What Are Student Loan Rehabilitation Programs?

Student loan rehabilitation programs are designed to offer students a structured path out of default. The U.S. Department of Education created this program specifically for federal Direct and FFEL loans.

Federal Direct and FFEL loans go into default when the payment is not made for 270 days or more. This carries a series of serious consequences:

  • Losing eligibility for additional federal loans and grants.
  • Loans are accelerated.
  • Losing eligible federal loan benefits such as income-driven repayment plans and deferment or forbearance options. 
  • The loan servicer reports the default to credit agencies, damaging your credit and making it even more difficult to borrow.
  • Loan services may also garnish your wages or seize your tax refund to repay a portion of the loan.

Student loan rehabilitation programs help you get out of default and avoid all of the above consequences. 

How Student Loan Rehabilitation Works

The way student loan rehabilitation works is that you agree to make 9 voluntary, reasonable, and affordable monthly payments. This must be done within 20 days of the due date during a period of 10 consecutive months. The 9 payments in 10 months essentially allows you to miss one payment during this period without losing your eligibility to rehabilitate.

Both you and the lender will have to agree upon what is a ‘reasonable and affordable’ payment amount. The payment amount you agree upon should be affordable for you and as long as you’ve made the 9 payments on time, default status will be removed from your credit history.

Once you’ve entered a student loan rehabilitation program, it’s crucial that you do not renege on your agreement. This is a one-time opportunity and can make things considerably worse if you miss your rehabilitation payment.

Before entering into rehabilitation, it’s important to understand the pros and cons of choosing this option.

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Pros of Student Loan Rehabilitation

Entering rehabilitation when your student loans are in default offers you these advantages:

  • Your loans will regain eligibility for federal benefits. Once you’ve successfully completed the rehabilitation process, you’ll regain access to income-driven repayment plans, deferment, and forbearance.
  • The loan default will be removed from your credit report. Only the student loan rehabilitation offers the facility of removing the loan default from your credit report. This is a huge benefit.
  • You’ll be eligible for applying for new federal student loans on successful completion of the rehabilitation program.
  • Your payments may be reduced significantly based on your discretionary income and family size.
  • Wage garnishment and tax refund offsets will stop. If your loan servicer has garnished your wages or seized your tax refund, that will end on completion of the rehabilitation process.
  • Collections calls will stop.

Cons Of Student Loan Rehabilitation

There’s no doubt that student loan rehabilitation programs offer significant benefits for students who’ve defaulted on their loans. However, before entering the program it’s important to understand the downsides associated with this option.

  • Student loan rehabilitation is a one-time only opportunity and is not an option if you default on your student loans again.
  • It takes up to 10 months to get out of default and the default status is removed only after 9 completed payments. Consolidation may be a better option if you’re looking to remove the default status sooner.
  • All 9 payments must be made on time to complete the rehabilitation program successfully. A late payment could restart the rehabilitation period.
  • Involuntary payments including wage garnishments and tax refunds are not counted towards the 9 required payments for successful rehabilitation.

If consolidation is not an option, there’s no question about weighing the pros and cons. Without the consolidation option, entering rehabilitation is the best way to get out of default with the least impact.

How To Rehabilitate Your Student Loans

Step 1: Contact your loan servicer and request rehabilitation. At this point, it’s more likely you’ll be dealing with a collection agency. According to the law, you’re required to pay only what is reasonable and affordable for you. Don’t let the collector force you into agreeing to pay an unaffordable amount.

Step 2: Agree to the payment amount in writing. Your rehabilitation periods starts immediately after and you have to make the 9 payments within 10 consecutive months. You can afford to miss only one payment during this time and still stay on track for rehabilitation. If you miss more than one payment, you’ll lose your eligibility and have to restart the rehabilitation period.

What Happens After Student Loan Rehabilitation?

After you’ve completed the agreed-upon payments within the 10-month period, your loans are no longer in default, considered rehabilitated, and transferred to a new loan servicer. Your new loan servicer will offer you a standard repayment plan. The new monthly payment will be much higher than it was during the rehabilitation period. If you can’t afford the higher payments, you can opt for one of the income-driven repayment plans instead.

Eligibility to income-driven repayment plans are restored on successful completion of the rehabilitation process. Choosing this option ensures that your payments are always affordable minimizing your risk of getting into default again. If you re-default on your newly rehabilitated loan, you cannot rehabilitate again.

 

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