III:00:12 Guidelines for Handling Defaulted Student Loans

I. PURPOSE

The following procedures provide a uniform standard for handling defaulted loans in accordance with the federal and state laws, and policies of the Tennessee Board of Regents.

II. GENERAL DEFINITION OF DEFAULT

Default is defined in the Federal Student Financial Aid (SFA) Handbook as "the failure of a borrower to make an installment payment when due or to comply with other terms of the promissory note or written repayment agreement."

III. DEFAULT AS IT PERTAINS TO TITLE IV ELIGIBILITY (PER THE SFA HANDBOOK)

A student in default on an SFA loan can't receive further Title IV aid until he/she resolves the default, which can be done different ways:

A. A student can resolve a default by repaying the loan in full.

B. If a defaulted loan is successfully consolidated, then it is also considered paid in full.

C. A student in default on an SFA loan can regain eligibility for Title IV aid if he/she has made satisfactory repayment arrangements (six consecutive, full, voluntary payments on time). Note that reinstatement of eligibility does not bring the existing loan out of default, and the borrower is not eligible for deferment. If the student continues making payments for a total of 9 consecutive, voluntary, on time payments, the loan can be considered rehabilitated and the student will regain all the normal loan benefits.

IV. CONSEQUENCES OF DEFAULT ON MTSU STUDENT LOANS

The policy of defaulted loans pertains to all student loans at Middle Tennessee State University using as a guide the Higher Education Act of 1965, as amended, the Higher Education Amendment of 1992, (Federal Register 34 CFR Part 674 Campus-based programs), laws of the State of Tennessee and policies of the Tennessee Board of Regents.

A. Admission – No applicant will be considered for admission as a student until all due and payable outstanding fees and charges from prior terms, of whatever nature, have been paid by the applicant.

B. Grades – Grades will not be released to a student with an outstanding balance due on an MTSU student loan (Perkins, SGA emergency, short term foundation, university loan, etc.)

C. Transcripts – A transcript will not be released to a borrower with an outstanding balance due on an MTSU student loan (Perkins, SGA emergency, short term foundation, university loan, etc.)

V. MISCELLANEOUS PROVISIONS

A. Due Diligence

1. MTSU follows the federal guidelines for due diligence with all student loan accounts.

2. All MTSU loans are reported to a credit bureau at the time of disbursement as required by the Higher Education Act of 1965, as amended. MTSU reports all loans on a monthly basis, electronically, based on data created at the time loan statements are printed. When the status of an account changes (from enrolled to grace to repayment), this status change is reported. Established credit history is not altered or removed from a borrower's credit file unless the information reported by MTSU is incorrect.

B. Deferment – A student does not qualify for a deferment if the account is in a delinquent status. Exception – If the right of deferment eliminates the delinquency, the deferment will be entered. For example, a student is in repayment and goes back to school as a full time student. Even if the borrower does not notify the student loans area in a timely manner as required by law, but does qualify for the deferment and the deferment wipes out the delinquency, the deferment must be granted. (Higher Education Act of 1965, as amended)

C. Monetary Disbursements to Students – Within a semester, any student receiving a monetary disbursement (SGA emergency loan, short term loan, Direct Sub/Unsub/PLUS, foundation/university loan, Federal Perkins Loan, scholarship, awards, etc.) will pay any balances owed to MTSU from that disbursement.

D. Rehabilitation Option for Defaulted Federal Perkins borrowers (in accordance with the SFA Handbook) – When a student contacts MTSU about his/her defaulted Perkins balance, the student may be offered rehabilitation. A borrower may rehabilitate a defaulted Perkins Loan by making nine consecutive on-time payments, the payment amount to be determined by the school. The outstanding interest balance must be paid current by the completion of the rehabilitation.
When the last consecutive on-time payment is received:

1. The borrower is returned to regular repayment status.

2. The first of the 9 consecutive payments is treated as the first payment in a new 10 year repayment schedule

3. The previously reported default is removed from the Trans Union and Equifax credit bureaus.

After rehabilitating a defaulted loan and returning to regular repayment status, a borrower regains the benefits and privileges of the promissory note, including deferment and cancellation.

E. Acceleration of a loan - The acceleration of a loan forfeits the borrower's right for any future deferment or cancellations as long as the loan remains accelerated. (Higher Education Act of 1965, as amended)

F. Assignment of a student loan to the Department of Education - The status of a loan that has been assigned to the Department of Education is still considered in default until the loan is paid in full, even if the borrower has made satisfactory arrangements to repay the defaulted loan in order to qualify for additional aid from SFA programs.

Revisions: August 30, 1994; March 4, 2011.

Cross-references: Federal Student Financial Aid Handbook;  Higher Education Act of 1965; Higher Education Amendment of 1992; Federal Register 34 CFR Part 674.