Federal Direct Student Loan in Default. Can I get settlement from Dept. of Ed., or rehabilitate?
I have a (1) Federal Direct Student Loan it went into default in 1986. It has been in default ever since. There have been no payments made to it nor has it been in any type of forebearence or deferrement. The original loan was for around $7000.00 with interest it now stands at about $17,000. I want to get this out of my life. I have been trying to get information on Debt Settlements I understand that they can take a settlement @ 30%, 50% or 90% of the total acrued interest plus priciple. I have also read that they can rehabilitate the loan at PRE-DEFAULT status if I make 9 payments on time. Acrued interest and collections fees waived.
What would be the best course of action for pursueing a SETTLEMENT, should I go to the CA or directly to the Dept. of ED?. Is the Rehabilitation scenario I described above true or not?
—Shawn
Settling federal government backed student loan debts with the collection agency that the loan is placed with makes a surprising amount of sense. The collector and agency owner is often working on a contingency. This would mean getting paid, or paid better, only when resolving loans. This can make the student loan collector your advocate when settling.
Settling Federally Backed Student Loans
What you know and commented about options and amounts that can be written down when settling fed owned student loan debts, rather than rehabbing, is what I know too. With the Federal Loans, the settlement benefit comes from forgiving fees, interest and penalties – not principal forgiveness.
By working directly with the collector for the Department of Education you have someone whose interests are aligned… somewhat. Some variables may be the collector’s experience.
You should be prepared to discuss some personal financial information, and even provide documentation, to the CA representative.
Rehabilitating Federal Student Loans
You have far better options for rehabbing your federal loans than those who have private student loans. Not only do you have the benefit of rehabilitating payments that can have a positive impact on interest and penalty reduction, once a gov backed student loan debt is rehabbed, you can also gain some credit reporting benefits. With a loan in default as long as yours, the credit reporting benefits of loan rehab may not mean much, but I do want to point this out for any future readers.
Once federally owned loan is brought out of default you can then also qualify for income based repayment options and also seek additional government loan products.
Anyone with federal loans in default, or that are unaffordable, will benefit from watching this recent interview I did with Andrew Weber.
Andrew responds to reader questions and concerns in the comments below.
Anyone with questions or concerns about their federal student loans can post in the comments below for feedback. You can also call in for a consult at 800-939-8357, and choose the options for student loans that applies to you.
About Michael BoveeMichael started CRN in 2004 with a mission to provide people in need with detailed debt and credit help and education. Michael has participated as an expert panelist in federal consumer protection rule making, collaborated on state law changes governing debt consolidation, has worked as an expert witness in court matters related to the debt relief industry. He is available to speak with you about your financial struggle and helps people resolve their debt problems daily.
I’ve been trying to get my student loans rehabilitated. The last CA refused to send me anything in writing even though I was paying over $500 per month. I ended up filing a complaint against that company with the FTC and State Attorney’s office for fraudulent business practice and violation of federal law. The DOE has assigned another company to my account. How do I get them to send me something in writing?
I borrowed 11,ooo in the 90’s. I couldn’t repay it when I got my first job out of college, making only 200 a week. The loans were bought and sold over the years and I now “owe” over 170,000. I believed the student loan companies when they told me to consolidate several years ago. Essentially what happened legally is that my signature on the consolidation wiped out the 11,000 original loan amound and made it over 50,000. Now it looks like I originally borrowed 50k, which is not the case. Why should I believe or trust anything these companies tell me? They are sneaky, and my experience has been that they lie and use horrible tactics to try and get you to do what benefits them and their numbers.
I too am willing to pay the original loan amount plus REASONABLE interest. What happens if I sign the “reasonable and affordable” paperwork? Legally, what will that mean? I am “uncollectable” according to the IRS. And right now that is true. But, even if I had a million dollars, I WOULD NOT PAY what they want, I would fight it in court and start a class action lawsuit to get something changed so future borrowers don’t find themselves in my situation.
Please don’t get me wrong, I am taking responsibility and I am not portraying myself as a victim, however, I do feel powerless. I am looking at my part in the situation, and trying to deal with it. I see I am not alone.
Any help or experience is greatly appreciated.
