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One out of every 10 Americans has defaulted on a student loan, and 5% of student loans are in default at any given time. Borrowers who want to get out of default might start student loan rehabilitation.
Student loan rehabilitation is negotiating a payment agreement with your loan holder to get your loans out of default and allow you to return to current payment status. Removing a default can help avoid negative consequences like credit score damage and wage garnishment. However, it’s available only for federal student loan borrowers.
To rehabilitate your student loans and get out of default, you’ll need to follow a process set by the U.S. Department of Education:
Once you’ve contacted your federal loan servicer and it’s determined that you’re eligible for rehabilitation, you’ll receive a written rehabilitation agreement within 15 days. If you agree, you’ll sign and return the agreement. You’ll have 10 consecutive months to make your required payments. After you’ve completed your payments, your loans will be taken out of default.
After you make the ninth and final student loan rehabilitation payment, your loans will typically transfer to a new loan servicer. At that point, there are several benefits you can start to enjoy:
Allowing student loans to remain in default can create significant problems for your finances, so it’s important to remedy the situation as quickly as possible. Rehabilitation could be a good option for you if:
Rehabilitation is only an option if you have federal student loans. Private student loans don’t qualify for the rehabilitation program. If you default on private student loans, you may need to pursue other options, like negotiating a settlement or consulting a student loan lawyer for guidance.
Because you have only one shot at rehabilitating your student loans, it’s critical to manage the process well. If you fall behind on your student loan payments during the rehabilitation period or default on your loan again in the future, your options will be more limited than they were before. Plus, every time you default on a student loan, the loan holder may add expensive collection fees to your outstanding balance.
Although rehabilitation can be helpful for many borrowers who are struggling with their student loan payments, it’s not the right fit for everyone. Some borrowers may be better served by consolidating their student loans. Consolidation is a faster process, and there’s no limit to how many times you can exercise this option.
If you have outstanding federal student loans that are in default, you can use a one-time student loan rehabilitation. Doing so will remove the default from your credit history, improving your credit score and freeing you from wage garnishment. You will need to continue repaying the loan. Make sure this process is right for your financial situation before pursuing it.
