Federal Student Loan Rehab - The Law and You .. please read

[Anonymous]

there have been many posts recently regarding SL rehab and i think some of you guys are not fully understanding what this means. 

in short, after you rehab a loan, the CRAs are required to remove the DEFAULT STATUS ONLY.  see below for the exact language.

they will not delete your defaulted loan history.  they will not delete your lates.  they will not delete the tradeline. 

what happens on your CR is this...

your loan status field is changed to PAID OR PAYING AS AGREED, the loan balance will be zero, and the loan will be closed and possibly marked TRANSFERRED TO ANOTHER LENDER in the remarks field. 

the closed loan will stay on your report for 7 years from the date it was closed, and the lates will fall off 7 years from the date the late payment was due.

on the bright side, you reset the 10 year maximum loan repayment period  and your new loan will stay on your report until paid in full plus 10 years.  so the new loan it will outlast your old loans and if you pay on time every month you will have the positive history for much longer than you will have the negative history.  also, any privileges lost by going into default are restored, and adverse actions such as wage garnishment and collection activities are ceased.

please note that i am not taking into account GW adjustments.  it is possible that down the road you may be able to talk the lender of the defaulted loan into deleting the tradeline, but this is NOT required by law.  they are actually required by law to report accurately, and any GW adjustment or 'mistake' in your favor is not the norm.  if you have personal experience to the contrary please chime in.  we'd like to know how you did it.

20 USC § 1078–6 (C)

Upon the sale or assignment of the loan, the Secretary, guaranty agency or other holder of the loan shall request any consumer reporting agency to which the Secretary, guaranty agency or holder, as applicable, reported the default of the loan, to remove the record of the default from the borrower’s credit history.

34 CFR § 682.405   (b)(2)

The guaranty agency must report to all national credit bureaus within 90 days of the date the loan was rehabilitated that the loan is no longer in a default status and that the default is to be removed from the borrower's credit history.

the applicable law for FFEL (stafford) loans is  20 USC § 1078–6, found here http://www.law.cornell.edu/uscode/uscode20/usc_sec_20_00001078----006-.html

the applicable regulation for FFEL loans is 34 CFR. § 682.405, found here http://law.justia.com/us/cfr/title34/34-3.1.3.1.40.html#34:3.1.3.1.40.4.40.6

the terms for rehabilitation of perkins loans are essentially the same as stafford loans.

[Anonymous]

My problem is that the old balance is still showing and has never been marked as 0 balance or referred to a different lender. Even though my loans have been rehabilitated, they are showing a big balance. The positive ones are on my report too, how do I get the bad ones to show 0 balance as they should. I can deal with it better if it shows the correct balance.

[Anonymous]

as i understand it, only the current holder of debt can show a balance on your CR.  others must show zero.  how long have you had the new loans?  if not long, there may not have been enough time for the new info to make it through the system.  if it's been more than a couple months you might want to initiate communication with the appropriate dept of the old lender.  who is the lender?  if it's sallie mae, contact their 'office of the customer advocate'.  if it's another lender you want to find their ombudsman or some similar dept that will really investigate for you.  try a corporate office and keep calling back if you get the runaround.  

[Anonymous]

Loans came out of default in Oct of 2010. It is both Sallie Mae and Dept of Ed. Where do I find contact info for them. I have them all reporting the current good credit, but I have 2 Sallie Mae and 4 Dept of Ed that are reporting the old loans and showing balances instead of showing them as paid off.

[Tazman81]

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@Anonymous wrote:

there have been many posts recently regarding SL rehab and i think some of you guys are not fully understanding what this means. 

in short, after you rehab a loan, the CRAs are required to remove the DEFAULT STATUS ONLY.  see below for the exact language.

they will not delete your defaulted loan history.  they will not delete your lates.  they will not delete the tradeline. 

what happens on your CR is this...

your loan status field is changed to PAID OR PAYING AS AGREED, the loan balance will be zero, and the loan will be closed and possibly marked TRANSFERRED TO ANOTHER LENDER in the remarks field. 

the closed loan will stay on your report for 7 years from the date it was closed, and the lates will fall off 7 years from the date the late payment was due.

on the bright side, you reset the 10 year maximum loan repayment period  and your new loan will stay on your report until paid in full plus 10 years.  so the new loan it will outlast your old loans and if you pay on time every month you will have the positive history for much longer than you will have the negative history.  also, any privileges lost by going into default are restored, and adverse actions such as wage garnishment and collection activities are ceased.

please note that i am not taking into account GW adjustments.  it is possible that down the road you may be able to talk the lender of the defaulted loan into deleting the tradeline, but this is NOT required by law.  they are actually required by law to report accurately, and any GW adjustment or 'mistake' in your favor is not the norm.  if you have personal experience to the contrary please chime in.  we'd like to know how you did it.

