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How student loan rehabilitation works

Get out of default and clear it from your credit history with this federal program.

Student loan rehabilitation offers you one-time shot to get your federal student loans out of default. Student loan rehabilitation erases the default from your credit report and gives payments that fit your budget. It also restores access to benefits like forgiveness programs.

But it’s not available for private loans and, in some cases, federal loan consolidation could be a better choice.

How student loan relief affects rehabilitation

Federal student loans are in automatic forbearance from March 13, 2020 until September 31, 2021 to help borrowers cope with the financial impact of COVID-19.

The Department of Education is counting all payments covered by automatic forbearance toward student loan rehabilitation. This means that if you enroll in student loan rehabilitation in March 2021, you will automatically meet six of the nine payments required to rehabilitate your loan. Read about student loan relief during COVID-19 for more information on how it works.

What is student loan rehabilitation?

Student loan rehabilitation is a program that allows you to get your federal student loans out of default. To rehabilitate your federal student loans, you must make nine reduced payments on your student loans within 20 days of the due date, over a period of nine or 10 months.

Once you’ve completed the program, the default is erased from your credit report and the federal government will stop garnishing your wages or tax refund if your loan was in collections. You can also qualify for federal student aid and repayment benefits again. This includes eligibility for programs like the Public Service Loan Forgiveness (PSLF), deferment and forbearance.

But this is a one-time program and late payments will stay on your credit report for seven years.

How to qualify for federal loan rehabilitation

You’re eligible for federal student loan rehabilitation if you have defaulted on a federal Direct or FFEL or Perkins student loan that hasn’t been enrolled in federal loan rehabilitation before.

Most federal student loans are in default after you miss a payment by 270 days. One exception is Perkins loans, which go into default as soon as you miss a payment. But if you’re less than 270 days late on another federal loan, take steps to avoid going into default. This can include enrolling in an income-driven repayment plan or asking for deferment or forbearance.

How to rehabilitate your student loans

You can rehabilitate your federal student loans by contacting your servicer and filling out a federal loan rehabilitation form.

After you’re signed up for federal loan rehabilitation, your servicer will give you a new monthly payment based on your income after taxes and basic personal expenses. Payments can be as low as $5 in some cases.

Then, you have to make nine payments within 20 days of their due date to complete the program. For Direct and FFEL loans, you must complete within 10 months. For Perkins loans, you must complete the program it within nine months.

How does rehabilitation affect my credit?

Student loan rehabilitation is one of the fastest ways to rebuild your credit because it’s the only program that removes the default from your credit report. With other programs like federal loan consolidation, the default stays on your credit report for seven years.

But this doesn’t mean your credit score will fully recover once you’ve finished the rehabilitation program. Late payments will still show up on your credit report for seven years and will continue to impact your score.

Other ways to get out of default

If you already rehabilitated your federal student loan or your private lender doesn’t offer rehabilitation, then choosing to consolidate your debt or pay it off in full are your next best options.

Federal loan consolidation

Consolidating your federal loans involves taking out a Direct Consolidation Loan to pay off your current student loans. It’s a faster option than rehabilitation, meaning you’ll be eligible for benefits like forgiveness, forbearance and deferment sooner. And there’s no limit to how often you can consolidate your loans.

But it won’t remove the default from your credit report. And you can’t qualify if you have a judgement against you that allows the government to garnish your wages.

If you want to consolidate right away, you’ll have to pay off the rest of the loan loan under an IDR. Or, you can choose whichever repayment plan you want after making three on-time, consecutive payments based on your financial circumstances.

Repay in full

You can also get out of default by paying off your loans in full. This option is available on both federal and private student loan holders.

To pay off your loan in full, contact your servicer and ask for the payoff amount on the date you plan on closing out the balance. This is usually a little higher than your current balance, because interest accrues every day.

What happens next?

After you rehabilitate your federal student loans, your loans are usually transferred to a new servicer. You’ll no longer owe the same low monthly payments that you had under student loan rehabilitation. But you can enroll in an IDR plan, which bases payments on your income after basic expenses.

If you have a sudden changes to your personal finances, contact your new servicer and ask about deferment and forbearance options — or update your income if you’re enrolled in IDR.

Also take steps to improve your credit score. Reporting utility payments, paying down other debts and keeping your credit card balances low are great ways to get started.

Bottom line

Student loan rehabilitation is the only way to get your federal loans out of default and erase it from your credit report. But you can only use this option once. Once you’ve completed the program, find a student loan repayment plan that fits your budget to avoid defaulting again.

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