Student loan default rehabilitation is a one-time opportunity to clear the default on a federal student loan. It also allows you to regain eligibility for federal student aid after your loans have gone into default.
With student loan rehabilitation, you can work with lenders to create a new payment plan that is theoretically more reasonable and affordable. This can be advantageous if you follow payment deadlines moving forward, but there are some caveats to student loan rehabilitation programs.
What Is Student Loan Rehabilitation?
Student loan rehabilitation is a program that’s offered by the federal government. Borrowers who have a Direct Loan, Federal Family Education Loan (FFEL), or Federal Perkins Loan that is in default, and owned by the Department of Education, may request rehabilitation. Private student loans are not eligible for student loan rehabilitation.
A federal student loan is considered in default when a borrower has missed payments for 270 days. Prior to defaulting on a student loan, the loan may be considered delinquent as soon as you miss a payment. If you fail to make a payment for 90 days, those late payments may be reported to the credit bureaus.
The monthly payment required during the student loan default rehabilitation depends on your income and can be as low as $5 per month. After making the minimum number of voluntary, reasonable, and affordable payments, the defaulted loan is considered rehabilitated.
How Student Loan Rehabilitation Works
If you already have a federal loan in default, you can submit a written request for student loan rehabilitation through your loan holder.
A calculation, called the 15% formula, is used to determine your reasonable and affordable monthly payment during the rehabilitation program. First, it determines how much of your Adjusted Gross Income exceeds 150% of the federal poverty guideline, based on your family size and state. Then, your loan holder will calculate 15% of that amount, divided by 12, to arrive at your monthly payment.
If you don’t agree to make voluntary payments at the amount that’s calculated under the 15% formula, you can ask your loan holder to calculate an alternative payment.
To do so, you must submit a “Loan Rehabilitation: Income and Expense Information” form. You’ll need to supply details regarding your monthly income and monthly expenses and certify your family size. This alternative amount might be higher or lower than the payment amount offered under the 15% formula.
Upon agreeing to the payment amount and signing the student loan rehabilitation agreement, you must make nine on-time monthly payments within a consecutive 10-month period. After the ninth payment is completed, your loan holder will contact the credit bureaus to request the removal of the default status on your student loan account.
Pros and Cons of Student Loan Rehabilitation
The student loan rehabilitation program can be beneficial for borrowers whose federal loans are in default. However, there are also a few caveats to consider before requesting student loan rehabilitation.
Pros of Student Loan Rehabilitation
There are a handful of advantages to student loan rehabilitation. Instead of making a lump sum payment to get a defaulted loan in good standing, rehabilitation allows you to make consistent, on-time installment payments at a reasonable amount.
After successfully rehabilitating your loans after nine consecutive payments, the defaulted mark on your loan account is removed from your credit record. This can potentially improve your credit score. Any involuntary payments, such as wage garnishment or Treasury offset, will cease upon successful loan rehabilitation.
Rehabilitating your loans also gives you access to federal aid; for example, if you want to get your master’s or your Ph.D., you’ll once again be eligible to receive loans from the federal government. You’ll also have access to federal benefits, like federal loan deferment and forbearance, and the option to enroll in income-driven repayment plans.
Cons of Student Loan Rehabilitation
Rehabilitation is a one-time opportunity. If you default again after your loans are rehabilitated, you can’t request a rehabilitation program again.
Another point to note is that involuntary payments, such as those collected by your loan holder though wage garnishment, don’t count toward the nine voluntary payments needed to rehabilitate your loan. This means you might potentially have two separate loan payments occur each month until some rehabilitation payments are made or your loans are fully out of default.
Upon successfully rehabilitating your loan account, the default is removed from your credit report, but the late student loan payments on the account remain on record.
| Pros of Student Loan Rehabilitation | Cons of Student Loan Rehabilitation |
|---|---|
| Can remove default status from your credit report. | Doesn’t remove history of late payments that led to default. |
| Stops collections efforts on successfully rehabilitated loans. | Only one chance given to rehabilitate student loans. |
| Rehabilitated loans can be eligible for income-driven repayment plans. | Involuntary payments can continue while your loan(s) is in rehabilitation. |
| You can regain federal loan benefits and eligibility for student aid. |
Student Loan Rehabilitation vs Consolidation
Another way to address a defaulted federal loan is through a Direct Consolidation Loan.
Consolidating defaulted federal student loans, making it easier to keep up with one monthly payment instead of multiple. This means using a Direct Consolidation Loan with a new interest rate — generally the weighted average of your initial interest rates. To undergo a Direct Consolidation loan, you must either:
• Make payments via an income-driven repayment plan or
• Make three consecutive and voluntary on-time payments before initiating a Direct Consolidation Loan.
