Understand Student Loan Forbearances, Rehabilitation Payments

The Student Loan likes to give readers the tools they need to manage their student loan debt in an educated way. Understanding student loan vocabulary is one of those tools.

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Loan language can be complicated. In fact, when it comes to student loan repayment, mixing up just one word – or even a variation of the same word – can cost you.

That's the case with two seemingly unrelated subjects: forbearances and involuntary payments. We hope you never need to use either; but in case you do, make sure you take advantage of the right version of each.

Discretionary vs. Mandatory Forbearance

As we have previously discussed, forbearances are tools available on many federal student loans and some private student loans that allow borrowers to postpone payments if they are in a financial pinch. Almost any option, though – except letting loans default – is usually better than using forbearance.

That said, forbearance can be a valuable tool if borrowers' student loans are at risk of going past due or defaulting.

When we refer to forbearance, we're generally talking about discretionary forbearances – these are given at the loan holders' discretion.

All loan holders have different criteria – although they are usually lenient – and different lengths of time they allow borrowers to utilize these tools. The average time is a total of three years over the life of the student loan.

Excessive debt forbearance, though, is another type of forbearance that might come in handy if lenders refuse borrowers' requests for a discretionary forbearance. This is also a mandatory forbearance, which means if borrowers are eligible, loan holders are required to give it.

Borrowers whose federal student loan payments add up to 20 percent or more of their gross monthly income qualify for excessive debt forbearance. They may request this forbearance for a year at a time for a total of three years over the life of the loan.

The benefit of this option is that borrowers can opt to pay a lower payment during this period instead of no payments at all; paying at least the interest is always a good idea.

To apply for excessive debt forbearance, borrowers should complete this form and submit it to all of their federal loan holders.

Involuntary vs. Voluntary Payments

A long time ago, the Student Loan Ranger heard a tenured, well-respected member of the higher education industry say that, for some borrowers, default is just part of the process. We've learned over the years that, unfortunately, this is absolutely true.

Borrowers get overwhelmed or don't realize the many free resources – not the least being their loan holder – that can help them manage their federal student loans and prevent them from defaulting.

Because default happens, Congress created a student loan rehabilitation program. In a nutshell, this program allows borrowers to make nine consecutive, voluntary payments to get their loan out of default and in good standing, lower the collection costs and remove the default from their credit report.

The problem: Many defaulted borrowers don't fully understand what the voluntary payment is. They assume that garnished wages are helping them complete the rehabilitation program.

If borrowers are in default and the loan holder is garnishing their wages, tax refund, Social Security or other federal payments, rehabilitation will help stop those garnishments.

However, those garnishments do not count as voluntary payments for rehabilitation purposes. This is the case even if borrowers decide not to appeal the garnishment order.

Only payments in the amount that the borrowers and their loan holders have agreed to and that the borrowers send in on time every month – no postdated checks – count as voluntary payments for loan rehabilitation. During the time they are working toward the nine voluntary payments, the garnishments will continue.

Once borrowers make their fifth on-time payment, the wage garnishment order will be rescinded from their employer. After they complete rehabilitation and their Study loan is again in good standing, other garnishments will also stop.

Source: http://www.usnews.com/education/blogs/student-loan-ranger/articles/2016-07-06/understand-student-loan-forbearances-rehabilitation-payments