Sallie Mae 2006 Annual Report Download - page 214

After the Department reimburses a guarantor for a default claim, the guarantor attempts to collect the
loan from the borrower. However, the Department requires that the defaulted guaranteed loans be assigned to
it when the guarantor is not successful. A guarantor also refers defaulted guaranteed loans to the Department
to “offset” any federal income tax refunds or other federal reimbursement which may be due the borrowers.
Some states have similar offset programs.
To be eligible for federal reinsurance, guaranteed loans must meet the requirements of the Higher
Education Act and regulations issued under the Act. Generally, these regulations require that lenders determine
whether the applicant is an eligible borrower attending an eligible institution, explain to borrowers their
responsibilities under the loan, ensure that the promissory notes evidencing the loan are executed by the
borrower; and disburse the loan proceeds as required. After the loan is made, the lender must establish
repayment terms with the borrower, properly administer deferrals and forbearances, credit the borrower for
payments made, and report the loan’s status to credit reporting agencies. If a borrower becomes delinquent in
repaying a loan, a lender must perform collection procedures that vary depending upon the length of time a
loan is delinquent. The collection procedures consist of telephone calls, demand letters, skiptracing procedures
and requesting assistance from the guarantor.
A lender may submit a default claim to the guarantor after a student loan has been delinquent for at least
270 days. The guarantor must review and pay the claim within 90 days after the lender filed it. The guarantor
will pay the lender interest accrued on the loan for up to 450 days after delinquency. The guarantor must file a
reimbursement claim with the Department within 45 days (reduced to 30 days July 1, 2006) after the guarantor
paid the lender for the default claim. Following payment of claims, the guarantor endeavors to collect the loan.
Guarantors also must meet statutory and regulatory requirements for collecting loans.
Student Loan Discharges
FFELP loans are not generally dischargeable in bankruptcy. Under the United States Bankruptcy Code,
before a student loan may be discharged, the borrower must demonstrate that repaying it would cause the
borrower or his family undue hardship. When a FFELP borrower files for bankruptcy, collection of the loan is
suspended during the time of the proceeding. If the borrower files under the “wage earner” provisions of the
Bankruptcy Code or files a petition for discharge on the ground of undue hardship, then the lender transfers
the loan to the guarantee agency which then participates in the bankruptcy proceeding. When the proceeding
is complete, unless there was a finding of undue hardship, the loan is transferred back to the lender and
collection resumes.
Student loans are discharged if the borrower died or becomes totally and permanently disabled. A
physician must certify eligibility for a total and permanent disability discharge. Effective January 29, 2007,
discharge eligibility was extended to survivors of eligible public servants and certain other eligible victims of
the terrorist attacks on the United States on September 11, 2001.
If a school closes while a student is enrolled, or within 90 days after the student withdrew, loans made
for that enrollment period are discharged. If a school falsely certifies that a borrower is eligible for the loan,
the loan may be discharged. And if a school fails to make a refund to which a student is entitled, the loan is
discharged to the extent of the unpaid refund.
Rehabilitation of Defaulted Loans
The Department of Education is authorized to enter into agreements with the guarantor under which the
guarantor may sell defaulted loans that are eligible for rehabilitation to an eligible lender. For a loan to be
eligible for rehabilitation, the guarantor must have received reasonable and affordable payments for 12 months
(reduced to 9 payments in 10 months effective July 1, 2006), then the borrower may request that the loan be
rehabilitated. Because monthly payments are usually greater after rehabilitation, not all borrowers opt for
rehabilitation. Upon rehabilitation, a borrower is again eligible for all the benefits under the Higher Education
Act for which he or she is not eligible as a default, such as new federal aid, and the negative credit record is
expunged. No student loan may be rehabilitated more than once.
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