Guide to student loan rehabilitation

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Student loan rehabilitation is the process of negotiating a payment agreement with your loan holder to get your loans out of default. Removing a default can help you avoid credit score damage, wage garnishment and more, though it’s available only to federal student loan borrowers.

What is student loan rehabilitation?

Student loan rehabilitation is a strategy that borrowers can use to get federal student loans out of default. The federal government gives you a one-time opportunity to rehabilitate each eligible student loan and return to a current payment status.

How to rehabilitate your student loans

To rehabilitate your student loans and get out of default, you’ll need to follow a process set by the U.S. Department of Education:

  1. Contact your loan holder. If you’re unsure of who holds your loan, log in to your account on the Federal Student Aid website and click “View loan servicer details.”
  2. Apply for loan rehabilitation. You’ll need to send your loan holder a copy of your most recent tax return. This information enables the loan holder to calculate your new payment: 15 percent of your discretionary income. If this payment amount is too high for you to manage, you can request a financial hardship form.
  3. Sign your agreement. If the loan holder approves your application, it will send you a loan rehabilitation agreement via mail. You’ll need to review the terms, including the payment amount, and return the signed agreement to the appropriate address.
  4. Pay on time. Once you agree to your new monthly payment amount, you’ll need to make nine on-time payments. You must make these payments back to back within a 10-month time frame. All payments must post to your account within 20 days of each monthly due date to complete the rehabilitation process.

What happens after student loan rehabilitation?

After you make the ninth and final student loan rehabilitation payment, your loans will typically transfer to a new loan servicer. At that point, there are several benefits you can start to enjoy.

  • Default status is removed. This should halt any collection efforts, such as wage garnishment or Treasury offsets of income tax refunds and other federal payments.
  • Your credit history gets an update. When you successfully complete a student loan rehabilitation, the notation of “default” should disappear from the rehabilitated loans. Late payments that occurred prior to the default will, unfortunately, remain on your credit reports.
  • Benefits resume. With a current loan status, you should once again be able to apply for numerous federal student loan benefits. Depending on your loan type, these benefits may include income-driven repayment options, forbearance and deferment.
  • You can apply for additional student aid. If you need to apply for new student loans and federal grants, you should once again be able to do so.

Who is student loan rehabilitation best for?

Allowing your student loans to remain in default can create significant problems for your finances, so it’s important to remedy the situation as quickly as possible. Rehabilitation could be a good option for you if:

  • The student loans you wish to rehabilitate are eligible. You can apply to consolidate Direct Loans, FFEL Program loans or Perkins Loans.
  • You’ve never rehabilitated your student loans before. The federal government will allow you to rehabilitate eligible student loans only once.
  • You’re hoping to improve your credit report. A successful student loan rehabilitation should remove the default notation from your credit report. This may have some positive impact on your credit score, although the late payments from before the default will remain.

It’s also important to note that rehabilitation is also only an option if you have federal student loans. Private student loans don’t qualify for the rehabilitation program. If you default on private student loans, you may need to pursue other options, like negotiating a settlement or consulting with a student loan lawyer for guidance.

Things to consider before pursuing a student loan assistance program

Because you have only one shot to rehabilitate your student loans, it’s critical to manage the process well. If you fall behind on your student loan payments during the rehabilitation period or default on your loan again in the future, your options will be more limited than they were before. Plus, every time you default on a student loan, the loan holder may add expensive collection fees to your outstanding balance.

Although rehabilitation can be helpful for many borrowers who are struggling with their student loan payments, it’s not the right fit for everyone. Some borrowers may be better served by consolidating their student loans. Consolidation is a faster process, and there’s no limit to the number of times you can exercise this option.

Next steps

If you’re interested in rehabilitating your defaulted federal student loans, your first step is to reach out to your loan holder. From there, you have the option to request a financial hardship evaluation to make sure that your new payments are affordable.

Finally, set up some safeguards to make sure that you keep to your new payment schedule once you enter the rehabilitation program. Automatic payment drafts, smartphone reminders and even old-fashioned sticky notes can make it easier for you to avoid missed payments in the future.

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Written by
Michelle Black
Contributing writer
Michelle Lambright Black is a credit expert with over 19 years of experience, a freelance writer and a certified credit expert witness. In addition to writing for Bankrate, Michelle's work is featured with numerous publications including FICO, Experian, Forbes, U.S. News & World Report and Reader’s Digest, among others.
Edited by
Student loans editor