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Federal student loan default comes with serious consequences, including being disqualified for deferment, forbearance, or future federal student aid; seizure of your tax refund or other federal benefits; damage to your credit; and possible wage garnishment. Re-establishing good credit after default can take years.
Repaying student loans in one lump sum isn’t always a viable option for borrowers who are in default. But student loan rehabilitation provides an opportunity to get your federal student loans out of default by making timely and consistent payments over a period of time.
Here’s how loan rehabilitation can help you get back on track.
Student loan rehabilitation is a type of payment plan that helps you get out of default and get back on a federal student loan payment plan. It’s available for borrowers with Federal Direct Loans, Federal Family Education Loans (FFEL), and Federal Perkins Loans.
The loan rehabilitation process can take less than a year, and once you complete it the Department of Education will ask credit-reporting agencies to remove the default status from your credit report. You’ll also regain eligibility for other federal loan repayment plans and relief programs.
Student loan rehabilitation differs from student loan forgiveness. Loan forgiveness cancellation or discharge removes the obligation for you to repay your remaining student loan balance. To qualify, you must make a certain number of eligible payments while working a qualifying job for an eligible employer. But if your federal student loan goes into default, you won’t qualify for loan forgiveness — even if you meet all the other requirements.
You can only rehabilitate a loan once — so if it falls into default a second time, you’ll have to look for other options, such as student loan refinancing.
Student loan rehabilitation is different from refinancing, which allows you to switch to a new, private lender to pay off your loans. Before you refinance your student loans, be sure to compare rates from multiple lenders. Credible makes it easy to see your prequalified student loan refinance rates in just minutes.
You must have federal student loans that are in default to start the rehabilitation process. This is just one of a few ways to get your student loans out of default if you’ve been unable to make timely payments. Contact your loan servicer to get started.
The type of federal loan you have will determine the steps you need to take for rehabilitation. For Federal Perkins Loans or FFEL Loans not owned by the Department of Education, you should contact your loan servicer for information. Keep in mind that for Perkins loans, your school may be the loan servicer.
For federal Direct Loans, follow these steps:
1. Provide the Department of Education with tax information
Mail or fax a copy of your latest tax return or tax transcript to the Department of Education. The department will use it to verify your income and calculate your monthly payments. Your federal tax forms must be signed, and the Department of Education doesn’t accept digital signatures. If you live with your spouse but file taxes separately, you’ll need to submit your partner’s tax return as well.
You can find the mailing address and fax number at StudentAid.gov.
2. Sign and return the rehabilitation agreement promptly
Once the Department of Education calculates your monthly payments, it’ll send you an agreement within 10 business days. This agreement will show your monthly payment and clarify the terms and timeline for your loan rehabilitation.
After reviewing the rehabilitation agreement, sign and return it to your loan servicer in a timely manner.
3. Make consistent monthly payments
The next step is to begin making consistent payments based on the amount laid out in the agreement. You need to make nine monthly payments in a 10-month time frame to get your loans rehabilitated.
When you’ve successfully made nine on-time payments, your lender will send a request to the three major credit bureaus to remove the default from your account. This could increase your credit score and will stop wage garnishment if this was occurring.
If you’re struggling to manage private student loan payments, refinancing can be a way to get a smaller monthly payment by extending your repayment period. Credible makes it easy to compare refinance rates from multiple private student loan lenders.
Rehabilitating defaulted federal student loans has some significant advantages, including:
- Student loan rehabilitation allows you to remove the default status from your credit history once you make the amount of agreed-upon payments to your lender.
- If you’ve struggled to make your student loan payments in the past, loan rehabilitation might allow you to pay a smaller amount per month. Payments are usually 15% of your annual discretionary income divided by 12.
- After successfully completing loan rehabilitation, you’ll regain eligibility for federal student loan relief benefits, such as income-driven repayment, deferment, and forbearance.
- Sometimes, your lender may collect overdue student loan payments through wage garnishment or Treasury offset when loans go into default. After your student loans have been rehabilitated, this will stop.