My new wife has old loan that she has ignored for many years. Basically no ability to pay and didn’t know how to handle. Loan is assigned to Progressive Financial. Principal is 60k, Interest 37k and fees and costs 23k in round numbers. She makes about 35k per year and has two children. Seems her best plan is to rehab and then seek an alternative payment plan. Ideally an IBP. The Progressive notice shows that DOE is the current creditor. Any estimate of what the monthly payment would be for 9 months to rehab the loan. Is there a better approach. Thanks for any insight and reference material to help me help her figure this out.
I’m sure I received a letter, but I stopped opening them because I assumed they were all the same, and I really didn’t take garnishment seriously because it hadn’t happened and I assumed it wasn’t going to happen. I know what all of my assumptions makes me look like, but now that I see they aren’t kidding, I need to get my act together as well.
Hope is way better than nothing. I will take what I can get.
Thanks Lynn.
Lynn,
I have been reading through the posts and I like how direct you are and the fact that you will not allow anyone to play the victim. Here is my victimless situation:
I have several loans totaling $110K that I have defaulted on, the original loan amount is $83K but with interest and collection fees – well that is the number now. I made the wrong choice not to pay, defer, consolidate or even care about taking care of these loans. Now I don’t have a choice, my wages are set to be garnished in the very near future (my payroll department is starting the paperwork that they received on Friday). Essentially, with garnishment my monthly payment will be $400.00 and I don’t think that is a bad deal for the loan balance – and I am in the position where I want to start paying these loans, but I don’t know which would be the better option. With my expenses I can really only afford to pay about $250.00 month, I make $45,000yr, and I can pay the $400.00 month (I have no choice), but that would leave me with no extra money and that would mean that absolutely nothing can happen in my life that would require money. I know there are other options, but I don’t think that between consolidation or rehabilitation that my payments would ever equal to $250.00 month. So basically I think my best option is just to continue to allow them to garnish my wages – is that a bad choice?
Thank you for your feedback,
Tera
One final question, what amount of loans would cause them to sue for garnishment if you only get 730 disability a month or to try take your vehicle, an old one that is your only means of getting to a Dr. or ER.
On my question, please post the answer on here. Thank you.
I do have a question that could benefit a lot of people since these things are not clear to most. Is a NDSL Loan a Perkins Loan and is that loan one that once you pay 9 months of payments you can then transfer to the Income Based Payment I am now hearing of. From what I now understand a Stafford Loan can qualify for IBR, but am unsure if a loan that is NDSL can be put under Income Based Repayment Plan. And I have no desire to contact them over the phone and have them claim I made a payment arrangement when all I want to is to know what type of loan I have and how much I owe- no promises on anything from me, because I am disabled and do not have any money to pay for anything. Can not even afford to buy clothes or go to the dentist. So, being on IBR would be my only choice. And I earn only 739 now for disability with ssi so am very concerned if they should try to garnish- all this over two 2500 loans from the 80s. Heaven only knows how much interest those loans had. Wish I had known I was going to become disabled at a young age so I could not have taken those loans. And no most 18 year olds do not read the print. Youth and most young people pay little attention to the fine print. So, can all Stafford loans go under IBR- and is NDSL Loan a Perkins Loan and is it able to go under a IBR- once you pay the monthly payments to bring it from default. Because I am thinking maybe I could borrow a small loan to pay the loans for 9 months from a relative, do not know for sure, but would try if I knew there was a way to put both loans under IBR. If they had processed my disability discharge it would have ended. And if they had ever when I was young told me I qualified for IBR for having no income due to illness I would have done that too and then 25 years the balance would have been forgiven by now.
Thanks Lynn.
These were “Direct Stafford Loans” (the ones from 2006/7) and “Stafford Loans” (from 2005) so from what you indicate the 20%+ fees would be waived on the “Direct” and reduced (max 18.5%) on the others?
I assume that the Direct Stafford are the same as the Direct Ford loans.
We have been working with the offices of one of the school and they have advised us to submit a letter of appeal which we have done; we are in process with the other school also working with their processes. The leverage here (little as it might be) is that the schools are concerned about students being successful – not to discount personal responsibility – but that they will be hurt by having too many such situations.
I appreciate your input and assitance. We are also going to do submit applications to cancel / discharge the loans to the lender. I do not have undue expectations about success here; however, we are going to negotiate all that we can in order to come up with a final # before we make the commitment.
I agree with personal responsibility – and feel that it is also lacking on the lender side and the academic side in terms of assessing risk. My take is that growth of student debt and default to the levels it is today is not solely the fault of the student but is also due to an environment that makes the availability of the money too easy.
