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Student Loan Refinancing can lower interest rates and help pay off debt quicker

Student Loan Refinancing can lower interest rates and help pay off debt quicker

How borrowers enter default

Borrowers enter default when they miss at least 270 days of payments on their student loans. Around day 330 to 360 of missing a payment, your loan goes into collections, says Betsy Mayotte, president and founder of The Institute of Student Loan Advisors. That’s when all the consequences kick in, like having your default reported to credit bureaus and having your tax refunds seized, she adds.

There are two options the federal government offers borrowers to exit default and resume paying off their loans in good standing: loan consolidation, which allows borrowers to quickly merge different loans into a single debt with lower monthly payments and a longer loan term, and loan rehabilitation, a longer process in which the borrower enters into an agreement to make nine on-time payments within a 10-month period, with the payment amounts based on the borrower’s circumstances. There are eligibility requirements borrowers need to meet to do either of these, and there is also a limit in the amount of times you can do each. Rehabilitation, for example, is only available once.

The CARES Act paused general payments toward student loans and suspended interest and collections. But – and this is the little-known provision many borrowers didn’t know about – it also said that defaulted borrowers on most federal student loans could count their „monthly payments” of $0 toward rehabilitation. (Previously, there was a minimum payment of $5.)

„An opportunity like this has never been available to borrowers in default,” Ben Kaufman, head of investigations and senior policy advisor at the Student Borrower Protection Center, wrote in a blog post last year. Once a borrower rehabilitates their loans, the default can be removed from their credit report and they once again have access to income-driven repayment plans, which are intended to help keep borrowers from falling behind on their loans.

Since the suspension has now gone on for nearly two years – significantly longer than nine months – any borrower who wanted and was eligible could have raised their hand and essentially gotten their loans rehabilitated without having paid anything, Yu says.

What advocates say went wrong

The Education Department’s approach to the suspension relied on borrowers to individually apply for rehabilitation. Experts say the process would not only require a ton of paperwork, but also for borrowers to find out about the program and understand the benefit.

„The failure to get borrowers into these programs that are designed to benefit them is really emblematic of many of the problems that we see in the student loan system,” Yu says. Borrowers often don’t access rights that are available to them because they don’t know those rights exist.

A recent report from the Government Accountability Office said that many defaulted borrowers did not respond to early outreach attempts from their loan servicer regarding the payment suspension, but also that the servicer managing borrowers defaulted loans initially didn’t have valid email addresses for about half of defaulted borrowers.

Even when messages do get through, they need to be crafted in such a way for borrowers to understand that this visit the site here isn’t just more debt collection, but something that could really help them, Shafroth says.

What advocates are asking for

Advocates are pushing for automation, so that borrowers – who may also be bogged down trying to navigate other government programs, like unemployment benefits or the Supplemental Nutrition Assistance Program (SNAP) – can avoid the many roadblocks mentioned above. The Education Department has all the information it needs to identify the borrowers eligible for rehabilitation, as well as to work with borrowers to make sure they get into a payment plan they can afford going forward, Shafroth says.

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