Imagine you’re a 35-year old who attended two years of college at age 18 and 19, but dropped out before receiving a degree. You racked up some student loan debt that you had every intention of paying back, but your life took other turns. Whether due to illness, divorce, or just plain hard times, you defaulted on your student loans. 

Now, several years have passed, and you’ve been able to get your financial life back in order. You have a stable job (or as stable as a job can be in this economy. Your salary has increased steadily over the past 10 years, and you’ve been able to make a dent in paying off your debt. For the past nine months you’ve worked with the holder of your defaulted student loans (a “guarantor”) and you’ve made a string of consecutive on-time payments. Making the room in your budget has been tough, but you’ve persevered because there’s a light at the end of the tunnel called “rehabilitation.” 

Rehabilitation will remove the federal default from your credit record, which has been preventing you from buying a home. Rehabilitation will also give you back eligibility for federal aid. You’ve been thinking about returning to school part-time. After all, why have the debt with no degree? Rehabilitation is a significant benefit.

No longer available
There’s a new problem. Your guarantor just informed you that rehabilitation is not available due to “current market conditions.” But wait, haven’t you been reading in the news that the government has put new programs in place to make sure federal student loans are available? ECASLA, TARP, TALF, put, participation, the conduit -- so many mechanisms, all designed to keep federal student loan borrowers protected during these times of financial uncertainty. So what’s the problem?

The problem, you learn, is that Rehabilitation has been derailed by a collision of the liquidity crunch and a myopic interpretation of legislative language. 

Until recently, after a borrower had completed nine months of on-time payments, a guarantor sold the loan back to a lender and returned funds to the government, effectively eliminating the default claim. The new “rehabbed” loan was considered a new, non-defaulted loan.

However, in our present credit market, no lender buyers exist. The recent ECASLA bailout exists for new student loans, not rehabilitated ones. 

Without Rehab, thousands of borrowers like the one described above are stuck in “Student Loan Hell.” Any plans they may have to borrow to return to school are stalled. Their credit ratings remain stained so they can’t borrow to buy a house or a car or refinance a mortgage. 

One minor change to ECASLA administration would enable thousands of consumers a fresh start. It will also provide an infrastructure in the event a troubled economy and job losses result in larger numbers of defaulting student loan borrowers. 

Saunders is American Student Assistance’s vice president of Strategic Services. Her Policy Perspectives blog can be found at http://www.amsa.com/blogs/policyperspectives.