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 have like 3 more payments left until I will be done with the rehabilitation program for my student loans. I got like 4 Law firm letters in the mail from different companies stating my dock or case number about being sued or garnishment. Will they be able to do that and I’m still making my payments?
Sorry but I have to state to you that Marian I think had you pegged pretty well. Collection thousands upon thousands of huge interest is really not helping anyone out. In fact some have said they hope students default so they can collect the interest accrued. Furthermore, something you may not have considered but “LOVE” has everything to do with a caring grandmother for her grandaughter and its really NOT your place to tell her she is a no good grandmother just because she wishes to help eliminate a burden, its not your business to say what a family should do or not do for their loved ones. So ya your a “hard ass” . Unless you feel you need to have all the nitty gritty personal details of this Marian’s life, I dont blame her for not sharing all the why’s of her thoughts with you. Ya your a “hard ass”. By the way they say out there that for a repayment plan based on income they will want coming July 2014, they will want 15% of a persons gross income.. That is a very heafty amount especially since many folks are starving with degrees and all, never mind those without a degree that just went to take a few courses etc. THINK before you speak.. Have compassion as a human being and please stop being brainwashed by mainstream into thinking you are actually helping someone with their heart palpitations and threats given to the students across the US … Its very dramatic.. Its the only agency that is allowed to do extortion !!!!!!!!!!!!!!!!!!!!!! get it !!!
PS…. Most people would be happy to pay their loans if they were not harassed, threatened to be made homeless and YES I know even lawyers that are poor due to all the interest that MOST cannot ever think to pay off in their lifetime… Making children be homeless and making people lose their cars and stealing from the mouths of people is NOT the way to settle or come to an understanding to pay off such a ludicrous extortion fees of interest, never mind the collection costs. Many people have good intentions and are NOT criminals for being poor.. Because frankly the education system does let down and not deliver what is promised when many of these bright shining stars get out of school. Others didn’t finish, or couldn’t, or had a loved one to take care of, or became ill, or just plain never get paid what they are worth… I forgot!!! all federal workers now get 10.10 an hour while the rest of the country just eats rice crispies by the box full. No Lynn, your not very knowledgeable.
Hi,
I have a question. My boyfriend recently confessed to me he has not been paying his student loans for years. I was under the impression he did not have student loans. I have been forthcoming and honest about mine. (I have approximately $150,000 in student debt)
According to his credit report, his loans amount to approximately $33,000 and growing due to interest and fees. He has defaulted on them twice. He rehabbed them for awhile and then lost his job and defaulted again. All the research I am showing is that he can not rehab them a second time. Is there any exception to this? Is there anyway he can rehabilitate them? He’s been a public service worker for years. It’s very depressing that he didn’t make payments because at this point his loans would have been forgiven by various programs. Any advice anyone can offer would be great. I’d appreciate no judgment, or rude comments. I can think of all that on my own.
Thanks, Amanda
Lynn,
Consolidation is a trap for couples. I’ve a friend who’s been trying for years (AND was making minimum payments in between deferments after an acrimonious divorce. This link better explains her situation in detail but in short she consolidated $17k in student debt with her (now ex) husband’s $117k. He was ordered by the court to make the payments and claimed to be. She never received any notification as he was the primary, but has a $1k/month garnishment about which she’s told she’s “not entitled to any details because it’s not her account” (I’ve read the emails and sat with her through the phone calls because I couldn’t believe this could happen) but they’ve not gone after him for a dime AND issue him the tax form to write off all the payments SHE’S made each year. Media has begun to inquire regarding her story’s ridiculousness as she’s even consulted with attorneys who’ve said her “unique situation, albeit ridiculous and in violation of multiple rights and portions of her signed agreements” are ones that have been nearly impossible to litigate since her ex-husband is refusing to participate (why would he? She’s paying his debt & he gets all the tax benefit on an original total debt of $134k of which 17 was hers, that has now ballooned to $300k) and she’s paid $13k this past year on top of her previous payments, drives an old paid off car, pays ALL her bills on time, is a public school teacher with a master’s degree (& yes only had $17k she hadn’t personally covered). She’s not a deadbeat, but has been told it’s not her account but since they are ABLE to collect money from her (her ex, also a school teacher, jumps from school to school so because she’s responsible but not the primary on the account, she’s not allowed ANY information but should be made to pay the debt, no recourse for her ex AND he gets the tax benefit?). She’s offered to pay her portion and all fees in a lump to be separated from this, they even agreed that would be appropriate and may be willing to do so – but only if her ex agrees. Surprise – he never returned the paperwork. What can she do besides wait and hope for so much negative PR that a government official will pressure them to protect her rights? And even if that happens? What about the countless others going through the same?
