What is the student loan rehabilitation program?

Key takeaways

• The student loan rehabilitation program is for federal borrowers who have defaulted on their student loans, and completing the program gets you out of default.
• Most federal borrowers in default can sign up for the program through the U.S Department of Education (ED) Default Resolution Group (DRG).
• If approved, you need to make nine to 10 minimum payments, which are based on 15% of your annual discretionary income.

Defaulting on federal student loans can lead to collection calls, a lower credit score, court dates, wage garnishment, and withheld tax returns and federal benefits. If your loans are already in default, you likely qualify for the federal student loan rehabilitation program. In just nine to 10 months, you could be out of default and back on track with your finances – we cover what you need to know below.

What happens if you default on federal student loans?

If you stop making payments on a loan for a set period, your account may go into default. For federal student loans, you have 270 days to start making payments again – after this point, your account is likely in default. At this point, your entire loan balance is due and the U.S. government may take you to court. In addition to losing eligibility for federal student aid, defaulting could carry the following repercussions:

• Your wages could be garnished
• Your federal tax return may be withheld
• Other federal benefits could be withheld to be put towards your loan amount

The federal government also notifies credit bureaus after 90 days of non-payment, which could drop your credit score and affect your ability to take out personal loans, mortgages, or auto loans.

How to avoid defaulting

If you can’t make loan payments per your agreement, reach out to your loan servicer as soon as possible. There are often repayment options available to federal borrowers that can help you avoid defaulting, including deferment, forbearance, consolidation, and income-repayment plans.

However, the student loan rehabilitation program could be your lifeline if you’ve already defaulted.

What is the student loan rehabilitation program?

The student loan rehabilitation program is for borrowers who defaulted on federal student loans that allows them to get out of default status. Here’s what you need to know:

• If you borrowed Direct Loans or the Federal Family Education Loan (FFEL), you need to make nine payments within 10 consecutive months to complete the program.
• For those who defaulted on Federal Perkins Loans, you have to make nine consecutive payments.
• Under the rehabilitation program, your monthly minimum payment is 15% of your annual discretionary income, divided by 12.

Pros of student loan rehabilitation

Aside from the obvious – getting out of default – there are several benefits to signing up for federal student loan rehabilitation, such as:

• You’re re-eligible for federal student loan benefits. Once you’ve completed the rehabilitation program, you’re eligible for income-driven repayment plans, deferment, forbearance, and other programs again. You’ll also be able to take out additional federal student loans as needed.
• The default is removed from your credit report. If your account is in default, you can only remove it by paying off the entire balance or completing the student loan rehabilitation program. You should also stop receiving collection calls.
• Your minimum payments are likely reduced. Since payments are based on 15% of your annual income and the government takes mandatory spending into account, your minimum payments will almost certainly be lower. If you still can’t afford this amount, you may qualify for an even lower minimum.
• You’ll pause wage garnishment and withhold funds. As long as you make payments according to your rehabilitation program agreement, your funds and wages won’t be withheld or garnished.

Cons of student loan rehabilitation

For most federal borrowers in default, student loan rehabilitation is the way to go. However, there are some downsides and general terms to note, too.

• It’s usually a one-time opportunity. You can only rehabilitate a defaulted federal student loan once, unless your previous rehabilitation was before August 14, 2008.
• You have to make regular payments. To complete the program and get out of default, you need to make nine to 10 payments, depending on the type of loan you have. If you’re late, you could restart the rehabilitation period or have your wages or tax refunds garnished or withheld.
• Involuntary payments don’t count. Wage garnishments and tax refunds don’t count towards the required number of monthly payments.
• It takes nine to 10 months to complete. If you’re looking to rehabilitate faster, it may be better to consolidate your student loans instead, but know that the default will remain a part of your credit history.

How to sign up for student loan rehabilitation

Here are some steps you’ll need to complete to sign up for federal student loan rehabilitation:

1. Find your loan servicer. You can find your loan servicer on your StudentAid.gov account under “My Loan Servicers.” For most federal student loan borrowers, it’s the U.S Department of Education (ED) Default Resolution Group (DRG).
2. Submit required documentation. You’ll need to mail or fax your latest tax transcript and a hand-signed IRS Form 1040 federal tax return from the most recent tax year.
3. Wait for a letter. If approved for the program, you’ll receive a letter detailing your monthly minimum payment, payment options, and terms and conditions. You may receive a request for additional documentation if your submission wasn’t sufficient.
4. Make a new MyEdDebt.ed.gov account. Your new account will show your Loan Summary, detailing your Repayment Agreement, when it began, your payment deadline, debt balance, minimum payment amounts, and more. You may be asked to take different steps if you have a different loan servicer – read over their instructions carefully.
5. Make payments. On your MyEdDebt.Ed.gov account, visit the “My Account” section to view Make Payment options. The ED accepts debit, pre-paid card, check, or money order. Your payments cover fees first, then interest, and then the principal balance.

What if you can’t make a payment?

If you can’t make the minimum payment according to your rehabilitation program’s terms due to your current financial situation, you can submit the Loan Rehabilitation Income and Expense form which may qualify you for a lower amount.

However, if you don’t notify the DRG of your inability to pay, you could have your wages garnished or your tax refunds withheld until your loan is no longer in default or you’ve made a minimum of five payments.

What happens after student loan rehabilitation?

Once you completed your student loan rehabilitation program, your MyEdDebt.ed.gov Dashboard will highlight your achievement under “Loan Summary.” The remaining balance of your loan will then be sent to a different loan servicer, which you can find on the same page under “Servicer Name.” “Servicer Name” and the default will be removed from your credit report.

Federal student loan rehabilitation can be an excellent route to get out of default and get back on track with your finances. You can learn more about your options by visiting the DRG website and StudentAid.gov.

Scholarships might be an excellent way to keep your student loan debt low, should you return to school after rehabilitation. Our Scholarship Search tool can help you find awards you qualify for – and it’s completely free to use!