A new rule made in November last year came online last month and offers great hope to those whose federal student loans are in default. If you’re behind on your loans, now is the time to act – you can get your loans rehabilitated for the lowest payments ever possible. This new rule has been making headlines lately, but we like to go straight to the source to read up on important legislative changes like this – if you want to read the new rule for yourself, click here to browse the Federal Register’s Final Rule for the Title IV Student Loan Program. If you don’t want to sift the minutia, here are the important parts:
#1 “Reasonable and affordable” clearly defined
This is now defined as 15% of the amount that your adjusted gross income (AGI) exceeds 150% of the poverty level for your state and family size. AGI is not the amount of income you gross – it’s an IRS term that is your gross earnings (not take home pay) minus deductions including alimony, medical expenses, contributions to your retirement plan and/or health savings account, deductible self-employment taxes and allowable student loan interest and tuition payments. For most states, the poverty line for a household of one is $11,670. 150% of this is $17,505. Say you’re grossing $30,000 per year and your AGI is $28,000, so you do this math: 28000-17505 = $10,495 and 15% of that = $1,574, which equates to about $130 per month. That’s sooo much better than what was demanded to rehab loans before.
#2 Eradicates unreasonable required minimum payments
One of the major barriers to rehabilitating student loans was that you were asked to make 10 payments that you clearly couldn’t afford. The only minimum that you have to hit now is that if the calculation we showed you in #1 comes out to a $0 amount, you’ll have to pony up a paltry $5 a month instead. If you’re unemployed, now is definitely the time to rehab your loans because you shouldn’t have to pay more than $5 a month. No matter how broke you are right now, you should be able to take advantage of this new rule. How cool is that?
#3 Gets debt collectors off your back
The new rule specifies that while you’re making rehabilitation payments, you shouldn’t be contacted by your loan servicer about paying less than they want or your prior default. Contact is pretty much limited to communication to support your rehabilitation plan – not to bug you for money, make you feel bad or hassle you in any way.
#4 Ends wage garnishment sooner than you can hope
One of the boogers about loan rehabilitation prior to this rule change is that if you were already being garnished, you were usually asked to make payments in addition to what was already being taken. That’s just not feasible (or reasonable). With the rule change, after you make five rehab payments, the wage garnishment will end unless you ask it to continue (and who would do that?). This can be a huge boon to those hard-hit by having their wages grabbed by the government.
You may be tempted to go for a consolidation rather than a rehabilitation plan because loan servicers sometimes push this option, but here’s why you may not want to do this: Consolidation is a one shot only deal, so why not save it in case you ever get in over your head again? Take advantage of this new affordable rehab plan to get your loans under control and keep consolidation in your back pocket.
To always know how much you owe and what’s going on with your loans, even if you’re in default now, sign up for Tuition.io’s free student loan tool. And read our blog often for other student loan news and great money advice.