Her story & petition here:
https://petitions.moveon.org/sign/asa-please-remove-me
Net is slightly under $6k.
Yes, I have received the 30 day notice and requested a hearing. Nothing is being garnished yet, and they have not even sent the letter to my employer yet. I have tried to convince them about the rehab numbers and how $890/month would not allow me to rehab the loan. The CA will not budge from that number. I spoke with the DRG and they basically agreed with me, but also said the CA has the right to enforce that amount as a voluntary payment.
At this point, I am just trying to hold off garnishment long enough for the consolidation to go through. I would rather rehab, but that looks like a lost cause.
Lynn,
Here’s a question (you’ve been very helpful to others).
I’ve been contacted about wage garnishment on my student loans. Total amount owed before collection fees is around $4,300. I have been attempting to work out a rehab. Unfortunately, since they are waiting to garnish, they want me to pay $890/month. That would not allow me to rehab (even with fees, I would pay this off in roughly 6 months).
I feel a bit trapped here and trying to negotiate the best route. At this point, I have put in my application for consolidation, but would prefer rehab if possible. Since they are at the stage just before garnishment, can they keep me to the $890/month for rehab ($890 is based on financial disclosure, and is also the amount of the garnishment if they proceed).
Lynn –
Thank you for the reply.
Brent
This question is for Lynn C:
My consolidated loan totals $16,532. That is $11,229 in Principal + $2,075 in Interest + $3,228 in Fees.
What would a reasonable and successful cash offer be to ECMC on the above? I want to pay this off.
Thanks, Brent
I have a student loan in default for 12 years . I have been unemployed and starting working about 4 years now. When i log on to Department of Education website it says i been assigned to a CA but DOE has also a my total balance owe which is 8,500(Principle and interest). I have been paying my balance off by my tax offset each year. I check to see where my tax offset is going to DOE to my balance. I check the payment history and looks like they are charges to me a total 3,074. Does my total balance with DOE have collection fees added to my interest.? Are collection fees charge one time fee or is it charge every month, over the years? Do you think i owe more then 8,500.00? I know i should call the CA but is not in option right now
Lynn, Thank you for the quick answer. I will ask for a settlement…thanks for that advice. On the collection charges, I must be missing something. The column that that shows amounts at setup shows over $8,000.00 in other charges which was added to principle bringing the loan to over $50,000.00. Then The current amounts shows other charges as over $9,000.00 which equals 18.5% of the setup total minus other charges I’ve paid. The rehab agreement states that “Collection costs and unpaid accrued interest will be capitalized (added to principal) at the time of the rehabilitation sale to the lender. You will be obligated to pay the new principal balance with all capitalized costs.” This represents over 25,500. in capitalized “costs”. I realize there are heavy consequences to being in default, I just don’t want to pay more that I have to.
If this is correct please tell me how it represents just one addition of collection costs. Also, if this is correct, which collection costs are they likely to waive. Thanks for helping out on this. I find it confusing.
Hi Lynn,
My loan is in Garnishment with Windham Professionals. I am ready to pay off the entire amount and did get the payment history as you suggested elsewhere. My question is, when I was talking to the rep regarding payoff he suggested rehab and said there would be no further collection fees added because when I entered rehab it would be out of collections. I specifically asked about additional charges when the loan was sold and he told me there were none. When he sent me the rehab agreement it shows that at the time of setup, which I assume is when they took over collections, there were collection fees added. To go into rehab they want to add .over 24% of other charges on a lower principle balance. and the rehab agreement states there will be an additional 18.5% added to the principle upon sale. This means that collection charges will be added three times. It was my understanding they could be added once on consolidation and once upon completing rehab. Am I wrong?
I would still like to pay it off. Can I do this since I am still in default? They have taken one payment from my account but I have not signed the rehab agreement papers.
Thank you.
Hi,
Glad I found this site. I need some help. Today I received (was left at my home unsigned for) a court summons for a defaulted Perkins Loan. I just recently had received a disability discharge and found that this one loan (the Perkins) was not covered in the disability discharge. Prior to receiving this court summons I have not received any phone calls nor nothing in the mail from any collection agency. I really thought it would be included in my discharge. So as of today for a $2,000 loan I owe 5% interest (since 2006) plus legal fees of approximately $1,600. I only receive social security disability. Yes, I am married and my husband and I share a checking account but it’s for bill paying purposes only. Our money is separate. We do not share financial responsibilities outside of household expenses. What’s his is his and what’s mine is mine.
