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What is Student Loan Rehabilitation (And When Do You Need It)?

Having student loans go into default can be confusing and overwhelming. And the financial consequences can be serious if the loan holder doesn’t take action to remedy the situation.

Direct Federal Student Loans are in default when the borrower has not made a payment in more than 270 days. Family Federal Education Loans reach default status at 330 days without a payment.

Student Loan Rehabilitation is one of the options for dealing with student loans in default. It can help borrowers bring their defaulted student loans up to date and help them get back on track. Here are the basics:

How Does Student Loan Rehabilitation Work?    Past due notice indicating need for student loan rehabillitation

The borrower must agree in writing to make nine consecutive, on-time payments on the defaulted loan within a 10-month period. The collection agency determines the payment amount; usually 15 percent of a borrower’s discretionary income divided by 12.  If the borrower can’t afford the initial proposed payment amount, the agency will further evaluate the borrower’s income and expenses and calculate an alternative amount. Some borrowers have had loan rehabilitation payments as low as $5 a month. Borrowers must provide proof of current income and, in some cases, expenses.

What Happens After the Rehabilitation Period?

Once a borrower completes nine monthly payments, the loan is considered rehabilitated and the default status is removed. The borrower will once again be able to take advantage of options previously available for the loan, including deferment, forbearance, and income-driven repayment plans. As an added benefit, the loan servicer removes the record of default from the borrower’s credit report (the record of late payments from before the rehab period will remain, however).

What if the Loan Goes into Default Again?

In most cases, Student Loan Rehabilitation is a one-time option. Borrowers cannot let the same loan go into default and apply for rehabilitation again. That’s why it’s important to find a manageable repayment option and continue making on-time payments once the loan is rehabilitated.

How Do I Request Student Loan Rehabilitation?

Contact your loan servicer to start the conversation. You will need to provide proof of current income and may need to show your expenses as well. Having those prepared before you call will help the process go smoothly.

If you’d like help with Student Loan Rehabilitation or need additional assistance with student loan options, our Student Loan Counseling and Student Loan Payoff Calculator are great places to start.

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