Guide To Student Loan Rehabilitation

Guide To Student Loan Rehabilitation
Written by Publishing Team

Student loan rehabilitation is the process of negotiating a repayment agreement with the loan holder to get your loans out of default. Clearing a default can help you avoid credit score damage, withholding wages, and more, although it’s only available to federal student loan borrowers.

What is student loan rehabilitation?

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

How to Rehabilitate Your Student Loans

To rehabilitate your student loans and get rid of defaults, you will need to follow a process outlined by the US Department of Education:

  1. Contact the loan holder. If you are not sure who the loan holder is, log into your account on the Federal Student Aid website and click “View loan service details.”
  2. Apply for loan rehabilitation. You will need to send a copy of the loan holder’s most recent tax return. This information enables the loan holder to calculate the new payment: 15 percent of your discretionary income. If this payment amount is too high and you cannot manage it, you can request a financial hardship form.
  3. Sign your agreement. If the loan holder agrees to your application, they will mail you a loan rehabilitation agreement. You will need to review the terms, including the amount of payment, and return the signed agreement to the appropriate address.
  4. Pay on time. Once you agree to the new monthly payment amount, you will need to make nine payments on time. You must make these payments again within the 10-month time frame. All payments must be sent to your account within 20 days of each monthly due date to complete the rehabilitation process.

What Happens After Student Loan Rehabilitation?

After the ninth and final student loan rehabilitation installment is paid, your loans will usually be transferred to a new loan service. At this point, there are many benefits that you can start enjoying.

  • Default mode has been removed. This should stop any collection efforts, such as withholding wages or Treasury compensation for income tax refunds and other federal payments.
  • Your credit history gets updated. Upon successful completion of student loan rehabilitation, the phrase “defaulting” should disappear from the rehabilitated loans. Late payments that occurred before the default will, unfortunately, remain on your credit reports.
  • Resume benefits. With your current loan status, you should again be able to apply for the many benefits of federal student loans. 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 be able to do so again.

For whom is the best student loan rehabilitation?

Allowing your student loans to remain in repayment mode can cause major problems for your finances, so it is important to address the situation as quickly as possible. Rehabilitation may be a good option for you if:

  • Student loans you wish to rehabilitate are eligible. You can apply for direct loan consolidation, FFEL loans, or Perkins loans.
  • You have not rehabilitated your student loans before. The federal government will only allow you to requalify eligible student loans once.
  • You are hoping to improve your credit report. Successful student loan rehab should remove the default mark from your credit report. This may have some positive impact on your credit score, although late payments before you default will still exist.

It’s also important to note that rehabilitation is also an option only if you have federal student loans. Private student loans are not eligible for the rehabilitation program. If you default on your private student loans, you may need to pursue other options, such as negotiating a settlement or consulting with a student loan attorney for guidance.

Things to Consider Before Pursuing a Student Loan Assistance Program

Since you only have one chance to rehabilitate your student loans, it is critical to manage the process well. If you default on student loan payments during the rehabilitation period or default on the loan again in the future, your options will be more limited than they were before. Additionally, each time you default on a student loan, the loan holder may add a hefty collection fee to your outstanding balance.

Although rehab can be beneficial for many borrowers who are struggling to pay off student loans, it is not right for everyone. Some borrowers may be better served by consolidating their student loans. Consolidation is a faster process, and there is no limit to the number of times you can exercise this option.

Next steps

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

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

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