What is Student Loan Rehabilitation?

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Stanley Tate

#1 Student Loan Lawyer

Updated on October 6, 2022

The student loan rehabilitation program gives borrowers an opportunity to dig their federal student loans out of default by making nine monthly payments over 10 consecutive months. It also removes the default status (but not the late payment history) from their credit reports and stops collection activities.

The student loan rehabilitation program lets borrowers bring  their federal student loans back into good standing after they make nine monthly payments. Out of the three options available to manage default, it’s the only option that erases the default status from credit reports. It does take three times as long as settlement and loan consolidation to exit default using this program

Ahead, learn all about the federal student loan rehabilitation program, including what happens after you complete it and how it impacts your credit score.

Resources for student loans in default

***The Education Department announced the payment pause would be extended until August 31, 2022. The department added that it would grant more than 7 million borrowers in default a “fresh start” and automatically return their accounts to good standing before the freeze ends. There’s no word yet on when this change will happen.

What is student loan rehabilitation?

Loan rehabilitation is a program that gives federal student loan borrowers one opportunity to dig out of default by making nine on-time payments in a 10-month period. It restores eligibility for federal student aid, stops wage garnishments after your fifth payment, and may waive collection costs. Private student loans aren’t eligible for the program.

Throughout the Covid-19 forbearance, the Education Department has paused student loan payments for borrowers who are rehabilitating Federal Family Education Loans and Direct Loans. Read more about how the CARES Act affects student loan rehabilitation.

Learn More: How to Get Student Loans Out of Collections?

How to rehabilitate student loans

Follow these steps to complete the rehabilitation process:

  • Step 1: Find your loans. After you default, the loan holder pulls your account from the student loan servicer and places it with a collection agency. The U.S. Department of Education uses the Default Resolution Group, but older Perkins Loans and FFEL Loans may be moved to a different debt collector. Check studentaid.gov to find the current out who has your defaulted student loans.

  • Step 2: Establish a repayment plan. Your monthly payment amount will be 15% of your adjusted gross income for the family size on your tax return. If you can’t afford that amount, you can request a lower payment — as low as $5 per month — that is calculated based on your discretionary income, i.e., your monthly income with accepted living expenses deducted. Download the Loan Rehabilitation Income and Expense Form.

  • Step 3: Sign the loan rehabilitation agreement letter. You’re not officially enrolled in the program until you sign and return the written agreement with proof of your income, either a tax return or two recent pay stubs. Do not make your first payment until you contact the debt collector to ensure it received all the documents and approved your enrollment into the program.

  • Step 4: Make the nine rehabilitation payments. On-time payments must be made within 20 days of the due date and be voluntary payments.  Money that is taken using wage garnishment and treasury offsets that take your tax refunds and Social Security benefits aren’t counted towards the nine required payments.

Learn More: Student Loan Consolidation vs. Rehabilitation

What happens after student loan rehabilitation?

Once your loans are rehabilitated, the default status is removed from the credit bureaus, and your loans will be moved from collections to a new loan servicer. Your eligibility for loan forgiveness programs, income-driven repayment plans, and deferments will also be restored. Your name will be cleared from the CAIVRS report, freeing you to qualify for an FHA home loan. You’ll also be eligible to receive financial aid again if you plan on returning to school.

The loan rehabilitation program is a one-time opportunity. If you default again on the rehabilitated loan, your only options to fix the situation would be to negotiate a settlement or apply for a Direct Consolidation Loan if you have eligible loans. If neither of those work for you, filing a student loan bankruptcy case may make sense. Due to the loan’s poor credit history, it will likely be impossible to find a lender willing to refinance the loan balance at a fair interest rate.

How much will my credit score increase after the student loan default is removed?

Borrowers have shared that their credit scores increased by 75 points after the student loan default status was removed from their credit reports.

Screenshot of Reddit user talking about credit score increase after student loan rehabilitation.

FICO score increased 57-74 points.

Screenshot from Reddit user showing credit score increase after completing the loan rehabilitation program.

FICO score increased by 75 points.

As long as you’re paying your other bills on time and keeping your credit card balances low, you may see a similar jump in your score. But it may take three to four years for your scores to recover to their previous high, according to a report from the Urban Institute.

Learn More: How Student Loans Affect Credit Scores

How to avoid student loan rehabilitation problems

Borrowers have complained for years that the rehabilitation program is riddled with issues. They’ve told stories of rehabilitation payments not counting and not being brought back into good standing despite making the required payments.

The federal government examined the program in 2014 and put measures in place to improve the Debt Management and Collections System so that more borrowers would complete the rehabilitation process. However, issues remain.

Follow these steps to avoid problems with your loan rehabilitation:

  • Contact the collection agency and ask if it has received and approved your paperwork.

  • Demand a written agreement before you make your first payment.

  • Confirm your payment amount and due dates.

  • Confirm that the money is being taken out of your checking account every month.

  • Update your contact information as needed.

  • Contact your servicer after completing the program to get into the best repayment plan for your new loan.

Trying to fix a student loan default? Let's talk.

If finding your loans, dealing with collection agencies, and navigating this complex system crossed sounds exhausting, I get it. That’s why I’m here to help — schedule a free call with me.

During our call, I can get a general idea of what’s going on with your federal and private student loans and assess your best repayment options. From there, we can create a game plan that best fits your needs and sets you up for success.

UP NEXT: Can Defaulted Student Loans Be Forgiven?

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