September/October 2004 Online Publication    





Students can still borrow money for college even if they've defaulted on previous loans... here's how.

Repayment, Rehabilitation, and Eligibility After Loan Default
 By Allison Bradley Fleming, EDFUND Communications

Students who have defaulted on previous federal loans aren’t necessarily ineligible for new Stafford loans. By following a clearly defined set of repayment and rehabilitation steps, students can get themselves back on the right track and able to borrow money for college. EDFUND’s experts consistently help financial aid staff answer questions about discerning student eligibility after loan default. Here are some of the frequently asked questions we’ve compiled:

Q: When can a student qualify for financial aid after defaulting on a student loan?

A. A borrower who has defaulted on a student loan may regain eligibility by resolving the defaulted loan(s) in one of the following ways:

  • The defaulted loan is paid in full.
  • The defaulted loan is discharged or determined to be dischargeable in a bankruptcy action.
  • The borrower makes satisfactory repayment arrangements by contacting the loan holder for each of the loans defaulted, and makes those payments (as described in the following question). Once the payment arrangements have been fulfilled, the borrower may regain eligibility. Note: A borrower may reestablish loan eligibility only once under these provisions.
  • The defaulted loan has been rehabilitated.
  • The defaulted loan has been discharged because the student or parent borrower was unable to complete a program of study due to the school’s closing.
  • The defaulted loan has been discharged by the Department because the borrower’s eligibility for the loan was falsely certified by the school.
  • The borrower has made satisfactory repayment arrangements on the defaulted loan and consolidated that loan, or the borrower consolidated that loan by agreeing to repay the consolidation loan under an income-sensitive repayment schedule.

Q: What is meant by satisfactory repayment and rehabilitation?

A. To reestablish eligibility for federal student aid after defaulting on a student loan, satisfactory payment arrangements must be made to the appropriate loan holder for each defaulted loan. Defined as:

  • Six consecutive full monthly payments as agreed upon with the holder (a lump sum prepayment of future installments does not satisfy the requirement for six consecutive payments)
  • On time (within 15 days of the payment due date)
  • Voluntary (directly by the borrower; court-ordered or involuntary payments obtained by state offsets or federal Treasury offsets, wage garnishment or income or asset execution do not count against the six required payments)
  • After reestablishing eligibility, the borrower must continue to make payments according to the arrangements made with the guarantor/holder, and the loans are still considered to be in default.

Consolidation
To consolidate a defaulted loan, satisfactory repayment arrangements are defined as:

  • Three consecutive full monthly payments as agreed upon with the holder (a lump sum prepayment of future installments does not satisfy the requirement for three consecutive payments)
  • On time (within 15 days of the payment due date)
  • Voluntary (directly by the borrower; court-ordered or involuntary payments obtained by state offsets or federal Treasury offsets, wage garnishment or income or asset execution do not count against the three required payments)

Rehabilitation
To rehabilitate a defaulted student loan, the borrower must make payments that are:

  • 12 consecutive full monthly payments as agreed upon with the holder (a lump sum prepayment of future installments does not satisfy the requirement for 12 consecutive payments)
  • On time (within 15 days of the payment due date)
  • If the borrower fails to send a payment on time during any of the 12 months, the 12-month cycle must start over.
  • Voluntary (directly by the borrower; court-ordered or involuntary payments obtained by state offsets or federal Treasury offsets, wage garnishment or income or asset execution do not count against the 12 required payments)
  • After the borrower satisfies the above requirements, the guarantor will generally assist the borrower with rehabilitating the loan with a FFEL Program lender.

Q: How does bad credit affect eligibility?

A. For borrowers applying for a Stafford loan, credit history is not a factor. For borrowers applying for a PLUS loan, lenders are required to determine if the borrower has adverse credit history and may not approve a loan if an adverse credit history is determined.

EDFUND’s Web site, www.edfund.org, offers a comprehensive explanation of these and other eligibility issues, including total and permanent disability discharge. Considering adding our FFEL Program FAQs to your list of favorites as a reference tool.

©2004 EDFUND
For more information on EDFUND products and services, contact Michael Amaloo, Senior Client Relations Manager at PO Box 566, Kyle, TX 78640 – Telephone: Toll Free 1.866.299.1741 or 512.405.3800 – Fax: 512.405.3801 – mamaloo@edfund.org – www.edfund.org.