Student Loan Rehabilitation

Does student loan burden you? Have felt hopeless after your student loan was defaulted? Then student loan rehabilitation is the solution for you. Read more about the advantages, drawbacks and other features of student loan rehabilitation.

Posted by Theres Ann on 8th April 2019


Student loan rehabilitation programs create an agreement between the borrowers and lenders, to erase defaults from borrower’s accounts if they stick to a repayment plan for 10 consecutive months. The black marks that are typically created by the financial histories of borrowers and repairing of credit scores are removed during the rehabilitation process. This program also restores the ability of the borrower to restore in the future.

If the borrower is not entitled to student loan rehabilitation, then the borrower’s creditworthiness can severely be damaged. This also leads to court-ordered wage garnishments. For the wages that are already garnished, rehabilitation procedures can stop income seizures and returns control to you.

Once the loan is entitled to a rehabilitation plan, then the credit history of it will be repaired. Loan deferment eligibility, forbearance eligibility, and forgiveness will also be restored. Usually, the rehabilitation process happens for 10 months. But the duration can vary between 4 to 12 months, based on the lender.

For federal Perkins Loans, the rehabilitation is completed within nine months. Programs including William D Ford Direct Loan Program, and Federal Family Education Loan Program, have similar procedures for the rehabilitation program but should make 9 payments within 10 months.


Table of Contents

SI No Topics
1 Advantages of Loan Rehabilitation
2 Steps involved in the loan rehabilitation process
3 Outcomes of student loan default
4 Why Rehabilitate?
5 Pros and Cons of Student Loan Rehabilitation
6 Flaws in student loan rehabilitation
7 How to choose between student loan rehabilitation and consolidation
8 What happens behind the rehabilitation process?
9 Types of loans eligible for Loan Rehabilitation
10 Type of Rehabilitation
11 Negotiation with Collection Agencies and Guarantee agencies

Advantages of Loan Rehabilitation

A few of the advantages of the loan rehabilitation programs are as given below.

  • A loan is kept in a good standing

  • The program makes you eligible for deferment, forbearance, consolidation, forgiveness and alternative repayment.

  • Additional loans and financial aid are other added advantage

  • Rehabilitation will be the end of collections activity or legal issues over your loan

  • Wage garnishments can be stopped by this program

  • Positive progress will be reported in the credit report of the loan repayment.

  • Moreover, negative marks from your credits on your defaulted loans will be removed.

The average student loan debt has tremendously increased over the years. It is necessary to fully understand the loan agreement, before borrowing the loan from the lender. If you face difficulties to make a payment, it is necessary to let the lender know it right away. If you have more than one student loan, then you can plan of consolidating your loan first.


Steps involved in the loan rehabilitation process

Steps involved in the rehabilitation process are as given below.

Step 1

Initiation of the rehabilitation process. When payments are not made for nine months, student loans automatically default. Once the default stage is reached, the rehabilitation process has to begin. The monthly payment should be reasonable and affordable. Income-based repayment is used to compute installments.

The advantages and disadvantages of loan rehabilitation are mentioned by the lender. Income-based repayment is used to compute installments. Repayment plans of the rehabilitation program should also be mentioned. At 15% of the annual discretionary income, payments are capped.

A lower rate is negotiated if the lender is willing to give one. Income-based repayment is always better than fixed rate repayment. Irrespective of your income, you are supposed to pay only a fixed amount, under the 10-year repayment plan. Depending on the time at which you borrowed the money, you’ll be eligible for forgiveness programs.

If your account was turned over to a collection agency, then you can try for a negotiation with the agency. Costs can be added to collection agencies in default. The Department of education does not currently charge collection fees on Federal Direct Loans. Loan rehabilitation is usually a one-time opportunity.

Step 2

Making of necessary payments. Missing a single payment can cause several issues. On time payments are those where the payments are received within 20 days of the due date. The on-time payments for Perkins Loans are 15 days away from the due date.

Step 3

Once you agree on a monthly payment plan, the default will be removed from your credit history.

Student loan default is one of the easiest solutions that students arrive at when they do not have enough money to repay their loans. Defaulting occurs when no payment is done within a 270 day period. Those struggling to pay their loans can receive help from the Student loan advisory group.


Outcomes of student loan default

Poor credit history, debt collections, federal aid borrowing limitations, wage garnishments, deferments, forbearances, and tax offset are a few of the outcomes of defaulting student loans.

Poor credit history

Poor credit history has a negative impact on your credit report. Poor credit history makes it difficult to apply for a home or a car loan. Even if the loan is paid off after being defaulted, credit history shows that it is being defaulted. This would definitely stay for long in your credit files. 

Debt collections

If the loan is transferred by the lender to the collection agency, then it is possible that additional charges will be levied along with the loan amount, for the efforts taken by the collection agency to recover the debt owed.