Again, many thanks!
By the way – I just had a conversation with DOE and they indicated:
Collection fees are waived upon completion of the 10 month rehabilitation period
Credit record is NOT wiped clean (i.e., DOE wipes their mark but the lender does not). This is a little unclear for me since I believe some of the loans (i.e., direct?) are direct from the DOE and others are through secondary lenders?
Forgiveness after xx years. Once the loan is rehab’d and transferred to another lender then it is back in normal status, payment is re-negotiated and normal forgiveness rules apply (i.e., if it’s not paid off in 25 years it’s forgiven, etc).
They are sending me a package explaining Rehab AND sending me an “Unpaid Refund Discharge” form as regards periods of time / classes that we want to request cancel / discharge of the loan amounts for. 10 – 14 days to receive and then we’ll see.
Also talked to the CA and they are supposed to be sending me some Rehab T’s and C’s based on a letter I faxed to them (only ACT would agree to this – not ECMC). However, they already advised me that it will not say anything about collection fees, etc.
It is insane. Completely insane. Enter into a legal process and no clear T’s and C’s. Maybe it’s because it’s the government running the show?
I’m trying to advise my son regarding about $28K in loan defaults from 2005 forward. Medical extenuating circumstances abound: Drug addiction / Substance abuse including arrest and inhouse rehab, methadone program, under the care of a clinical psychiatrist and psychologist, hospitalization for lung issues, long recovery period, and unemployability. My position is that the lending agencies and the schools did not recognize that he was high risk. I.e., he never should have been lent the money and his Academic Advisors, Teachers and Financial Aid Advisors should have been intervening. $28K and little to nothing in value as a result.
We are working together with the collection agencies (two of them – ECMC and ACT) and are also doing appeals to the two schools for refunds of tuition and fees.
I’m concerned that the collection agencies WILL NOT provide me with clear terms and conditions of the rehabilitation programs (my position is that if he is going to enter into a contract then we need to see the T’s and C’s up front). For instance I can’t find crisp statements concerning whether the collection fees are waived or reduced, what happens if they can’t sell the loan at the end of the 9 month rehab, if they do sell what happens to the payment schedule, is there a “forgiveness” period – i.e., that after 20 or 25 years of payments the loan is forgiven if there is an outstanding balance.
Also I’m considering starting up a negotiation with them for a lump sum settlement if it can help my son get out from under the huge collection fees.
Can you give me your thoughts?
I’ve spent countless hours on the phone with the collectors and they have been very professional and patient and frankly very sympathetic. But they have not been able to advise me crisply and precisely it seems. Maybe I am asking for too much.
Thank you Lynn. That was the same thing I was thinking about the phone calls. When I refused to give them my family members or even friend’s numbers they just called out 2 people that I gave when I applied for the loan.
Actually I would rather pay it all off than to deal with the phone calls. I wouldn’t give them my worst enemy their phone number, it’s just that bad.
I owe the Department of Education was originally $8,000. Now since they have sold it to Conserv Collection Agency it is now $11,000. I am not disputing that because DOE said they will charge interest and all of that. How I chose to pay it all off is to just withdraw from my 401k? I set up a payment plan with Conserv to where they would take out $137.00 a month. It would have been more expensive than that until they asked me if I could start paying sooner. I agreed and now they will take from my account. It is called a rehabilitation program. I don’t want them to take from my account every month so, I just want to pay it off and have it taken out of my check through a 401k loan that will be coming back to me. I know that I will lose money but atleast it will be for something that I owe anyway. My question is, is there any way that I can just wait to settle it and save a little money or just do it the way I was thinking? My 401 company will give me 30 days to decide. I guess in the mean time allow them to take money from my account? I just want the calls to stop. I have changed my number from DOE, the collection agency won’t tell me how they got my number. I guess with my SSN but my phone provider don’t have my SSN, there was no contract to sign….
Sabrina – You already recognize the costs associated with taking a loan out from your 401k. One benefit of taking the loan is that you are paying yourself back with interest (that interest replaces – in a way – what that money taken out would have been doing for your retirement account). There are several reasons to avoid tapping into the 401k like this. One I will point out here is that, should you leave that job, the loan may become payable. Do you have a secure job?
You cannot settle federally backed student loans like you can other unsecured debts (like credit cards), or even how private student loans can sometimes be settled.
