The new rehabilitation rules affect both FFEL and Direct Loans, including:
1. Direct Loan rehabilitation now requires a written agreement (this was true of FFEL before, but not Direct Loans); and,
2. There is a specified method for calculating reasonable and affordable payments using the 15% income based repayment (IBR) formula.
Once you request rehabilitation, your loan servicer will ask you for your most recent adjusted gross income (AGI) and/or other income (e.g. public assistance) and proof thereof. The loan servicer will use the IBR calculator (based on the 15% IBR formula) to come up with a preliminary rehabilitation payment.
If you can’t afford the calculated rehabilitation payment, you must provide documentation of your income and expenses using a new form.
Under the new rules, you do not have to be eligible for IBR in order to make the 15% IBR calculated payments during the rehabilitation period. Servicers will be using the 15% IBR formula (and the IBR calculator) as a proxy to determine reasonable and affordable payments.
One thing that is important to understand is that rehabilitation loan payments based on the IBR formula does not qualify you to participate in the IBR program. So, if you have a parent PLUS loan or are otherwise not eligible for IBR, you should understand that even though the collector will use the 15% IBR formula to determine your payments during your rehabilitation, your monthly payments will likely go up after your student loan rehabilitation is completed.
Your servicer may tell you that you have to make a “good faith” payment while they are waiting for your income documentation. This is your choice. Please understand that you do not have to make any “good fatih” payments. However, you may want to do this so that you can get started with the nine month rehabilitation period.
Once the payment is established, the collection agency sends a written rehabilitation letter and the rehabilitation plan begins. You still have to make nine payments within a ten month period in order to complete the rehabilitation period and get out of default.
The bottom line is that the new rules are intended to curb the abuses of student loan servicers in demanding monthly payments higher than those calculated using the IBR formula. Under the law, you are only required to pay reasonable and affordable amounts. There is no minimum amount that the servicer must charge.