Student loan rehabilitation is a program that lets a borrower bring her federal student loans current after defaulting. The rehab program is controlled by the Department of Education. The Department usually doesn't handle the collection of the defaulted student loans themselves. Instead, they typically hire a private debt collection agency to handle the enrollment of student loan borrowers into the program.
To get out of default, the loan rehabilitation process requires you:
- agree to make 9 on-time payments in 10 consecutive months
- return proof of income (tax return, pay stub, etc.)
- sign and return the rehabilitation agreement letter
You can enroll in the rehabilitation program by contacting the private debt collection agency that has your loans.
There’s no private student loan rehabilitation program.
The only way to get out of default is to pay what you owe or negotiate a settlement.
The impact of the COVID-19/Coronavirus on your federal student loans
In response to the COVID-19/Coronavirus pandemic, the federal government ordered the Department of Education to suspend collection activity (treasury offset, wage garnishment, etc.) on defaulted student loans until September 30, 2020. This period of no-collection activity may or may not have been extended until December 31, 2020 via an executive order signed by President Trump.
The suspension of collection activity only applies to federal student loans owned by the Department of Education. If a guaranty agency like MOHELA, Trellis, or ECMC is the loan holder for your federal loans, those loans aren't covered. Nor are private student loans.
How to find who has your defaulted student loans?
You have two options to find out who has your defaulted federal student loans:
- check studentaid.gov to see all of your federal student loans (you'll need an Federal Student Aid ID) or
- call the Department of Education’s Default Resolution Group at 800-621-3115.
When you call the DRG, you'll put in your social security number and date of birth. After that, the autoresponder will tell you which collection agency has your federal loans. If you have Federal Family Education Loans (FFEL) that aren't with the Department of Education, the operator will transfer you to the National Student Loan Data System. The NSLDS representative will tell you who has your defaulted FFEL loans.
Click here to learn How to View Your Federal Student Loans?
How do you qualify for student loan rehabilitation?
You qualify for student loan rehabilitation if this is your first time rehabilitating the defaulted loan. You can only rehabilitate a federal loan one time. If you default a second time on your rehabilitated loan, you're no longer eligible for that repayment option. Instead, your repayemnt options to get out of default are limited to Direct Loan consolidation or bankruptcy.
Is Loan Rehabilitation a Good Thing?
The loan rehabilitation program is a good option for two reasons:
- it removes the default status from your credit report and
- waives the collection costs from your loan balance
After you complete the loan rehabilitation program, your credit report will be updated to show that your loan is no longer in student loan default. This may improve your credit score slightly.
I say slightly because even though the default status will be removed, the late payments will remain in your credit history.
Click here to learn How to Get Federal Student Loan Collection Fees Waived
How long is student loan rehabilitation?
The student loan rehabilitation program requires you make 9 monthly payments over a 10-month period.
So depending on when you make your payments, the loan rehabilitation program can last 8 to 10 months for most defaulted student loans.
You can speed the process up by a month if you make your 9th rehabilitation payment within 20 days of the due date.
A federal Perkins Loan that's in default takes 9 consecutive months of payments to get out of student loan default.
Can you rehabilitate a student loan twice?
You cannot rehabilitate a defaulted federal student loan twice. You're limited to one student loan rehab per loan. If this is your second default, your options are limited to paying the loan off, filing chapter 13 bankruptcy, or applying for loan consolidation.
Click here to learn Can you rehabilitate a student loan twice?
Should I consolidate or rehabilitate my student loans?
Consolidation gets your loans out of default quicker than rehabilitation. But rehabilitation usually waives collection fees. So if you want to get out of default fast (to get your tax refund for example) and don't care that your loan debt may increase, a consolidation loan is the right choice. And if you want to keep your loan balance low: rehabilitate.
Click here to learn Is it Better to Consolidate or Rehabilitate a Defaulted Student Loan?
Does loan rehabilitation stop administrative wage garnishment?
The loan rehabilitation program stops student loan wage garnishment after it starts when you make 5 monthly payments.
This means the garnishment will continue and you'll make payments on top of the garnishment for 5 months.
You may be able to speed up the process by making your 5th payment early.
How do you get into the student loan rehabilitation program?
To get into the student loan rehabilitation program, you’ll need to:
- Contact the debt collection agency that has your defaulted federal student loans
- Ask if you’re eligible for the loan rehabilitation program
- Let them calculate your discretionary income using your AGI and family size
- If you can't afford the monthly payments they calculated, ask for reasonable and affordable payments
- They'll calculate your monthly payments using your income and expenses
- Make your first payment and schedule future monthly payments
- Return proof of income (and expenses if necessary)
- Sign and return the rehabilitation agreement letter
- Confirm the letter has been received and approved
The last two steps are critical.
I’ve seen a lot of student loan borrowers either fail to turn in the paperwork or return it but fail to confirm the paperwork was received and approved. As a result, they end up with a student loan wage garnishment.
Don’t think because you faxed or mailed the letter back that it was approved. Call and confirm.
Click here to read How Do I Rehabilitate a Student Loan?
How are student loan payments calculated during rehab
The loan rehabilitation program is one of the only times your actual living expenses are factored into your monthly student loan payments.
Under the rehab program, your monthly payment amount is calculated using either:
- your adjusted gross income and number of dependents on your tax return or
- your monthly income, expenses, and family size
Typically, you can get a more affordable payment if you use your income, expenses, and family size. This requires more work and completing the loan rehabilitation income and expense form.
Click here to read Tips for Completing the Loan Rehab Income and Expense Form
Should I sign the loan rehabilitation agreement letter?
Yes, you should sign the loan rehabilitation agreement letter. While you may want to change some of the language in the letter, changes aren't allowed. So if you want to get your loan out of default, sign the letter.
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Problems with the student loan rehabilitation program
There are four main problems with the rehab program:
- your affordable payment amount includes your spouse’s income if you’re married
- it takes almost a year to get your loans out of default
- the debt collection agencies can be hard to work with
- it may be hard to keep track of your loans after you complete the program
Unfortunately, you can’t demand your defaulted loan be sent to a different collection agency. You have to work with them to get your loan out of default.
If they don’t answer the phone or return your voicemails, keep calling. It sucks, but that’s all you can do.
What happens after student loan rehabilitation?
Here’s what happens after you complete the program:
- the collection fees are waived from your student loan debt
- your loan is brought back into good standing
- the credit reporting bureaus receive notice to remove the default status from your loans
- your loan is sent to a new loan servicer
- you regain eligibility for deferment, forbearance, and loan forgiveness programs
- the loan servicer contacts you to set up new monthly payments under a repayment plan of your choice
Click here to read What Happens After Student Loan Rehabilitation