Questions:
What are the interest rates on your loans?
Have you ever consolidated them in the past?
How long have you been making your loan rehab payments to Conserv?
What is the reasoning for not wanting the 137.00 payment plan?
Collectors have different ways to access information about you. My questions is why they are calling to try to collect when you are already working with them, and making rehabilitation payments?
It doesn’t show in this letter my interest rates are. They sent me a letter before but I threw it away. I think they verbally told me on the phone but I wasn’t paying attention.
I have never consolidated with them in the past, this is my first consolidation.
Today is the day that they will start taking out payments so, I will start today…every month for 9 months.
I have a steady job, but it is part-time and sometimes we are busy and sometimes not. I’m scared that maybe there is a quarter to where we are slow and they take from my account and I won’t have enough to pay my rent.
Hi Lynn, Thank you for the fast response I am scared since I’ve never been in collection or been threaten before. Should I offer 6500 since I get paid this coming week? Sorry for the question again.
Hi Lynn, I have a few questions maybe you can help. I just received a letter from ECMC saying they are going to garnish my wages in 30 days. I owe total $8854 I have 6000 cash on me from death of family member. Before I call them I wanted to ask if ECMC will negotiate for 6000 to pay off the loan or should I make the monthly payment they are going to set up for me? Sorry I’m asking so much questions my parents use to pay it for me until I joined the Marines so I was clueless about the loan until I got the letter. Please let me know any advice you have.
Hi Paula, thank you for your service first and foremost. I know you posted this a while ago, but I wanted to chime in with my 2 cents. You can negotiate a federal loan settlement with ECMC, although it can be difficult. There are also ways to get out of a federal loan garnishment (the best option being 5 months of Rehabilitation payments) so you may want to look into that if they have already started garnishing wages. Usually settlements with ECMC result in some of the accrued interest being reduced, but occasionally I have seen part of the principal amount forgiven in settlement also.
Hi, Lynn I have questions, I took a loan from wellsfargo (30K) the loan went into default in 2010 I paid in monthly payments last year about 11K to Primary Financial (collection company) the ending balance was around 23K, but they never call me again to set up more payments and I never call them either, I have not received any calls or letters or anything, I live in Texas and I know there is no wage garnishes here, and I know about the Statue of Limitations which in my state is 4 years that would be 2014, how does the SOL works because I talk to the collection company in 2012 and made payments, does that reinstate the SOL automatically, because I read that it doesn’t? If so, if I own about 23K could I get sue? is there a minimum amount to take someone into a civil case? I checked also my credit report and the account’s status is closed and the 30K was written-off as soon as I defaulted in 2010, what does that mean?
It sounds like this is a private loan. SOL issues vary greatly state by state, but usually by making a payment that does “restart the clock’.
The credit report showing $30k written off in 2010 is most likely the balance at the time of the default/charge-off, but due to interest and late fees, that amount can increase after the charge-off date.
Since this is a private student loan, you could probably settle it for less than 50%; but Wells Fargo is one of the least aggressive private student loan lenders, so it might make sense to continue to wait it out and see if they try to do anything. If not, you may be able to wait until it falls off your credit report and/or goes past the SOL in your state.
Wow this forum is awesome. So I have old college loans (since the 80’s) that caught up with me several years ago. ECMC sold my loan to Premier Credit, which has garnished my wages apprx $10k over the last 3 years, and also garnished my tax returns (which I’ve only occasionally filed). Last year I got SOBER, which completely changed my outlook on everything, including my finances. Today, I learned that my wages were no longer being garnished from Premier Credit, and my balance is back with ECMC. Because it is new, it is still in ‘pending’ status, they want me to call them back in 48
hours to discuss the status and remaining balance (apprx $12k). I want and need to deal with this as honestly and with as much clarity as possible, but does anyone have any suggestions on dealing with ECMC? I don’t want an easy way out (I’ve been doing that way too long!), but I would like to know my options. Lynn C seems very knowledgeable about such things. Thank you.
It can be possible to settle federal loans with ECMC that have not been paid in a while, mainly for a reduction in interest accrued; but occasionally for a reduction in principal as well.
Hi all, Thanks for all this good information. So, if I have my wages garnished, after 9 months they will lift the default and I can then negotiate for a settlement amount or apply at that time for this government service program. Is that right? Will I be able to negotiate away the penalties and interest? Who is ECMC? I’ve never heard of that organization nor do I know how to contact them. I know I have paid in $21,000. Thanks again for your help and later.
