Student Loan Rehabilitation: A Guide to Rehabilitating Defaulted Student Loans
If you’re one of the millions of Americans struggling to repay your loans, you may be considering student loan rehabilitation. But what is student loan rehabilitation and how does it work?
Defaulting on your student loans certainly isn’t the best but all is not lost yet. You can rehabilitate student loans, get back on track and avoid some of the negative consequences of default.
The first step in the student loan rehabilitation program is to contact your loan servicer and make arrangements to begin making monthly payments again. You must make nine voluntary, on-time, full monthly payments within 20 days of their due date over 10 months. Once you have made these payments, your loan will no longer be in default and you will once again be eligible for benefits like deferment and forbearance.
Before you decide to start the rehabilitation of your student loans, it’s important to understand that the process will likely increase your monthly payment amount. Your loan servicer will calculate your new payment based on your updated income information and the total amount of your debt.
What is Student Loan Rehabilitation?
If you’ve defaulted on your student loans, you might be feeling like there’s no way out. But don’t despair, there is a way to get back on track. It’s called student loan default rehabilitation and it can help you get it back into good standing.
This will also remove the default status from your credit report and once you rehabilitate your loans, you’ll be eligible for enrollment in income-driven repayment plans. These plans can lower your monthly payment amount based on your income and family size.
Doesn’t this sound like a perfect solution? Let’s take a more in-depth look at- how do you rehabilitate your student loans.
How Does Student Loan Rehabilitation Work?
The rehabilitation program for student loans is fairly simple. To start the whole process, you must first contact your loan holder and explain that you want to rehabilitate your loans. Your loan holder will then give you a Rehabilitation Agreement form to fill out and return. This form will outline the terms of your rehabilitation, including your monthly payment amount.
Once you have returned this form, you will begin making your payments. If you make all 9 payments on time and in full, your loan will no longer be in default and this status will be removed from your credit report.
In case you are unable to afford the monthly payment outlined in your Rehabilitation agreement, you can still rehabilitate your loans by making smaller monthly payments over a longer period of time. To do this, you will need to submit a new agreement form with a revised payment plan to your lender.
How to Rehabilitate Your Student Loans
As we already explained, you first need to talk to your lender in order to start the process. To qualify for rehabilitation, you must agree to repay your loans under a new plan. Your lender will work with you to determine an affordable repayment plan option based on your current financial situation.
You will then need to make nine voluntary, and affordable monthly payments within 20 days of the due date. After you have made these payments, your default status will be removed and you will again be eligible for federal student aid. So then you can begin working towards other financial goals, like buying a home or saving for retirement.
Student Loan Rehabilitation: Pros and Cons
Rehabilitation is a great process if you have accumulated a lot of student loan debt and then failed to make your payments on time. Once your loan has been reported as defaulted, rehabilitation can put you back on track.
However, there are pros and cons to everything in life and federal student loan rehabilitation is no different. Here are some of the key benefits and drawbacks to consider when thinking about whether or not to rehabilitate your loans:
Pros
- This will allow you to get out of default status.
- Your credit score will improve. Defaulting on your loans can have a major negative impact on your credit score. Once you successfully rehabilitate your loans, your credit score will start to improve.
- This will give you a chance to qualify for a new repayment plan or even a forgiveness program.
- You may be eligible for certain benefits again. Some benefits, like deferment and forbearance.
- You’ll avoid wage garnishment. If your loans are in default, the government can garnish up to 15% of your disposable income to repay your debt.
Cons
- You will need to have enough money to make 9 full, on-time payments.
- Your balance will increase during rehabilitation due to accrued interest and fees.
- It can take a long time to complete the process. This can be a problem for borrowers who are struggling to make their monthly payments.
- This will not erase your loan history. Your late payments will still show up on your credit report.
- Can be expensive. The fees associated with the program can add up, and you may end up paying more than you may have anticipated.
What Happens After the Student Loan Is Rehabilitated?
This is designed to help borrowers get back on track with their payments. But what happens after student loan rehabilitation?
Once the loan is out of default, the payment history is reported to the credit bureaus and this status is removed from your credit report. Rehabilitation also restores the eligibility for federal student aid.
Additionally, a lot of inconveniences you may be experiencing due to missed payments will be removed once your status changes.
How Does Student Loan Rehabilitation Affect Your Credit?
Defaulting on any loan will have consequences on your credit score in general. Once the missed payments are reported to the credit bureau your score can fall by more than 100 points.
But, if you have made 9 on-time payments, your loan will no longer be in default and your credit reports will reflect this change.
Rehabilitating your student loans will improve your credit score immensely and make it easier to qualify for new lines of credit in the future. If you stay consistent your score will soon be back to its original state.
Student Loan Rehabilitation vs. Consolidation: Which is Better?
If you’re struggling to keep up with your student loan payments, you might be considering consolidation or rehabilitation. But which one is right for you?
First of all, consolidation is when you take out a new loan to pay off your existing ones. This can help you get a lower interest rate and monthly payment. However, it also means extending the life of your loan, which can end up costing you more in the long run.
And as we already said, rehabilitation is a process where you make on-time monthly payments over the course of 10 months. This can be a good option if you’re struggling with your installments but don’t want to extend the life of your loan.
So, at the end, which one is better? It all depends on your situation. If you’re looking for a lower monthly payment, consolidation might be the way to go. But if you want to get rid of your default status and don’t mind making slightly higher payments, rehabilitation could be a better choice.
Who Should Consider Student Loan Rehabilitation?
In case you’ve defaulted on your federal student loans, going through the rehabilitation process is the best way to get back on track. There may be many reasons why you have failed to make payments but this time around you need to stick to it. If you have a good job and can afford to pay slightly higher than what your installments used to be, we say, do so!
In general, rehabilitation is a good strategy and a great way to ensure you will be debt free soon enough. This is why this process is good for almost anyone who is struggling with their loans. Consolidation or rehabilitation are both much better options than letting your loan go into default and doing nothing about it.
Final Thoughts
By now, you probably have a good understanding of what student loan rehabilitation is and how it works. If you are struggling to make your payments, take your time to figure out if this process is for you.
Rehabilitation is a great option for many borrowers because it will help you get back on track quite fast and improve your credit score along the way.
In case you have any questions about loan rehabilitation, be sure to contact your loan servicer. They will help you understand the process and answer any questions you have. And remember- rehabilitation is a process, so don’t get discouraged if it takes some time to get everything sorted out.
