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How student loan rehabilitation works

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How this service can help if you’ve defaulted on your federal student loans.

Defaulting on your federal or private student loans can feel like the end of your financial future, but there are ways to dig yourself out of default.

Student loan rehabilitation is a comprehensive way to handle your debt and get you back on the right track. You’ll make the most informed decision by understanding what’s involved with rehabilitation and looking at alternatives.

What is student loan rehabilitation?

Student loan rehabilitation is a process offered by the federal government to help ease your federal student loan out of default and remove the record from your credit report. It’s offered to any borrower who has defaulted on a federal student loan and may be in collections. If you’re having a difficult time making the requisite payments to stay above water, then student loan rehabilitation is a service you might want to consider.

To enter into rehabilitation for a Direct Loan or FFEL Program loan, you’ll need to agree to make nine monthly payments over the course of 10 consecutive months. The amount you pay is determined by your loan holder and is calculated as 15% of your yearly discretionary income divided by 12. If you have a Federal Perkins Loan, your payments are calculated the same way, but they must be made monthly within a nine-month period.

If you can’t afford the monthly payment, you may request an alternative payment. This is based off of your monthly income after your bills and other financial obligations are paid. Submit a Loan Rehabilitation: Income and Expense Information form along with documents that outline your monthly income and expenses.

If you want to start the loan rehabilitation process, contact your loan holder. After you’ve completed rehabilitation, your federal student loans will no longer be in default.

How do I know when my student loans are in default?

Default happens when you fail to make a number of payments on time. The exact specifics of default are set by your lender, so review your loan contract to understand the terms of default.

  • Federal student loans. A Direct Loan or FFEL Program loan will enter default after 270 days of missed payments.
  • Perkins and private student loans. Default usually begins as soon as you miss a payment.

The moment your loans enter default, the entire amount you owe becomes due. A lender may sell your debt to a collection agency and choose to take legal action against you. If it’s successful, a judge may declare that the lender can garnish your wages or collect a Treasury offset. You’ll also be charged multiple fees for your default, further worsening the situation.

Your credit is also impacted. The default is listed on your report for the next seven years along with every missed payment. This can have a huge negative affect on your score and make it harder for you to borrow money in the future.

If you enter default on your federal student loans, you’ll become ineligible for repayment flexibility and other repayment assistance programs. You’ll also be unable to borrow another federal student loan until your default is settled.

Pros and cons of student loan rehabilitation

If you’ve borrowed a federal student loan and have entered default, you’ll want to weigh the benefits and drawbacks of entering the loan rehabilitation program. While you’ll likely qualify for lower monthly payments and have your default eventually erased from your credit report, you’ll also have to go through the process while your wages are garnished, which might make it harder to make your rehabilitation repayments. We look at the pros and cons below.

Pros

  • Default erased from your credit report. Once you’ve completed loan rehabilitation, your default won’t appear on your credit report.
  • Low monthly payments. Your repayments during rehabilitation are based on your income and could be as little as $5 a month.
  • Former loan benefits are restored. After the rehabilitation process, you’ll be eligible for deferment, forbearance and loan forgiveness again.

Cons

  • Wage garnishment still in effect. You’re expected to make your rehabilitation payments while your wages are being garnished. This will end once your loan is no longer in default.
  • Not available for many private student loans. It’s rare for private lenders to offer rehabilitation plans to borrowers.
  • Late payments remain on your report. Although your credit report won’t show your default, the late payments will stay and continue to negatively impact your credit.

Are there other options to get out of default?

If you have 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.

Consolidate you federal student loans

When you want to consolidate a federal student loan, you have two options. You may choose to repay your new Direct Consolidation Loan via an income-driven plan, or you can make three full, consecutive monthly payments before consolidating. This second option allows your Direct Consolidation Loan to function more like a rehabilitation plan, with your loan holder charging you a reasonable payment based on your financial situation.

If your defaulted loan is in collections due to a judgment against you or is currently garnishing your wages, you won’t be able to consolidate your loan until the order has been lifted.

Consolidating your loan removes the default status and allows you to receive benefits previously stripped due to the default. This means you’re eligible for forbearance, deferment and loan forgiveness. However, consolidation doesn’t remove the default from your credit report.

Consolidate your private student loans

You may be able to consolidate your private student loans into one larger loan through refinancing — provided you still have a good enough credit score to receive a large loan from a new lender. In this instance, consolidating your loans functions much like refinancing. You’ll take out a new loan, pay off your defaulted loan and start making payments toward your new outstanding balance.

This doesn’t remove the default or missed payments from your credit report, however. You’ll still have to work to improve your credit and recover from such a large financial setback, but choosing to consolidate is a good way to start tackling your debt problem.

Repay in full

If you’re in default, you can always repay your loan in full, but this isn’t an option for most people.

Rehabilitating or consolidating your debt are the best paths to getting your finances back on track after defaulting on a student loan. Once either process is complete, you can refinance your student loan to lower your interest rate and lower your monthly payments.

Compare student loan consolidation and refinancing offers

Rates last updated September 19th, 2018
Name Product Min. Credit Score Max. Loan Amount APR Product Description
Credible Student Loan Refinancing
Good to excellent credit
None
2.57%(As low as ) (variable)
Get prequalified offers from top student loan refinancing providers in one place.
SoFi Student Loan Refinancing Variable Rate (with Autopay)
650
full balance of your qualified education loans
2.570%–6.980% (variable)
A leader in student loan refinancing, SoFi can help you refinance your loans and pay them off sooner.
Purefy Student Loan Refinancing
620
$300,000
2.57%–8.69% (variable)
Refinance all types of student loans — including federal and parent PLUS loans.
Earnest Student Loan Refinancing Variable Rate (w/ autopay)
650
no maximum
2.47%–5.87% (variable)
Get a tailored interest rate and repayment plan with no hidden fees.
PenFed Student Loan Refinancing
700
$300,000
3.25%–7.03% (fixed)
Straightforward refinancing with competitive rates.
CommonBond Student Loan Refinancing
660
$500,000
2.72%–7.25% (with autopay) (variable)
Trade in your existing school loans for competitive APRs that come with a discount for autopay.
LendKey Student Loan Refinancing (with AutoPay)
660
$300,000
2.51% (As low as) (variable)
Find competitive rates and unmatched loan benefits from LendKey’s network of not-for-profit lenders.
LendingTree Student Loans
Good to excellent credit
Varies by lender
3% (As low as) (fixed)
Compare multiple student loans and student loan refinancing options in one place.

Compare up to 4 providers

Bottom line

Entering default on your federal or private student loans doesn’t have to be the end of the world. There are ways you can repair your credit and pay down your debt. Take the time to research your options and find a method that fits your needs with our comprehensive guide to student loan refinancing.

Frequently asked questions about student loan rehabilitation

Kellye Guinan

Kellye Guinan is a writer and editor with finder.com and has years of experience in academic writing and research. Between her passion for books and her love of language, she works on creating stories and volunteering her time on worthy causes. She lives in the woods and likes to find new bug friends in between reading just a little too much nonfiction.

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