Student Loan Rehabilitation: What It Is and When to Use It

You can rehabilitate defaulted federal student loans only once to get them back in good standing.

Ryan LaneApr 9, 2021
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Student loan rehabilitation is a one-shot opportunity for borrowers to get federal student loans out of default. Private student loans are not eligible for rehabilitation.

Rehabilitation takes longer than student loan consolidation, the other primary option for default recovery. But rehabilitation is generally the better choice because it:

  • Removes the default from your credit report. This will improve your credit score, though the late payments leading to the default will remain.

  • Eliminates additional collection costs. Rehabilitated federal direct loans are subject to collection costs, but those fees are not capitalized, or added to your loan balance.

You can consolidate out of default simply by agreeing to repay your new loan under an income-driven plan. This makes consolidation a good option to resolve default quickly — for example, if you’re heading back to school and need access to federal student aid.

But unlike rehabilitation, consolidation will not remove the default from your credit report. Also, consolidating out of default can add collection costs of up to 18.5% of your balance to your new loan’s balance, increasing the amount you owe and repay.

How to rehabilitate student loans

Follow these steps to rehabilitate student loans:

  1. Contact your federal loan holder. This could be a servicer, collection agency or different company, depending on your loans and how long they’ve been in default. Log in to your account if you’re unsure whom to contact.

  2. Agree to a payment amount. Rehabilitation payments must be “reasonable,” which usually means 15% of your discretionary income. But if you can’t afford that amount, you can request an alternative payment based on your overall finances. Alternative payments can be as small as $5 per month.

  3. Sign a rehabilitation agreement. You must submit a written agreement to rehabilitate your defaulted loans. Don’t start making payments until you’ve officially started this process; they may not count toward rehabilitation.

  4. Pay as required. Student loan rehabilitation requires you to make nine on-time payments — within 20 days of the due date — over a 10-month period. Payments must also be voluntary. For example, money seized from your tax refund wouldn’t count as a payment. Keep in mind that months spent in the current automatic forbearance for federal student loan borrowers count toward student loan rehabilitation.

Student loan rehabilitation calculator

What happens after student loan rehabilitation

After student loan rehabilitation, your loan is usually assigned or sold to a new servicer. All collection activities stop — though wage garnishment will end after you make five rehab payments — and you’ll regain access to federal student aid and repayment options, such as deferment, forbearance and income-driven repayment.

Because you’re allowed to rehabilitate a student loan only once, have a strategy to afford your payments post-rehab. If you originally fell behind because payments were too expensive, selecting an income-driven repayment plan will likely be your best choice. Your new servicer will give you this option when you restart repayment.

If your rehabilitated loan defaults again, you’d have to consolidate it out of default. But if you already consolidated that loan, you wouldn’t be able to do this unless you have another loan to add to the consolidation. Your only choice would be to pay your full balance.

If you reach that point, your loan holder may settle for less than you owe. Filing for bankruptcy could make sense as well. But neither of those options is guaranteed to save you money or get rid of your loans.

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