20 USC § 1078–6 (C)

Upon the sale or assignment of the loan, the Secretary, guaranty agency or other holder of the loan shall request any consumer reporting agency to which the Secretary, guaranty agency or holder, as applicable, reported the default of the loan, to remove the record of the default from the borrower’s credit history.

34 CFR § 682.405   (b)(2)

The guaranty agency must report to all national credit bureaus within 90 days of the date the loan was rehabilitated that the loan is no longer in a default status and that the default is to be removed from the borrower's credit history.

the applicable law for FFEL (stafford) loans is  20 USC § 1078–6, found here http://www.law.cornell.edu/uscode/uscode20/usc_sec_20_00001078----006-.html

the applicable regulation for FFEL loans is 34 CFR. § 682.405, found here http://law.justia.com/us/cfr/title34/34-3.1.3.1.40.html#34:3.1.3.1.40.4.40.6

the terms for rehabilitation of perkins loans are essentially the same as stafford loans.

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As I read this, I guess I am reading it different than you are.  My position would be if it were intended to only remove the "default status" then why would the sentence not stop there after "default status".  I am not agreeing or disagreeing with you, just making a statement.  Because to be honest with you, I don't even know anymore, and I don't even think any of the government agencies know.  I wrote in to a few agencies and what I've gotten from all is "ask your lender".  I can see where this law is read both ways, and I think that is why some have had success in having the status along with the lates removed from their credit reports and others have not.  I have always understood it as having both the status and the lates removed, but in a way I am starting to question it because of the ambiguity of how the law is written.  I guess it can be argued that in essence, a 30 day late is a "default".  You have defaulted on your original terms of the contract to make timely payments, therefore that default (the 30 day late) is being reporting to the CRAs.  Anyhow, good information.  And like I said, not agreeing or disagreeing; just stating my position.  Any other thoughts?

[Anonymous]

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@Tazman81 wrote:

  I guess it can be argued that in essence, a 30 day late is a "default".   You have defaulted on your original terms of the contract to make timely payments, therefore that default (the 30 day late) is being reporting to the CRAs.  

Section 435(l) of the Higher Education Act of 1965 defines a federal education loan that is paid in monthly installments to be in default if the loan is more than 270 days delinquent.

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I'm reading the law with a very strict interpretation of the wording.

think of the loan as an object, an think of default as a status of that object.  

the law requires removal of the status from the CR, but not the whole object.

20 USC § 1078–6 (C)

Upon the sale or assignment of the loan, the Secretary, guaranty agency or other holder of the loan shall request any consumer reporting agency to which the Secretary, guaranty agency or holder, as applicable, reported the default of the loan, to remove the record of the default from the borrower’s credit history.

34 CFR § 682.405   (b)(2)

The guaranty agency must report to all national credit bureaus within 90 days of the date the loan was rehabilitated that the loan is no longer in a default status and that the default is to be removed from the borrower's credit history.

default is a status.  the loan is 'in default'.  

i read the letter of the law as.. the 'default (status)' will be removed, and the law does not compel CRAs to remove the 'loan (object) which is in default'.  

hope that makes sense.

the spirit of the law is open to interpretation, but obviously it is interpreted by the lenders and CRAs to mean the 'default status' is to be removed.

it is interpreted by debtors to mean the 'loan which is in default status' is to be removed.  no offense to anyone, but i think this is a bit wishful, since the letter of the law requires no such thing.  and in full disclosure, i just began reading the actual laws myself after many years of relying on SL CSRs and word of mouth information, much of which is flat wrong or at least skewed to promote the interest of the person giving the info.

but like i said before, if anyone has personal experience to the contrary, i'd like to hear it.  i'm only writing this to shed some light where there seems to have been a lot of confusion regarding what the law requires, and if anyone can school me, i will stand to be corrected.  