Apparently ECMC plays a shell game with several collection agents so they are able to dodge you and keep you in default. You will know who they are if you stop your wages from being garnished but they will disappear again. I’m sure if you paid $21k, it won’t likely show up on their records because every nine months they switch collections agent and charge you up to 25% of your loan balance making it a game that you cannot win. Eventually the Department of Education and Department of Justice will catch up with them but not before they destroy peoples lives all because they have been given the authority to but not because it’s right. The laws favor you if you are very poor or very rich but if you are middle class with a job guess what – your kids will not be able to go to school because you will still be paying for yours.
Lynn, working on it .. Like I said they are hard to get a hold of while they are taking your money. I will send you the info when received if you want to be wrong but I’m sure a JD from Canada with a chip on his shoulder is never wrong especially when helping children apply for financial aid. Let me know where I can send the info . Why don’t you put you education to use and help people get out of this situation – does it make you feel better just to ridicule them.
You would want to do 5 months of payments on the Rehabilitation to stop the garnishment. If you do the full 9 payments, that should bring the account current, and some collection agencies also remove the default fees at the end of “Rehab”, but you’d want to check with them first.
Wow–With friends like Lynn C, you sure don’t need any enemies. I have very successfully completed the default program for my granddaughter and am proud of it. And I received very good treatment from the rep, for which I have expressed my sincere appreciation. My granddaughter is NOT getting a free ride, but even if she is, what does Lynn C care? I think these so-called “experts” won’t be satisfied until they rip all your teeth out through your nostrils just in case you might be hiding a gold filling in there somewhere.
However, Lynn is correct in that you MUST complete the rehab program and get out of default before you can negotiate, but if you can get a good knowledgeable rep to explain that process to you, the default can be lifted after 9 months. I forgot to mention that fact in my last post for which I apologize, but contrary to Lynn’s low opinion of me and my efforts, I’ve got a lot more than a clue, not only about student loans, but a whole lot more as well. Until I got involved, my granddaughter and her mother had given up on ever getting the info they needed to get her out of default, so I know what you young people are going through. And by the way, Lynn’s disparaging remarks about me are a bit like being called ugly by a frog. I am not impressed.
Lynn C.: You know you are really quite hostile to all of us trying to come to grips with our situation. I don’t think your attitude is at all helpful. However you are very informed and so, since no one else is responding to my questions except for at this site, I have to say that you’re not quite correct regarding Marion’s situation. I have been told by a Dept. of Ed Ombudsman that I should apply for the civil servant program even though I am in a garnishment action. I would rather pay off the loan now and not be in a 10 year program but I can’t seem to get anyone to talk to me about that proposal. Also I think that by not allowing you to make a payoff it is a de facto pre-payment penalty and I don’t believe my promissory note addressed that type of action. What do you think?
Hi, I think it would be a good idea to stop the garnishment via Rehabilitation payments, and then you can apply for a variety of different payment plans.
Steve Rhode has a great guide on how to stop garnishments here: https://getoutofdebt.org/63335/easiest-way-stop-student-loan-wage-garnishment-loan-rehabilitation
John, I have NOT worked as a collector or am not an expert at anything. However, I have dealt with the same people you are dealing with now. I now have my granddaughter out of default and will be negotiating with the new collection company very soon (they sell these loans to different collection agencies every year). Best advice: 1, Call the current collection company and keep calling until you get someone who will listen to what you are saying, which may take a week or so. 2. Be extremely nice to that rep–there aren’t many of them who give a rip. 3. Go here: https://www.nslds.ed.gov/nslds_SA/SaFinLoginPage.do (your login page) to find out what you really owe to whom and how much interest and fees are tacked on. 4. Get back to the nice rep and find out what your options for repayment are. You can also find these options on the internet 5. Try for the best settlement you can work out and decide on a method of payment which is best for you.
This takes a lot of time and patience which most young people do not have because of other constraints, such as working, eating, sleeping, etc. Most people are not interested in helping you, but one thing to remember. These people get paid for results, so if you can find one who has even a smidgen of humanity, stay with him/her and thank them profusely for whatever information you can glean from them. Keep in touch with that rep but verify–verify–verify! I feel sure there is more that I could tell you, but these are the basics. Good luck.