Q: What happens after student loan rehabilitation?

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After you complete the student loan rehabilitation program, collection activity will stop, collection costs may be waived, and your credit report will be updated to show your loans are no longer in default. 

Also, you’ll regain eligibility for deferments, forbearances, and loan forgiveness programs, and your loan will be sent to a new loan servicer.

Collection Fees May Be Waived

Depending on the type of defaulted loan you rehabilitated, the student loan collection costs may be waived.

The Department of Education has a standing policy to waive collection fees on Direct Loans at the end of the loan rehabilitation program.

In fact, this language is typically included in your rehabilitation agreement letter.

With FFEL loans, however, the collection fees may not be waived. That choice is entirely up to the guaranty agency.

You'll want to check your rehabilitation agreement letter to see what it says about waiving collection fees.

Consolidation After Collection Fees Are Waived

After the collection fees have been removed from your account, you may want to consolidate your loans. 

While a consolidation loan won't get you a lower interest rate, it can get all of your student loans with one servicer (or even a new lender, if you consolidate a FFEL or Perkins Loan). 

Student loan consolidation may even qualify your federal loans for Public Service Loan Forgiveness (again, if you have a FFEL or Perkins Loan) if you work full-time for the government or a nonprofit entity.

Default Status Will Be Removed From Your Credit Report

Following your last rehabilitation loan payment, the student loan default status should automatically be removed from your credit report.

The removal isn't instant, however.

In my experience, it takes about a month after the rehabilitation process ends before your report is updated.

If after a month, the default status remains, consider contacting the credit reporting bureaus to request they remove the status.

As for the late payments, even though your loans have returned to good standing, those payments won't be removed from your credit history. They'll stay. And they'll keep dragging your credit score down until they fall off your report or you get them removed for some other reason.

Your federal student loans will be sent to a new loan servicer

After you make your 9th monthly payment, your federal student loan will no longer be in default.

Because of that, your student loans will be moved from the collection agency to a new servicer.

Exactly who that loan servicer will be is unclear.

For Direct Loans, that's up to the Department of Education.

For FFEL Loans, that decision will be made by the guaranty agency (ECMC, MOHELA, Trellis, etc.).

No matter the loan holder, you should be contacted by the new loan servicer after you've completed the repayment plan.

Get a New Repayment Plan

No matter which repayment option you choose, your expenses won't play a factor in your payment amount.

The new loan servicer will contact you to arrange payment of your student loans.

Don't be shocked if they send you a bill demanding way more than the $5 payment you had under the rehabilitation agreement.

True, you may not be able to get a payment that low again.

Remember, that low payment amount you got under the rehab plan was based on your income and expenses.

That won't be the case with your new payment.

No matter which repayment option you choose, your expenses won't play a factor in your payment amount.

That said, if you want the most affordable payment possible, you'll want to choose an income-driven repayment plan like the income-based repayment (IBR) plan.

Under those IDR plans, your payment amount will be a combination of your loan balance, family size, and adjusted gross income.

But what do you do if that student loan payment isn't affordable?

Ask for a deferment or a forbearance.

The last thing you want to do is end up defaulting again on the same loan.

A second default can cause your student loan debt to double or triple.

On top of that, rehabilitation is a one-time thing.

So if you default again, the only ways you can get out of default and stop a wage garnishment or your tax refund from being taken are to:

  • pay the student debt in full
  • settle the amount for slightly less than you owe or, if you can,
  • consolidate the loan into a new loan.

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