[Anonymous]

Here is my issue with your interpretation and please feel free to reply with your thoughts.

It would seem to me that the status of default by definition would be a student loan account in severe delinquency.  You're stating that "default status" is merely a useless term tagged to an account. By only removing the term "default status" from the account you are serving nearly no purpose to the borrower in terms of helping their credit rating.  It would seem the main idea behind the Rehabilitation is to give the borrower a second chance in regards to both ones credit rating and they're eligibility to receive new federal aid in various forms.  Lets be honest, most of us trying to rehab our loans need it solely to acquire an acceptable credit rating, so the function it serves under your interpretation is barely of use.

Imagine you are a lender and you pull my credit report, (in this scenario I have completed the rehabilitation, had the "default status" term removed from my report, and am paying perfectly on my loans to the new lender) you see an account labeled "College Loan". It is clearly a student loan account and you naturally look at the payment history and it is horrific....for nearly a year no payment has been made and the account is just closed, the balance zeroed out and says "Paid as agreed" or whichever term they could use.  What is the first thing you would think?  Well he obviously defaulted on this student loan, clearly he's not responsible.....

Now I highly doubt you have defaulted on a student loan as you clearly have no clue what it looks like on a credit report.  There is no tag or label that just says "In Default Status". On mine personally, it shows the last known payment history, which for me was 120+ days past due, and in the remarks it states "Loan permanently assigned to the government".  I have completed the rehabilitation program and have been paying successfully to my new lender for six months.  Yet my old account still exists in that condition....sure it doesn't specifically say "in default" but it never did, the default status is assumed because of the severe delinquency and "assignment to the government".  Now I am wanting to buy a home because my financial situation warrants it but no lender will look at me because of my student loans, that "aren't in default" but clearly were defaulted on, are driving them away. As a side note, the only other debt I have is a car loan that has been paid on perfectly for years (auto loans are able to hit you with extremely high rates so they'll lend to anyone). So if you're thinking, "well I bet he has thousands of dollars in credit card debt" that would be incorrect, I have two credit cards that are used but always keep a zero balance at the end of the month.

Now don't get me wrong, I am a mature and understanding adult.  I don't claim that I was preyed upon by the lenders or the government that loaned me the money to go to school.  I willingly borrowed all the money and knowingly didn't pay it back as I was supposed to.  I am willing to accept the consequences of my actions because I understand I'm the only one to blame for the situation I am in.  Now here is the issue, I am being promised a second chance with this rehabilitation but as you describe it there is barely a second chance.  Sure I am now eligible for federal aid in the form a student loans again but that is not why I went through the rehabilitation, I just wanted to repair my credit rating.  I could have achieved the same thing by consolidating my loans again and not dealing with all the paperwork and headache that comes with the rehabilitation process. 

Now as for my interpretation of the law, I believe that deleting the default status from ones credit history means removing the evidence of the delinquency that lead to the loan being in so called "default" status.  I would appreciate any thoughts to the contrary and it would seem that the ambiguity here comes from the wording of "removing the record of default".  What does that mean? As I stated my credit report never even labeled my student loan account as "default" so what purpose does "removing the word default" even serve me?

Thanks,

Matt

[boonelb]

Thank you it finally took going up the chain and then redisputing it to get my rehabbed loans to report correctly. I am lucky that the lates will be off by this year.  AES claimed that they never got notification of the rehab. 

[Anonymous]

After making my first post i read through this reply.  I don't agree with your analogy of the loan being an object and the default being a status of the object.  I appreciate that you acknowledge it is open for interpretation and you understand that's your interpretation. But as for the way i understand it, the definition of "default" in terms of a student loan means being 270 or more days delinquent on payment.  I'm not 100% on that definition but that was the consensus i found searching online.

Thus you fill in the definition in place of the actual word default and you get this:

"Upon the sale or assignment of the loan, the Secretary, guaranty agency or other holder of the loan shall request any consumer reporting agency to which the Secretary, guaranty agency or holder, as applicable, reported the "270 or more days of delinquency" of the loan, to remove the record of the "270 or more days of delinquency" from the borrower’s credit history."

I know it's not always that simple with the law, but I feel this is a different and intelligible way to interpret it.

[Anonymous]

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