A Complete Course on Student Loan Rehabilitation
You can be forgiven for hoping very much that the Biden Administration decides to “cancel” student debt, or at least some of it. While the policy wonks argue and the economists debate, nearly 45 million Americans carry some college student debt – nearly 1 in 4 of us!
You don’t have to have an economics degree or your own talk show to know that that’s kind of a lot. Most of us started off with the best intentions, figuring that paying off student loans would be relatively easy once we graduated and started our highly educated careers. Then, well… it turned out that things don’t always go as smoothly as we’d hoped. Student debt comes due, interest piles up, and before we know it, things are out of control. It should help a little that you’re far from alone in this – but probably only a little.
As of this writing, the great debate is between $10,000 in student loan debt being wiped out or $50,000 in student loan debt being wiped out. A secondary debate involves the method – will President Biden issue an executive order of the sort becoming increasingly common in recent decades, or will he wait for Congress to pass legislation dealing with the problem (since that’s kind of their job and everything)?
One thing is for certain – many, many different organizations and other pretty smart people think that some form of student debt relief is a very good idea right about now.
More than 325 organizations and nonprofits, including the NAACP, the American Psychological Association and the National Consumer Law Center, are also calling on Biden to cancel student debt through executive action. Close to 1 million people have signed a Change.org petitio.
[A]dvocates point out that it’s low-income borrowers, women and people of color struggling most with student loans -- a pattern the pandemic has only exacerbated.
What Is Student Loan Rehabilitation?
Student loan rehabilitation is a system which allows you to get out of default on your student loan. It only applies to federal student loans and you can only do it once. It doesn’t eliminate the debt – it’s not bankruptcy or anything – but it does allow you to more or less “reboot” and get back on top of what you owe.
How does it Work?
You contact the name at the top of your college student debt paperwork, or whoever’s billed you for them most recently. If you’ve been hiding in the woods and avoiding calls, mail, or human interaction out of the overwhelming shame of it all, find a public library in the closest settlement and log in to your studentaid.gov account to find out who holds your loan.
Tell them you’re interested in student loan rehabilitation. They’ll offer you a monthly repayment amount usually based on 15% of your current income, minus some figuring and accommodations and math and stuff. You have some negotiating room here, so if you know you can’t pay that amount each month, politely explain why and offer what you believe you can pay. Eventually, or so we hope, you’ll reach an agreement.
Student loan rehabilitation is old school. There’s paperwork to be signed which usually has to be on actual paper. The reason this matter is that until that paperwork is signed, returned, and approved, you’re not officially “in rehabilitation.” You can still make payments during that window, but they won’t count as part of your agreement and you’ll still be expected to make your monthly contributions as arranged.
Get Advice on How to Manage Debt Better. Debtry Can Help You.
How Long Does Student Loan Rehabilitation Last?
It’s typically a 10-month process. During those 10 months, you must make your payments on time, every time, and only the voluntary payments count. If it’s around tax season, for example, and your refund is grabbed by the powers-that-be to apply to your outrageously behind student debt, that’s a tough break but you still have keep making your student loan rehabilitation payments. If your parents surprise you and tell you they paid a nice chunk of your student loans in lieu of getting you that Borderlands 3: Game of the Year Edition like you actually wanted, you should still thank them – but it won’t change what you own on your rehabilitation.
But here’s the thing – during student loan rehabilitation, all those nasty collection calls and letters stop. They have to. If you’re having wages garnished to pay student loan debt, that goes away halfway through your loan rehabilitation period. At the end of the 10 months, you may still owe money on your student loans, but you’re no longer in default. The time you were behind on your payments no longer impacts your credit score. You’re once again qualified to seek creative repayment options, income-driven repayment, deferment, or other restructuring.
In some ways, student loan rehabilitation is like refinancing a loan on your home. The balance doesn’t go away, but you’re back in a position to maybe make it a bit more manageable. Plus, you’re not on the naughty list of collectors and lenders anymore. That’s never a happy place to be.
Positives and Negatives of a Rehabilitation
Before entering into a rehabilitation, it’s important to understand both the positives and the negatives of rehabilitating your student loans. The negatives only exist because of the option to consolidate rather than entering into a rehabilitation. If consolidation is not an option for you, then the rehabilitation should always be considered as the best option for getting out of default.
Let’s start with the potential pros of rehabilitating your loan (and yourself). At the end of 10 months…
You’d be eligible for student loans again.
The default is removed from your credit report (late payments may still show up but won’t impact your credit score in the same way).
Your loan is eligible for forbearance or deferment.
No more scary collection calls and nasty letters.
You’ll feel better.
On the other hand, it’s worth keeping in mind…
You can only attempt student loan rehabilitation once (like, in forever and ever).
10 months can be a long time. If you can’t keep up with your payments, the period might restart or the entire effort end up voided.
Rehabilitation won’t immediately impact ongoing garnishments from your wages, tax returns, etc. That could mean some rough months as you try to manage both at the same time.
Do I Have Other Options?
It depends. You might consider a debt consolidation loan of some sort, from your local bank or credit union or from one of the reputable online lenders who specialize in such things. This can be an attractive option if student loans aren’t your only problem. If you have multiple debts which pile up each month, making it hard to even keep track of them all, let alone pay them on time, debt consolidation can allow you to pay off all of them and replace them with one more manageable monthly payment – maybe even at a better average interest rate.
What Debt Consolidation Do?
Debt consolidation doesn’t make the debt go away, but it can dramatically lower your monthly payments, reduce the interest you’re paying, and eliminate all those late fees and penalties for not being able to pay everything each month. Consolidation can dramatically improve your credit score as well, assuming you make your new payment on time each month and don’t run up new debt while still paying down the old.