The summons for court gives me sixty days to respond as I do not live in the same state it is being served. I really do not have a clue what to do here. Should I contact the school that the original Perkins Loan was given? Should I contact the attorney on the paperwork? Should I seek my own legal representation? I feel yes in part I know it was a bit my responsibility I did take this loan. I really did believe it would be included as part of the disability discharge. Shouldn’t I have received some kind of phone call or something in the mail letting me know I owed still? I just received my discharge in August. I lost my father and was grieving extremely heavy and didn’t really pay much mind to anything. I’m still surprised I didn’t get anything by mail or phone. I guess what I want to know is what should be my next course of action? What should I do to resolve this or who should I contact? Do you think they would work with me on the interest and legal fees? Thank you in advance for any help.
Thanks Lynn. Of course your right.
Hello,
I asked a question some time ago, and I didn’t get a direct answer. I just wanted to follow up to see if you could offer some assistance. I owe a huge loan amount – $102,000 (after added collection fees) and my wages are currently being garnished at 15% which makes my monthly payment roughly $400.00. I am newly married and we have filed our taxes jointly; however this student loan debt is mine alone. Together we make $86,000.00. I wanted to know if I consolidate my loans if my monthly payment would go down or if I should just leave the garnishment in place.
Tera – Wage garnishment is typically going to result from a court judgment being enforced. The time to consolidate your student loans and get a lower payment is before being sued. Once a judgment is in place, and your wages are being garnished, you generally have to look to the court, and whether your income and expenses meet state limits, to qualify for either partial or full wage exemption.
Edit to add: Above applies to private loans.
My understanding its 18 to-24% of your outstanding balance?
How will that work in my situation ? In 2013 my outstanding balance was 12,000, DOE garnish my tax refund of 4000. As of 2/7/14 my balance is 8,000. My question will collection apply 18-24% of your highest balance or 18-24% of balance as of today? For example if collection will call me today.
I have been in default since 2001. My total balance of my student loan was 12,000. Last year Department of Education took my federal income tax of 4,000. I log on to my account @ DOE and it says 4000 went to my interest. As of 2/7/14 I have a total balance of 8,000, which 5000.00 is the principle and 3000.00 is the interest. My question is do i owe more then my total balance because of collection fees. ? Should i expexct DOE to take more then my total balance?
Mp – Yes, the collection fees are a monster on default student loans. Are you expecting more than a 5k tax refund? What prevented you from rehabilitating the loan for this long?
Hi Michael,
No im not expecting more than 5k tax refund more like 4k. I was just planning to use my tax offset to pay off my balance. My principle and interest. Im been in default for 14 years. I was unemployed for almost 10 years. I been employed for almost 4 years now. Im afraid to call the collection agency and they sart garnising my wages i live paychechek to paycheck. I cant afford another monthly payment on my budget. I rather have them take my tax refund
each year.
How do they calculate collection fees?
What do you think my balance would amount to with collection fees?
Do you think its a good ideal to just pay off my balance with my tax offset?
I dont what to do NEED SOME ADVICE ?
We are in the process of rehabbing my husband’s student loan that was sold to a collection agency. If we make 9 consecutive payments it will be out of default and back in the hands of the Department of Education. My question is, is any of the amount we are paying considered tax deductible student loan interest? Or does it not qualify since it is still in the hands of the collection agency?
Be careful, very careful of ECMC – they are an arm of Ed Financial who lies and refuses to work with borrower, use predatory and threatening tactics. They should have a “class action” against them.
Hi Lynn, I have question about Direct Consolidation Loans as you seem to recommend them. I was wondering when the correct time to apply with them would be. I have just made my first payment on the 9 month Loan Rehabilitation Program. ECMC is my lender, ACT is my Collections Account. I was under the impression from ACT that what happens is; after you pay the 9 months successfully, the loan gets sold/sent back to your original lender or another lender, and it is there that you have the option to enter into an Income Based Repayment Plan. They (ACT) never mentioned anything about Direct Consolidation Loans, or that I had to move my loan there in order to be eligible for the IBP. Would one have to take a specific action at a specific time in order to move one’s loan to Direct Consolidation Loans in order to enroll into the IBP? Any clarification would be helpful. Thank you in advance for your help!
My loan is in rehabilitation status, I have made 2 payments already and will continue to as I promised. Why is Sallie Mae calling me and someone else manage my loans?
They violated the law by other actions including but not limited to failing to report payments to the DOE, threatening to charge me with a federal crime because of a computer problem on their end (which I had an affidavit from my financial institute proving), and telling me that I could be jailed for not answering their phone calls. These are just a few of the items for which they were fined by the FTC. I wasted no one’s time but my own and yes I want something in writing this time to protect myself from these people.