Federal Aid Borrowing Limitations

When federal student loan defaults you are no longer eligible for federal aid. This is definitely a black-mark for those individuals, who would want to return to school and obtain an advanced degree. To be eligible for federal aid, you’ll have to get out of default.

With wage garnishment, 15% of your expected paycheck is deducted. If wage garnishment is in place, default recovery options will be limited. You’ll not be eligible for student loan consolidation in this case. To get the garnishment removed you’ll have to take extra default recovery steps.

Deferments and forbearance exclusions

Ineligibility for deferment or forbearance can be a result of defaulted student loans. These programs offer more financial stability to students, till they can find, enough time and money to repay their loans. However, if you default a program, you’ll not be eligible for offers including deferments and forbearance again.

Tax offset

In order to regain an amount owned by requesting the offset to your tax account refund. All tax refunds will be sent from the IRS to student loan lender. Money in the form of tax refunds will be sent from IRS to student lender to pay off the debt. This also includes your legal spouse’s federal tax refund when it is filed jointly.

The student loan advisory group has found out ways to remove your student loan default. The current student loan situation is analyzed and helps in the determination of the best course of action and also helps in the removal of student loan default. Rehabilitation, Consolidation, Negotiation, and full-payment are ways to remove student loan default.


Why Rehabilitate?

Rehabilitation is definitely a reformative task to remove your student loan from default. 9 months are spent under a strict repayment pattern to get the loan out of the default status. If default monthly payments are correctly paid every month, then the default status will be removed. Income-based payments are made during student loan rehabilitation to not add financial duress or encourage a successful outcome.

If wage garnishment has not been placed under your finances, consolidation of student loans will be possible. William D Ford direct loan program helps in consolidating your student loans. A new can be begun under good standing and can seek favorable repayment options. There exist a few borrowers who are ready for $0.0 payments. This helps in qualifying for certain student loan forgiveness programs as well.

In a negotiated payment you are supposed to pay the entire amount but at the same time, pay much lesser than how much you actually owe to pay. However, lenders will agree for a settlement only if they think that their amount can be recovered through options including wage garnishments or tax offsets.

Lenders will agree for a negotiated settlement in payment scenarios including:

  • Payment of principal amount along with 50% of the entire interest is paid.

  • 90% of interest and balance total is paid.

  • According to the third option, if you pay the total principal balance, total interest balance and unpaid interest, then other fees including collection fees, late fees, and related charges are waivered.

However, within 90 of the agreement, the borrower has to pay the settled amount. Although lump sum payment is best for individuals who have not defaulted their loan, negotiated settlements are not allowed if the borrower has never defaulted, or if he/she does not have the financial stability for debt recovery, or if the lump sum amount is more than what they get through collection options.

One way to escape from the student loan is to pay it off in full. This can be done by seeking a professional loan to pay off student loans. As there is a default mark on your credit, you might need to have a co-signer on your consolidation loan. Private Student Loan Refinancing Lenders can help you in locating Student Loan Advisory Group and helps to provide a new loan for struggling borrowers.

Rehabilitation process helps in easing your student payment loans and helping you to remove that record from the credit report. This program is offered by the federal government. Any borrower who has defaulted on a federal student loan and its collections has the right to use the rehabilitation program to ease his student loan. If you are finding it really difficult to pay back the loans, then rehabilitation is one option that you would want to consider.

The amount to be paid for rehabilitation is decided by the student loan lender. When for a direct loan or FFEL program, nine monthly payments are made within 10 consecutive months, for federal Perkins loans the payments must be made monthly within a nine-month period. If you can’t afford to make a monthly payment, an alternative payment is made. This is based on the net amount after your payment and other financial obligations.

The loan contract can be verified to understand the terms of default.

After 270 days of missed payments, a direct loan or FFEL will enter a default. The default of Perkins and private student loans start once you miss a payment. The moment your loans enter a default, all the amount that you owe becomes a due.

In this case, debt is sold to a collection agency, and legal action is chosen against you. If the lender is successful in the case, then he can charge a wage garnishment against you. A treasury offset can also be collected in this case.


Pros and Cons of Student Loan Rehabilitation

Like the flip of a coin, student loan rehabilitation programs have advantages as well as disadvantages. A few of the advantages of student loan rehabilitation program are as given below.

  • The default is erased from the credit report – after the completion of loan rehabilitation, the credit report, default wouldn’t appear on it.

  • Lower amounts of monthly payments – repayment during rehabilitation is income based and is very low as $5 in a month

  • Former loans are benefited – eligibility for deferment, forgiveness, and forbearance will be granted after the rehabilitation process.

A few of the disadvantages of student loan rehabilitation are as given below.

  • Rehabilitation payments are made after the wages are garnished. This garnishment will end, once your loan is no longer in default.

