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Student loan rehabilitation is one of two strategies the federal government offers to get out of student loan default, the other being loan consolidation.
Most federal loans go into default when you miss at least 270 days' worth of payments. As a result, you'll lose access to repayment benefits and to additional federal financial aid, and those late payments will damage your credit score.
Student loan rehabilitation can help you get your loans back into good standing. It requires you to make nine on-time monthly payments that generally equal 15% of your discretionary income. Here's what you need to know about student loan rehabilitation, and what to expect during and after the process.
How Does Student Loan Rehabilitation Work?
Once you enter into a student loan rehabilitation agreement, your student loan servicer will assign you a monthly payment tied to your discretionary income. You must make nine payments within a 10-month period on time—which the government defines as within 20 days of the due date—and at the end of your agreement, the loan will no longer be in default.
That means your credit report will no longer reflect that the loan went into default, though the late payments leading up to it will remain for seven years. Additionally:
- If the government was previously collecting your unpaid debt by garnishing your wages or withholding your tax refunds, those actions will end.
- You'll regain the ability to get more federal student aid and take advantage of repayment benefits.
- You'll no longer receive communications from collection agencies, which the government enlists help from to recover unpaid debt.
You can only rehabilitate a defaulted loan one time, so it's crucial to develop a plan to avoid a future default. Work with your student loan servicer to choose an ongoing repayment plan that you can afford. Consider one of the four income-driven repayment plans, which, similar to your rehabilitation agreement, calculate your monthly payment as a portion of your discretionary income. You'll make payments for 20 or 25 years, depending on the plan.
If you choose an income-driven plan, at the end of your repayment period, your unpaid balance will be forgiven. You'll likely have to pay income tax on that amount. Consider using the government's repayment estimator tool to evaluate which plan is best for you and how much of your balance may be left at the end of the repayment period.
How Do I Rehabilitate My Student Loans?
To pursue student loan rehabilitation, first contact your loan servicer, the private company that collects your payments on behalf of the government. Based on income documentation you provide, the company will assign you a monthly payment amount that's 15% of your monthly discretionary income. Once you make on-time payments for nine months, you can ask for a lower payment than you were initially assigned if you need it.
If the government is collecting your debt directly from your paycheck or tax refunds, that may continue during student loan rehabilitation. But these payments won't count as one of your nine required monthly bills. Keep this in mind when you negotiate your payment amount with your loan servicer.
At the end of the rehabilitation period, your loan will come out of default, and will be considered in good standing. You'll make payments until the loan is paid off according to the repayment plan you chose through your servicer. Prioritize paying each bill on time to avoid falling behind again. Stay in close contact with your servicer if you need to lower or postpone payments, potentially through forbearance, during periods of financial distress.
Will Student Loan Rehabilitation Help My Credit?
A major benefit of student loan rehabilitation is its positive impact on your credit. Unlike student loan consolidation (the other default resolution option) rehabilitation removes the record of default from your credit report.
That means your credit score may continue to suffer from your previous late payments, but it will likely also benefit from the elimination of the default notation on your credit report. Student loan consolidation happens faster than rehabilitation—within three months instead of nine months—but the record of default will remain on your credit report for seven years.
When deciding between the two routes, check your credit report to identify how dramatically the record of default may be affecting your credit. Consider whether you'd like to apply for new credit, such as a mortgage or car loan, in the near future. Your decision will likely come down to getting out of default fast versus enjoying the long-term benefit of the default record's removal.
Staying out of Default
Rehabilitating student loans is a worthwhile way to restore your credit and bounce back from the ongoing financial stress of default. So once you've made the effort to rehabilitate your loans, keeping them in good standing should be a top priority.
Payment history is the most important factor in your credit score, and the more on-time payments you make going forward, the lower the impact your prior missed payments will have on your score. Successfully rehabilitating a defaulted loan is a major accomplishment; let yourself feel proud and relieved, and resolve to continue that positive behavior for the remainder of your loan term, and beyond.