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U.S. to Finalize Rules Aimed at Distressed Borrowers, Default Rate Manipulation

U.S. to Finalize Rules Aimed at Distressed Borrowers, Default Rate Manipulation
October 30, 2013

The Education Department is set to issue a package of final regulations on federal student loans that are aimed, in part, at helping distressed borrowers and preventing colleges from manipulating their default rates.

In a notice last week, the department said it would officially adopt the rules “within the next several days” (though they would not take effect until next July). In addition to making minor changes to reflect legislative changes, the 423 pages of rules also beef up some protections for federal student loan borrowers.

Under the new rules, a borrower who is at least 270 days delinquent in paying his or her loans would be able to be placed in forbearance based on an oral request as opposed to the current written request requirement. This verbal forbearance request, however, would have limitations in order to prevent colleges from easily coercing students over the phone into unnecessary forbearances that help the institution avoid a default on its books -- or at least defer the default until the end of three-year period that the federal government evaluates. Any forbearance based on an oral request would be limited to 120 days and could not be extended without a written request and supporting documentation for why a loan deferment is needed.

In addition, the new regulations set a limit on the size of the payment that loan servicers can demand of defaulted borrowers who are trying to avail themselves of the opportunity, under federal law, to rehabilitate their student loans by making “reasonable and affordable” payments. The new rules would automatically define that “reasonable and affordable” standard as 15 percent of a borrower’s discretionary income -- that is, what he or she would be paying under an income-based-repayment plan. The clarified standard reduces the amount of financial documentation needed from the borrower.

The Institute for College Access and Success, which pushed for many of the changes, praised the new regulations in a blog post Tuesday as “key protections” that will “make it easier for borrowers to get out of default and repay their loans.”

 

 

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