Consolidation isn’t always the answer, however, especially with student loans. Paying off your student loans with a personal loan eliminates options like deferred payments or debt forgiveness based on where you work or what profession you choose. And, even if President Biden does push through $10,000 or $50,000 student loan debt forgiveness, it’s unlikely to be retractive. You can explain all you like about how what you’re currently paying the bank is actually a student loan plus a few credit cards and an unexpected kitchen repair, but my bet is you’ll be out of luck.
Paying Off Student Loans Either Way
Whatever happens with the current proposals, chances are you or someone you know will still be juggling some student debt – now or in the future. Let’s revisit a few basic guidelines for responsibly managing student debt, just in case. And here’s a little tip from the pros: many of these guidelines apply to pretty much any sort of debt you may incur, now or in the future. Good habits are good habits pretty much across the financial board.
First, read the details before you sign. Student loans may involve the least-read paperwork in history, right up there with user agreements for every piece of software you’ve ever downloaded. We’re often young, or the parents of kids about to go away to school. We’re excited, and worried, and thrilled just to have been accepted, and not sure what we’ll need or what costs we haven’t considered and do I need to bring my own mattress and oh my little baby is growing up so fast! Finding out we qualify for other loans throughout our lives rarely brings the sort of joy and relief it does when trying to figure out how to pay for college.
All the more reason, then, to pay attention to the details. When does repayment actually start? How will the interest be computed, and how often could it change? What are the exact terms of repayment and of potential waivers? Ask questions, make notes, and don’t be afraid to hold off on anything that doesn’t sound right. “This is just standard stuff” is something used car dealers used to say or something your ex’s lawyer uses to try to slip something by you. Maybe it is – but take a little extra time to find out.
Second, don’t be afraid to call the lender and ask questions about repayment. Make notes during each call or ask for information in writing. The more involved you are in the specifics, the better. Yes, it’s a pain – but come on, you survived that statistics class with that one professor and you made it a whole year with the worst dorm mate in the state. You can handle some small print.
Third, and this is a biggie, don’t underestimate the importance of making payments on time if at all possible. Student loans can impact your credit score and credit history just like any other loan, and aren’t as easy to negotiate away or dispute as some other types of debt. They’re not generally covered even by bankruptcy, and unpaid student loans can impact your ability to get the job you want, buy the home you want, or get reasonable rates on vehicle financing or insurance.
You don’t have to think they’re fair or fun or anything else for them to matter a great deal. For better or worse, student loans are a thing, so we’ll just have to do our best to deal with them. I suppose that’s why we’re here right now talking about student loan rehabilitation.
Managing Your Student Loan Debt (Along With Everything Else)
One thing you’ve probably noticed about all the stories and reports over student debt you see everywhere these days is that when they’re talking about student debt, they talk about it like it’s the only thing going on in the lives of the folks they profile. It’s always like, “This is Dan, and he has student debt. He wakes up in the morning and has student debt, has some coffee with his student debt, then spends the day having student debt until he finally falls asleep, exhausted from student debting all day.”
Sure, it probably feels like that sometimes, but I’m gonna bet Dan has at least a few other things going on in his financial world. Let’s assume he’s working, at least part-time, and that he has a checking account and savings account as well. If he’s a normal American, he probably has a few credit cards. He almost certainly has several types of insurance. He could be in denial about what he’ll need for retirement, or maybe he’s already saving for a home. If he’s a guy, he’s more likely than his fiancé (let’s call her Monique) to pretend he knows way more about home values than he actually does. He also thinks for some reason he could have negotiated a better deal for her on that sleek little car she drives.
So yes, student loans matter quite a bit to Dan – but they’re not the only thing going on in his world. Why pretend that he can somehow deal with student loans apart from his grocery bill, insurance premiums, tax refunds, or car payments? Money comes from a variety of places and goes to many more. It can be used in many ways for many things. But it’s all still money – whether it’s in your wallet, your checking account, your state retirement fund, your stocks, or those savings bonds you keep meaning to cash in. The $10 you spend on lunch counts the same as the $10 you save by canceling that streaming service you never watch. Lose $53 because you threw it out the window or lose $53 because you forgot to make a payment and the card company hit you with serious fees and interest – it hurts pretty much the same.
Why Unified Finance?
That’s why at Goalry we talk so much about unified finance. Your money is your money, wherever it’s going and whatever you’re using it to do. Saving money on your mortgage absolutely impacts how much you can invest towards retirement. Understanding how to manage student loan rehabilitation absolutely affects your credit score when you’re applying to finance a car. Properly assessing the value of a home you’re considering making an offer on can easily change how quickly you’re able to pay off credit card debt, which in turn shapes the terms you’re likely to be offered on that loan to pay for your daughter’s wedding.
It’s all connected in your life – why shouldn’t it be all connected as you’re making decisions or managing your money online?
Normally this is where I’d point you to the many parts of the Goalry family – Loanry, Budgetry, Accury, Taxry, and the rest. You should absolutely check each one out if you haven’t already. But instead, I have to tell you how giddy everyone’s been around here lately. Honestly, it’s been a bit weird. At first I thought it was the new coffee maker and the sugar buzz of Donut Fridays, but then I found out the real story.
Turns out it’s coming. You know – the thing. The one we’ve all been anticipating for months? Come on, I know you’ve caught all the hints we’ve been dropping! Finally, you’ll have it all at your fingertips, with a few swipes or clicks, all of your personal or small business—
You know what? I just remembered that TODAY is Donut Friday. I gotta get down to the break room before Andres takes the last jelly-filled. Guess you’ll have to check back next week to hear more about what’s coming and what it can do.
Personally, I can’t wait.