You should also consider some potential disadvantages of loan rehabilitation, including:
- If you successfully complete student loan rehabilitation once and then your loans go into default again later, you won’t be able to use this option again.
- It isn’t a fast process. Student loan rehabilitation takes nine to 10 months, on average. This could seem like a long time if you’re looking to get your loans out of default as soon as possible.
- If your wages have been garnished to pay back your student loans in default, setting up a rehabilitation agreement won’t stop this right away. Non-voluntary payments won’t count toward your agreement, and wage garnishment will only stop at the end of the 10-month period when you’ve made your agreed-upon payments.
- Rehabilitation won’t get you a lower interest rate on your loan.
Once your student loans are rehabilitated, you can get back on a regular repayment plan to pay off your debt. It’s important to prioritize student loan payments to avoid missing due dates or going into default again. Since student loan rehabilitation is a one-time option, you won’t be able to use it again.
Here are some tips for managing loan debt post-rehabilitation:
- Enroll in an income-driven repayment (IDR) plan. These federal student loan repayment plans aim to give you an affordable payment that’s usually based on about 10% of your discretionary income. Plans such as Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and Income-Contingent Repayment (ICR) extend your repayment term to 20 to 25 years. While going on an IDR plan and extending your repayment period can give you a smaller monthly payment, keep in mind that you’ll pay more in interest costs over the life of the loan.
- Use deferment or forbearance, if needed. Deferment and forbearance are federal student loan relief programs that allow you to temporarily postpone or reduce your student loan payments. You may qualify for deferment if you’re in school at least part-time, unemployed, or working less than 30 hours per week and looking for full-time work. Consider applying for forbearance if you don’t qualify for deferment. You’ll need to provide documentation and proof of financial hardship. Forbearance may be granted for up to 12 months at a time.
- Consider refinancing to lower payments and interest. Refinancing your student loans with a private lender could lower your payment and interest rate. This could be an option if you’re looking to pay your loans off faster and save money. But refinancing federal student loans means you’ll lose out on relief benefits like forbearance and deferment.
Loan consolidation is another option to get out of student loan default. It’s different from rehabilitation because it allows you to pay off more than one federal student loan with a Direct Consolidation Loan. With student loan rehabilitation, you have to rehabilitate each student loan separately.
Consolidating combines all your federal loans into a single Direct Consolidation Loan to give you one monthly payment. Your interest rate will be fixed and represent a weighted average of the interest rates on the loans you chose to consolidate, rounded up to the nearest one-eighth of 1%. To consolidate your loans, you need to agree to repay your new Direct Consolidation Loan under an income-driven repayment plan. Or, you can make three voluntary, consecutive, and on-time monthly payments on your defaulted loan first.
If you choose to make three consecutive payments first, you’ll be able to consolidate your loans and choose any repayment plan you’re eligible for — not just the income-driven repayment plans.
You can consolidate federal student loans more quickly than you can rehabilitate them. But consolidating your federal student loans to get out of default won’t actually remove the default from your credit report.
You also can’t consolidate a student loan that has payments being collected through wage garnishment unless you get the garnishment order lifted. Just like with rehabilitation, consolidating your loans to get out of default will restore federal loan relief options such as deferment, forbearance, and loan forgiveness.
You have options when it comes to getting your federal student loans out of default. Consider the pros and cons of student loan rehabilitation and contact your student loan servicer to discuss your options sooner than later. To avoid future default and pay your loans off more efficiently, explore student loan management options, such as consolidation, flexible payment plans, and refinancing.
If rehabilitation or consolidation aren’t right for you, refinancing your federal student loans into a private loan is an option. But it’s not right for everyone, and you should carefully consider the pros and cons.
Refinancing with a private student loan can pay off your federal loan debt, but it won’t remove a default from your credit report. And you’ll also lose access to important federal student loan benefits, like income-driven repayment plans and loan forgiveness.
If you decide to refinance, you can easily compare student loan refinance rates through Credible.