Although you can rehabilitate most federal loans, regardless of whether your student loans are in collections, there are special conditions and restrictions for Direct Consolidation Loans. For example, you can only consolidate an existing Direct Consolidation Loan that’s in default if you reconsolidate it with another eligible loan.
An important note: Consolidating only applies to your federal loans — you can’t roll private loans into a Direct Consolidation Loan.
Like rehabilitation, consolidating a defaulted loan through a Direct Consolidation Loan provides access to future federal aid, loan forgiveness programs, and federal benefits like deferment, forbearance, and an income-driven repayment plan.
Another notable factor that differentiates student loan rehabilitation vs. student loan consolidation is that the latter doesn’t remove a default from your credit history.
| Student Loan Rehabilitation | Student Loan Consolidation |
|---|---|
| Requires nine voluntary and consecutive, on-time payments. | Requires an income-driven repayment plan, or three voluntary and consecutive, on-time payments before consolidation. |
| Access to your choice of repayment plans. | Conditions and/or restrictions for defaulted Direct Consolidation Loans, FFEL Consolidation Loans, and PLUS Loans. |
| Can rehabilitate loans while making involuntary payments. | Can’t consolidate a defaulted loan that’s in collections. |
| Removes default from credit record. | Doesn’t remove default from credit record. |
Can Student Loan Rehabilitation Affect Your Credit?
Loan rehabilitation results in the defaulted loan status taken off of your credit report. Having a default removed from your record can potentially improve your credit score.
The record of late payments that resulted in the defaulted loan, however, will remain on your credit report. Late payments on your record are still considered a derogatory mark that could impact your credit for up to seven years.
What Happens After Student Loan Rehabilitation
After your defaulted loan is rehabilitated, your loan is sold or transferred to a new loan holder or lender. The loan holder will formally send a request to the three credit bureaus to have the default taken off of your credit report. Also, existing collection activity toward the rehabilitated loans will cease (e.g. wage garnishment or Treasury offset).
Once your loans are under a new loan holder, you’ll need to select a repayment plan, otherwise, a standard 10-year plan will apply.
To request a lower monthly payment, you might be able to enroll in an income-driven repayment plan which calculates your monthly payment based on your Adjusted Gross Income and family size.
This type of repayment option extends the term across 20 to 25 years, depending on the plan. In doing so, your monthly payment is limited to a percentage of your discretionary income, but you’ll pay more interest over time.
In addition to being eligible for new federal aid, you’ll again be eligible for federal benefits that were inaccessible when your loan was in default. These benefits include access to student loan forgiveness programs, and deferment and forbearance.
The Takeaway
Student loan rehabilitation might not completely erase all of the missteps you’ve had with regard to your federal loans, but it can be an option to get out of default. Another option for getting a federal student loan out of default is to consider a Direct Consolidation Loan.
Refinancing a defaulted student loan can be challenging, but if your student loans have been rehabilitated, and you’re now in good standing on your loans, student loan refinancing may be an option to consider. Refinancing lets you take out a brand-new loan with a new interest rate and new loan terms. If you qualify, refinancing could allow qualifying borrowers to secure a lower interest rate or lower monthly payments. Note that lower monthly payments are generally the result of extending your loan term, which can cost more in interest over the life of the loan.
While refinancing can help make loan repayment more affordable over the long-term for borrowers who are able to qualify for a more competitive interest rate, it will eliminate any federal loans from borrower protections – such as income-driven repayment plans, so it may not make sense for everyone. If you feel refinancing is an option for you, consider SoFi where there are no hidden fees and the application is completed entirely online.
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FAQ
How long does it take to rehabilitate student loans?
It takes several months to complete a student loan rehabilitation program. Direct Loans, Federal Family Education Loans (FFEL), and Federal Perkins Loans require nine, full and on-time payments over 10 consecutive months to rehabilitate.
Can you rehabilitate student loans in collections?
Yes, you can rehabilitate student loans in collections. However, involuntary collection payments, such as those occurring as a result of wage garnishment, may continue while you make voluntary rehabilitation payments.
Is rehabilitation or consolidation of student loans better?
Deciding whether student loan rehabilitation or consolidation is best for you depends on your personal situation and goals.
Student loan rehabilitation takes longer than consolidation but by successfully rehabilitating your loans, you are able to remove the default from your credit history. So, if that is your primary goal, rehabilitation might make more sense. However, if your goal is to simplify repayment for your defaulted loans, and you want to enroll in an income-driven repayment plan as soon as possible, a Direct Consolidation Loan can be an option to consider.
Keep in mind that both student loan rehabilitation and Direct Loan Consolidation are only options for federal student loans.
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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