202-5144

Phone number: 1-877-557-2575

Fax number: 202-275-0549

Are there disadvantages to seeking renewal of eligibility?

There are no real disadvantages to seeking renewal of eligibility. As discussed above, you can also renew eligibility for loans and grants by consolidating a loan in default into either a new FFEL or FDL. You may be able to get a loan out of default through a FDL without making any payments if your income is low enough.

Discharges

Discharges due to school closures or false certification.

It is now possible to get a school loan discharged if you were unable to complete an educational program due to the school's closure, or if the school falsely certified that you were able to benefit from its program. These discharges are available for GSLs, SLS's, Federal Direct Student Loans, and the parents' obligation under PLUS Loans received after January 1, l986. There is no time limit on your eligibility for a discharge. Once you get the discharge, you are no longer obligated to repay the loan or any charges or costs associated with the loan. In addition, you are reimbursed all amounts paid to date on the loan, and are immediately eligible for new loans and grants. The holder should report the discharge to all credit reporting agencies so as to delete all credit history assigned to the loan. That means the reporting agency must delete all reference to the debt ever being delinquent.

You need to apply for a discharge before you raise a defense on your loan in a hearing or court proceeding. If a guaranty agency, in the context of a tax intercept, garnishment, or other administrative proceeding, determines a loan is unenforceable, the Department of Education will not repay the guaranty agency on the discharge claim. This probably means that the guaranty agency will refuse to process the discharge. Since you can get much faster relief by pursuing a discharge, you should attempt that first.

Who should I contact about a discharge?

If a guarantor agency is holding a loan, you should deal with it. If the Department of Education is holding the loan you should deal directly with the Department. If the Department is holding the loan and it is in default, it has probably assigned the loan to a collection agency. You will probably have to deal with that collection agency to obtain a discharge. Be aware that it is unlawful for the agency to tell you that you are obligated to repay a loan even if the school closed while you were enrolled. You should be able to obtain attorney's fees, up to $1000.00 in statutory damages, and actual damages under the Fair Debt Collection Practices Act ifÝa collection agency makes this misrepresentation to you. If this happens to you, you may wish to contact a lawyer.

How do I apply for a discharge?

Your guarantor agency may have forms for you to complete to apply for the discharge. The Department of Education plans to have standardized forms, but has not created them yet. You are required to submit a written request for a discharge with a statement made under penalty of perjury (it need not be notarized) indicating the following:

• You received at least part of the loan after January 1, 1986; and

• Whether you have made a claim relating to the loan with a third party such as a state tuition recovery program or surety for the school, and if so, the amount of any recovery; and

• That you agree to cooperate with the Secretary in any action to recover money relating to the loan from third parties, such as the school owners and its affiliates; and

• You agree to provide, if requested, other related documentation reasonably available to you.

You will also have to attest to other matters specific to the type of discharge you are seeking (either closed school or false certification).

There is no requirement that you reaffirm your debt or waive other rights. If any form given to you by the guaranty agency includes such provisions, you should cross them out and initial your deletions

When will I qualify for a school closure discharge?

You should be able to get a school closure discharge if the school or the branch of the school that you attended closed while you were still enrolled or on an approved leave of absence, or if you withdrew from the school within ninety days of its closure. The ninety-day period may be extended if the Secretary of the Department of Education determines that exceptional circumstances related to the school's closing would justify an extension.

A school's closure date is that date at which it ceases offering all programs, or all programs at a particular branch, not when it stops offering the particular program in which you were enrolled. The Department of Education determines the closure date, which you can find out from the Department's Cumulative List of Closed Schools. You may also call a Washington state agency, the Workforce Training and Education Coordinating Board, at (360) 753-5673. The Department of Education will accept this agency's dates. There have been many complaints of errors about the dates recorded with the Department of Education and the state agency. If you feel that its dates are in error, you should attempt to document the error (for example, by statements made under penalty of perjury by other students or former staff, or by newspaper articles or correspondence from the school) and provide that information to the state agency or your guarantor.

You will also need to specify in your sworn statement to the following points:

• That you did not complete the program because of the school's closing while you were enrolled, or on an approved leave of absence, or you withdrew within 90 days of the school's closure; and

• That you did not complete the program through a teach-out at another school or by transferring credits to another school (presumably this would only apply if you received a tuition credit at the new school because of your attendance at the closed school).

When will I qualify for a false certification discharge?

You should be able to get a false certification discharge if, after July 1, 1987 you were admitted to a school without a high school degree. The Department will find that the school falsified your ability to benefit from the program, unless you did one of the following:

1. You passed an ability to benefit test that was approved by the accrediting agency (or for enrollments after 1991, by the Department of Education) that was administered substantially in accordance with the requirements for use of the test; or

2. You successfully completed a program of developmental or remedial education provided by the school; or

3. You enrolled before July 1, 1991 and received a GED before completing your program of instruction.

Your sworn statement in your application will need to say that you had not graduated from high school before being admitted, and that you do not meet any of the three exceptions discussed above (be sure to address each specifically).

If you withdrew early from the course, your statement must also say that you did not find employment in the occupation for which the training was intended. If you did complete the course, you must state that you made a reasonable attempt but could not find employment in the occupation for which you studied, or that you found such employment only after receiving more training.

Even though you did do one of the above, or you enrolled before July 1, l987, you may still qualify for the false certification discharge if:

• You should have been prevented by a physical or mental condition, age or criminal record from meeting the physical or state requirements for acceptance into the educational program, or from performing the occupation for which the program was designed to prepare you; or

• Your school signed your name to the loan application or promissory note, or to a loan check endorsement or authorization for an electronic funds transfer.

