Q: Can you rehabilitate a student loan twice?

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Stanley tate

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In most situations, you cannot rehabilitate a student loan twice. Getting federal student loans out of default through the loan rehabilitation program is a one-time thing. 

So if you fail to make your monthly payments and default again, your options for getting out of default ordinarily won’t include the loan rehab program. Instead, you’ll be looking at:

  • Negotiating a settlement
  • Applying for a loan consolidation
  • Filing chapter 13 bankruptcy
  • Agreeing to make voluntary monthly payments

Click here to learn How to Get Out of Student Loan Default

Can I get out of default with deferment/forbearance?

Once you default on a federal student loan, you’re no longer eligible for deferment or forbearance. As a result, you can’t use a forbearance to catch up late payments.

Private loans are different.

Many lenders will let you use a deferment or forbearance to catch up late loan payments. Check the loan terms or contact the loan servicer to confirm your options.

#1 Negotiating a settlement

The US Department of Education accepts settlements only on defaulted loans. That’s one positive of defaulting a second time.

While settlement sounds awesome, the problem is that federal student loans don’t offer the same great settlement options private student loans offer.

Since Betsy DeVos took over the Department of Education, the best offer I’ve seen for settling federal student loan debt is 85% of the loan balance less collection fees.

Click here to read this Guide to Negotiating Student Loan Settlements

#2 Applying for a loan consolidation

While you can’t rehabilitate a student loan twice, you can consolidate the defaulted loan into a Direct Consolidation Loan.

This option works only if you’re not under an active wage garnishment. Once an administrative wage garnishment order has been sent to your employer, you’re ordinarily no longer able to apply for a consolidation loan.

I say ordinarily because the one exception I’ve seen is when the defaulted loan is a Federal Family Education Loan that’s owned by a guaranty agency like Trellis or ECMC.

In my experience, some guaranty agencies will lift the wage garnishment if:

  • you’ve been garnished for 12 consecutive months and
  • You agree to make voluntary monthly payments (between 3 and 12 months)

The amount of the monthly payments is typically going to be what your payments would be under the income-based repayment plan.

To find out if this is an option for you, you’ll need to find who owns the federal student loans you defaulted on. You can find the loan holder by visiting studentaid.gov.

#3 Filing chapter 13 bankruptcy

While filing bankruptcy won’t automatically get rid of your federal student loans, filing bankruptcy can stop a student loan garnishment and get you out of default.

Chapter 13 bankruptcy has a rule (11 USC § 1322(b)(5)) that lets you cure the default on any debt that you’ll keep paying on after your bankruptcy ends.

This rule is typically used for mortgage debt. But there’s no rule that says it can’t be used for student loan debt.

To find out if this is an option for you, speak with a student loan bankruptcy attorney near you.

#4 Making voluntary monthly payments

Of all the repayment options for dealing with a twice-defaulted student loan, this is my least favorite.

Different than a loan rehabilitation agreement, this repayment plan won’t bring your federal loans back into good standing. It won’t make you eligible for federal student aid. It won’t protect your tax refund from offset. And it won’t help your credit score. But this repayment plan will stop a garnishment from starting.

Your payment amount under this repayment plan is typically based on your discretionary income, which is the difference between your income and expenses.

In my experience, your payments won’t be enough to lower your student loan debt.

Contact the collection agency that has your defaulted federal loans to set up the voluntary payment agreement.

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Hey, I’m Tate.

I'm a student loan lawyer that helps people like you with their federal and private student loans wherever they live.

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