More On Curing A Defaulted Loan...And A Mounting Backlog of Rehab. Loans in the Pipeline

Thanks to Tim Fitzgibbon of NCHELP for providing a clarification on my recent post "How Do I Cure A Defaulted Student Loan?"

"Your source “Creditcards.com” provides the following statement:  “Upon completion of nine steady, on-time payments, your loan will be cured and the default notation removed from your credit reports.”  The continuing credit market problems have made it difficult for many guaranty agencies to find buyers for all of their rehabilitation-eligible loans.  We estimate that nearly half of the guaranty agencies can offer only partial assistance to their rehabilitation-eligible borrowers. 

The recently-passed technicals bill authorized two new options the U.S. Department of Education can offer to assist guaranty agencies find solutions for their defaulted borrowers who have made the required number of on-time payments.  Unfortunately, the Department has not implemented either option at this time.  Therefore, thousands of borrowers around the country continue to be “stuck in the rehabilitation pipeline”.  I just wanted you to be aware that the final step of a lender purchasing a rehabilitation loan is needed for the process to be completed and the borrower to receive the full benefits of rehabilitation, including the adjustment to the borrower’s credit report."

He were a few follow-up questions that he answered:

What are the two options that Department can offer guaranty agencies to help defaulted borrowers and when will they be implemented?

"No estimates on when (or if) ED may move to implement the two options:  allowing rehab-eligible accounts to be assigned to the Department or making rehab loans “ECASLA eligible” regardless of the original disbursement dates of the loans." 

What are the pros and cons for the two choices that defaulted borrowers have?

"As for rehabilitation vs. consolidation, I believe rehabilitation is more attractive for the majority of borrowers since the maximum fee is the same (18.5%) but rehabilitation completely wipes out the guaranty agency credit reporting and removes the record of default, but not the delinquency leading to default, from the original lender credit reporting.  Consolidation is the better option if a borrower does not want to wait the 9-months required to rehab their loan."

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To make things even more interesting (or more confusing depending on how you think about it), this from FinAid.org which highlights the importance of timing in curing the default by consolidating the loan:

"Also, if the default is very recent, the lender may not yet have reported the default to a guarantee agency. Lenders do not need to file a default claim until 90 days after the default occurs. If the borrower brings the delinquency under 270 days (the definition of default for federal education loans) within the 90-day period, before the lender has filed a default claim, they can cure the default.

It may also be possible to cure the default by consolidating the delinquent loan before the lender has filed for a default claim. Since the consolidation loan is a new loan and it pays off the deliquent loans, it effectively wipes the slate clean."

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I realize now that my earlier posting and the source referenced there left out one minor (OK, maybe not so minor) detail.  It didn't mention this 18.5% fee, which is the maximum fee for a loan rehab. or consolidation for a defaulted loan.  So I went back and re-checked the Department of Education web page focused on Loan Rehabilitation and Consolidation.  How about the webpage on Repaying Student Loans (including defaulted loans)?  Still no mention.  Isn't this fee material enough to appear on the Department of Education site?

Here is how HESC disclosed it on its Loan Rehabilitation webpage:

"You must agree to pay a fee of up to 18.5% of the unpaid principal and accrued interest. These costs are added to your unpaid balance when the loan or loans are sold to the lender. This fee is about the same as the collection cost you’re paying on the defaulted loan. The collection costs are removed before being purchased by the new lender, then the one time fee of 18.5 percent is added."