Student Loan Rehabilitation & Credit Scores: Your Questions, Answered

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Student loan rehabilitation lets you dig federal student loans out of default by making nine monthly payments. If you complete the program, you may be eligible to waive collection fees and improve your credit score by removing the default status from your credit report.

The student loan rehabilitation program lets you bring federal student loans out of default and back into good standing by making monthly payments. Private student loans aren't eligible for loan rehabilitation.

Rehabilitation is the slowest option to exit default. It takes at least nine months to complete the program. The other two options to fix defaulted loans, settlement and consolidation, take less than three months to complete. So those two are superior if you're trying to go back to school or are buying a home with an FHA Loan. But if you have time, loan rehabilitation may be your best choice because it:

  • Removes the default status from your credit report. This may cause your credit score to improve by nearly 75 points (more on that below), but the late payments will remain on your credit report if they haven't disappeared.
  • Reduces collection fees. A Direct Consolidation Loan adds the collection fees and interest to the principal balance of your new loan, but rehabilitation keeps those fees separate. Plus, the Department of Education will waive collection costs for its loans when you complete the program.

You can find the student loan rehabilitation law for Federal Family Education Loans (FFEL) at 34 CFR § 682.405 and Direct Loans at 34 CFR § 685.211.

Learn More: Student loan consolidation vs. Rehabilitation

What does it mean to rehabilitate a student loan?

Rehabilitating a student loan means bringing it out of default by making monthly payments until the loan is returned to good standing. Direct Loans and FFEL Loans require nine voluntary, full payments within 10 consecutive months. For a Federal Perkins Loan, you'll need nine consecutive payments.

You apply for loan rehabilitation by contacting the loan holder or collection agency handling your defaulted loans.

if you started the loan rehabilitation program between March 2020 and May 2022, you'll get credit for the months spent in the COVID-19 forbearance. When student loan payments start in May/June 2022, you'll need to make any remaining qualifying payments to complete the rehabilitation program.

Learn More: How The CARES Act Affects Student Loan Rehabilitation

How to rehabilitate student loans

Follow these steps to complete the student loan rehabilitation process:

Step 1 - Find your federal student loans.

Start the student loan rehabilitation process by finding your loans either by logging into the Federal Student Aid website,, or calling the US Department of Education's Default Resolution Group (800-621-3115).

If you call, have the representative check the National Student Loan Data System to see if you have any FFEL or Perkins Loans in default. You may need to call another loan holder or collection agency to learn your options if you do.

Step 2 - Setup a payment plan.

Once you know who has your defaulted student loan debt, call and ask if you're eligible for the loan rehabilitation program. To calculate your monthly payment amount, the debt collector will identify your discretionary income by asking for the adjusted gross income (AGI), and the number of dependents claimed on your federal tax return.

You can reject that payment amount if you can't afford it. You'll then be asked to provide your monthly income, expenses, and family size to calculate a reasonable and affordable payment amount. Many of my clients — even those earning over six figures — pay less than $200 per month during the rehabilitation program.

Step 3 - Sign the loan rehabilitation agreement letter.

The collection agency or Default Resolution Group will send you a contract with repayment terms. Review and sign the rehabilitation agreement and return it via fax, mail, or email with a digital signature.

Step 4- Make your monthly payments.

To complete the student loan rehabilitation program, you must make nine on-time payments in a 10-month period. You can't make the payments at one-time. Each payment has to be made within 20 days of the due date.

Also, the payments must be voluntary. Money that's taken for wage garnishment, tax refund offset, or Social Security garnishment doesn't count as a payment.

Does loan rehabilitation affect credit?

Loan rehabilitation can raise your credit score by removing the default status from your credit report. Although the late payments that led to the default will continue to be reported with the credit bureaus, some borrowers have shared that the negative marks were eventually removed, and their credit scores increased by over 70 points.

Gmoney144 reported that they finished student loan rehab, and their score went up by 74 points.
FICO score increased 57-74 points.

JeddieBell shared that their score went up by 75 points after completing loan rehabilitation and 796 credit score four years later.
Credit score up 75 points.

Exactly how much your credit increase will increase when you rehab a student loan depends on how you manage the payments for your credit cards, car loan, mortgage, etc.

Learn More: How Student Loans Affect Credit Scores

What happens after student loan rehabilitation?

Four things happen after you've completed the loan rehabilitation program:

  1. The default status will be removed from your credit history for the rehabilitated loans.
  2. Wage garnishments, Treasury offsets, and other collection activities stop.
  3. You'll regain eligibility for new financial aid, loan forgiveness programs, deferment, forbearance, and other income-based repayment options.
  4. Your account will be sent to a new student loan servicer to set up new payment arrangements.

How to avoid student loan rehabilitation problems

For years, student loan borrowers have complained 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 your financial information.
  • Demand a written agreement before you make your first payment.
  • Confirm payment arrangements and dates, including ensuring the debt collector receives your signed agreement and approves you for the loan rehabilitation program.
  • Confirm that payments are being made out of your checking account every month.
  • Update your contact information as needed.
  • Contact your servicer after completing the rehabilitation program to get into the best repayment plan for your situation.

Learn More: Guide to Paying Student Loan Debt

What can I do for defaulted private student loans?

If you have a private student loan in default, your options are:

  • Negotiate a settlement - Private loans typically settle for anywhere between 40-75% of the loan balance. Most companies will want a lump sum, but some are willing to accept monthly payments. You can click here to read this guide to negotiating student loan settlements.
  • Refinance with a new lender - Student loan refinancing can help you start fresh with a new loan. However, the late payments that lead to your default may make it difficult to find a lender willing to refinance your debt at a fair interest rate.
  • File student loan bankruptcy - Getting rid of private student loans in bankruptcy is easier than eliminating federal loans. Speak with a student loan bankruptcy lawyer to learn your chances of getting a discharge.

Talk To A Leading Student Loan Lawyer

If finding your defaulted student 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 10-minute talk with me.

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

UP NEXT: Student Loan Default: What It Is & How To Get Out Of It

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