Have you ever considered Private Student Loan Rehabilitation as a thing?
After all these years of going through forbearance, deferment, and interest rate reduced student loan payments, your loan balance has increased.
You checked out refinancing to bag a new loan with new loan terms.
Think about it. Who’s going to refinance you when you can’t make you’re struggling with your current loan repayment schedule?
Your loan servicer or loan holder refuses to work with you.
They’re often rude AF.
Now they’re saying unless you make the payment amount they’re demanding, you’ll be in default, and they’ll send your account to a debt collector.
Does this sound familiar?
Good news! There may soon be a way to get your private student loans out of default – Private Student Loan Rehabilitation!
What Is Loan Rehabilitation
First things first, let’s answer the question:
What is loan rehabilitation?
In simple terms, loan rehabilitation is a process that allows you to bring out defaulted loan out of default and back into a current repayment plan.
You can have a loan rehabilitation program for a cell phone, home, car, etc.
Essentially, if you have borrowed a loan and you later default on it, you may be able bring it back into good standing by entering into a loan rehabilitation program.
What Is Student Loan Rehabilitation
In layman’s term, student loan rehabilitation is a process that allows you to get a defaulted loan out of default by making a series of on-time payments.
Currently, many federal student loan rehabilitation programs and few for private loans.
Many private student loans do not have a formal process that allows you rehabilitate a defaulted loan back into good standing.
However, things may be changing.
The GOA Calls For Private Student Loan Rehabilitation
Recent reports to Congress ha revealed what the Government Accountability Office made clear is that there’s no reason why student loan borrowers should not be granted access to a private student loan rehabilitation program.
As of January, 2019, none of the five banks with the biggest [private student loan portfolios offered rehab programs for defaulted loans
The most common reasons the private lenders gave were:
- Private student loans have low default rates and delinquency
- They already offer alternative repayment options such as forbearance
- Concern that a loan rehabilitation program would make borrowers more likely to avoid alternative repayment options or default\
- They’re unsure of how loan rehabilitation would work since they sell defaulted loans to debt purchasers and debt collection companies
- Worried that a private lender would violate certain unfair and deceptive acts and practices laws because they couldn’t accurately describe the program’s benefits to a borrower (i.e., credit score improvement)
2 other main concerns raised by nonbank private lenders (think agencies like MOHELA and New Jersey Higher Education Authority) were:
- The law that authorizes private student loan rehabilitation programs doesn’t grant them authority to remove negative information from credit reports and
- The law doesn’t define a private student loan default.
That last part is interesting because the GAO points out that none of the 3 major credit bureaus (Experian, TransUnion, and Equifax) uses the term default in credit reporting for private student loans.
Rather, private student loan lenders use various status codes to show they do not anticipate being able to recover losses on the loan.
Of course, this is very different from loans owned by the DOE (Department of Education). Federal loans (Perkins Loans, Direct Loans, Direct Consolidation Loans, etc.) have a clear definition for default.
Your loans go on default in federal student loans when you go more than 9 months without making a required payment on your loan.
Why Defaulted Private Student Loan Rehabilitation Should Exist
Here’s the thing:
There’s no good reason as to why Private student loan default rehabilitation shouldn’t exist.
The GAO said in its report that private lenders that take part in such a program would face a little extra risk for the following reasons:
- The education loans being rehabilitated would already be considered a loss
- Most private student loans have cosigners and those co-signers will likely help the borrower make their monthly payments under a rehab program
- The private loan default rate is low (it was less than 3 percent from Q2 2014 through Q3 2018)
How Would Private Student Loan Rehabilitation Work
So let’s take it that private student loan rehabilitation were a thing.
The big question to ask then would be: what would private loan rehabilitation really do?
Sadly, there’s exist a great answer to that question.
What we do know for sure is that the program would eradicate a default status from your credit report one-time.
While this sounds sweet, the reality is that it’s unlikely to have a huge impact on your credit score.
In a simulation of more than 1 million borrowers with student loan debt, the GAO saw that for just one education loan default, the average borrower faced a 60 point drop in their credit score.
You want to know how much their credit score improved by having the default status taken away?
On average, 8 points and 11 points at best.
That line of advantage makes sense when you think about what loan rehabilitation actually does.
It just removes the default status from a credit report.
It doesn’t take away the late payments.
And those late payments are what really beats down your score.
2 of the credit bureaus said they offer student loans a lower weight than other consumer loan types in their generic credit scoring models. They added that the lower weight was because student loan debt proves to be less important statistically at predicting credit risk.
Pros And Cons Of Loan Rehabilitation Programs For Private Student Loans
There are 3 major advantages to a private loan rehabilitation program:
- Stopping wage garnishments by nonbank state lenders
- Allowing borrowers to keep their other non-student loan account in good standing.
- Stopping debt collection efforts
For majority of private loans, you can’t be garnished until you’re sued and the collection agency or private lender gets a judgement against you. Federal loans play different. They can garnish your wages, offset your social security benefits, take your tax refund and a couple of collection fees to your loan without suing you.
The disadvantages of the program are:
- You risk restarting the statute of limitations on debt collections
- You lack income-based repayment options after you get out of default, which may lead to you defaulting a second time on the same loan.
- You may increase the likelihood that negative credit information will stay on your credit history
Now that you know what Private student loan default rehabilitation and Private student loan rehabilitation are, feel free to share your thoughts and experience via the comment section below