If your school signed your name to a loan check endorsement or authorization for an electronic funds transfer and you did not get the loan proceeds or the proceeds did not go toward charges owed the school, you may qualify for a partial discharge.

If you are seeking discharge based on a forgery by the school, you must also indicate in your statement that the signature(s) on the document(s) was (are) not yours, and you must provide five signature specimens (two of which were signed within one year of the disputed signature). Where the forgery was on a check endorsement or transfer authorization, you must state that you never received the loan proceeds and that those proceeds were never credited to amounts owed to the school for that portion of the program that you completed.

Discharge for unpaid refunds

Under a new federal law, students can discharge student loan liability, for loans obtain after January 1, 1986, in the amount of any refund that the school owed the student but failed to pay the student.

If, for example, you obtained a student loan to attend a sham trade school from which you had to drop out, but from which you did not obtain a refund, you can now deduct that amount of the refund from the amount you owe.

This is a new change and it is not clear how these "unpaid refund discharges" will be handled by the Department of Education. If you have any problem getting a discharge, you may want to consult an attorney.

Discharge due to death or disability (Cancellation)

The borrower's death is a defense to collection actions on GSL, SLS, and Direct Loans, and the parents' deaths discharge PLUS loans. The borrower's permanent and total disability also excuses payment, although for a PLUS loan the disability of only one of two obligated parents does not discharge the debt. The claimed disability cannot have existed at the time of application of the loan, unless the condition has deteriorated.

To apply for cancellation based on a permanent disability, you should contact the holder of your loan for a form. You will need to have a M.D. sign the form, and certify that you have a condition which is permanent and which prevents you from engaging in any employment.

Discharge by bankruptcy

It may be possible to discharge a student loan through either a chapter 7 ("straight") or chapter 13 ("wage earner plan") bankruptcy filing, but it is difficult to do so. We recommend that you consult a bankruptcy attorney. You should expect a challenge to the loan's dischargeability. Guaranty agencies are required to diligently contest dischargeability. Schools making Direct Loans are required to oppose dischargeability if they determine that legal costs are not expected to exceed one-third of the amount owed.

In order to get an educational loan discharged you must show that payment of the debt "will impose an undue hardship on the debtor and the debtor's dependents."

If you are interested in bankruptcy as a way of taking care of a defaulted student loan problem, you should request the general materials on bankruptcy. Keep in mind that if you consolidate or refinance a loan that you will start the seven year period running again.

Deferments

The standards for deferments have now been changed, but changes are only in effect for new loans disbursed after July 1, 1993. If you want to take advantage of the new deferment standards you may consolidate your old loans into new FFEL (Federal Family Education Loans) or FDSL (Federal Direct Student Loan) consolidation program loans. This would also be a way for you to cure a default, which would disqualify you from obtaining a loan deferral. The FDSL program is probably the best option if you are in default and low-income. As discussed above, you do not have to make any payments to get out of default, if you meet certain conditions. Further, you may qualify for low or zero monthly payments.

GSL borrowers are legally entitled in certain situations to defer payments. For most GSL's, when a loan is being deferred, interest obligations do not accrue. This is not the case under forbearance, which is discussed below. Some of the most important grounds for deferral for loans disbursed prior to July 1, 1993 are the following: unemployment (maximum of two year deferment); full-time student at participating school; active duty status in the U.S. Armed Forces; receiving or being scheduled to receive service under a program designed to rehabilitate disabled individuals; temporary total disability; providing nursing or similar services to a spouse who is temporarily totally disabled; parental leave; and mother of pre-school children starting work at no more than one dollar above the minimum wage. There are detailed standards as to when a student is eligible for deferral based on each of these grounds.

The standards for loans disbursed after July 1, 1993 are as follows:

• The maximum unemployment deferment period will increase from two to three years;

• The existing three-year deferments for specified forms of financial hardship (e.g. for temporary total disability, taking care of a disabled dependent, parental leave, and mother with preschool children making slightly more than minimum wage) are replaced by a new three-year deferment category called "economic hardship." If you receive public assistance you automatically qualify. If you do not, the Department will apply a complicated formula to decide if you qualify.

Forbearance

Forbearance means permitting a temporary stopping of payments, allowing extension of time for making payments, or accepting smaller payments. Forbearance is usually awarded at the discretion of the guaranty agency, but an exception is discussed below. Lenders are encouraged to grant forbearance if borrowers are in poor health or other personal problems affect the ability of the borrower to make the scheduled payments. Forbearance would not be as helpful to you as a deferral because interest will continue to build while the loan payments are reduced or postponed. In fact, the size of the outstanding obligation could actually increase during a forbearance period. However, forbearance is available even if the loan is in default. Seeking forbearance would allow you to avoid default during a period in which you could not afford to make payments.

The law regarding forbearance was recently changed to require lenders to grant it when the borrower's debt exceeds twenty percent of gross income, and the borrower submits a written request. The lender shall grant the borrower forbearance of principal and interest for one year and shall renew it for a second and third under certain conditions. Further, the fact that a student was granted forbearance cannot be the cause of an adverse credit report, and no fees can be charged. Unfortunately, the Department of Education is limiting this right to loans held by lenders. It is not available if the loan has been taken over by a guaranty agency or the Department.

This publication provides general information concerning your rights and responsibilities. It is not intended as a substitute for specific legal advice.
This information is current as of the date of its printing, April 1999.