  • Rehabilitation programs are offered rarely to borrowers by private lenders.

  • Late payments sometimes remain on your report. Even though credit report doesn’t show default, late payments will definitely create an impact on your credit.

A loan rehabilitation and the full pay-off are other available options if loan repayment is not granted. The loan holder can be contacted to initiate the process of student loan rehabilitation. Loan holder’s contact information can be found out from the ‘my federal student aid’ portal.


Flaws in student loan rehabilitation

It was in 2014 that Scott Naylor, an English teacher defaulted his loan after not paying it for almost 270 days. After receiving the default status, Naylor couldn’t manage the expenses along with the debt he owed and hence filed a bankruptcy.

Rehabilitation leads to adding extra amount to the amount that is already owed, which in turn causes the drawback of the program to outweigh the benefits. Even after successful completion of rehabilitation in 2014, $1,30,000 is owed by Nailor today, due to the combination of Federal Direct Loans and Federal Family Education Loan.

There are also borrowers who default their rehabilitated loans again. Moreover, borrowers who were not enrolled in an income drive repayment program were more likely to default a loan than the others. The rehabilitated amount also includes the cost of placing the loan with a private collection agency, processing fee and attorney fees from the department of justice.

To establish a monthly payment that is both reasonable and affordable, the collection agency works with the borrower. A situation is thus created where a borrower is stuck again and need to be overwhelmed all over again. A spokesperson for the department of education says that the government is exerting the penalty of the of fees on the borrower instead of keeping it on the taxpayers.

Rehabilitation can in a way, make repaying even more difficult. The hardship of loan repayment is not lessened by the rehabilitation of student loans. When the last of an applicant’s scheduled rehabilitation payments were made, she believed to view a reduced balance on her loans.

Her initial balance had by then increased to $15,279 during this period. This is definitely a bane for all those students who couldn’t complete their course but had student loans to pay and have plans of restarting their school.


Tips to not fall into default after student loan rehabilitation

A few tips to not fall into default after getting the loan rehabilitated is as given below.

  • Never enter into a verbal rehabilitation agreement. It is necessary to make a written student loan application. This would be documented and used for future purpose. Thus confusions regarding what was said and agreed upon can be reduced.

  • Make sure to not include mistakes in your written application. Critical details including monthly payment details and more included in your application and they are necessary to carefully add details in the application form regarding this.

  • It is necessary to accept the payment amount without a fight. Monthly rehabilitation is set at a reasonable and affordable amount. If there are any recent changes in your income or expenses, then you should let the collector know about it.

  • Make sure that you are aware of the collection costs in the collection agency. Federal regulations grant permission to the collection agency to add the collection costs to the federal loans. So as a borrower you can try your best to negotiate with the collection agency to reduce your cost of collection. This negotiation has to be performed before the initiation of the rehabilitation amount.

  • It is necessary to stack up, the essential documentation if in case a clarification regarding payments are to be made. A few of the errors that can arise in the documentation process includes missing a payment, the inclusion of a late payment, mistakes from the collection agency to not credit the account in the right way, unavailability of copies of canceled checks or bank statements showing payments, and more. Keep all the necessary documentation ready can in a way reduce the anxiety and confusion that may come along.

  • It is also necessary to make fewer payments than required. 9 monthly agreed upon payments are to be made as per the federal student loan rehabilitation guidelines. In that case, you’ll have to make these payments on time. Your loans will remain in default if you don’t follow the rules. To make maximum use of student loan default, you’ll have to make all payments in time and within a given period.

  • Identify if there are changes in credit card reports especially during every 6 months. A small error says in the case of a mortgage or car loan can reduce the benefits of the whole rehabilitation program. If in case you find an error, you can have the problem investigated and then fixed.

  • Once your loan is rehabilitated then you can choose the best repayment plan that suits you. If in case you don’t select a repayment plan, you’ll automatically be placed under the 10-year repayment plan. Other options including income dependent plans will save your money each month. Discharge of unpaid balance after a period of time can also be caused by this program.


How to choose between student loan rehabilitation and consolidation

Reasonable and affordable payments are made available through a rehabilitation agreement. Rehabilitation takes a long time to be processed and hence it is a lengthy process to get out of default. Depending upon personal situation student loan consolidation makes more sense.

Moreover, late payments remain on your credit report as well. Compared to rehabilitation, consolidation is a faster way to get out of default. Capping of monthly payments can be made at a percentage of your income under the loan consolidation option. Consolidation also opens up ways for better repayment plans.

Consolidation takes only between 30 to 90 days and is less lengthy than rehabilitation. There is, in fact, no perfect answer on whether to choose rehabilitation or consolidation. The outcomes remain the same. You either get your student loan payments back on track or get out of default and are in good standing with your payments. The choice is purely personal based on one’s current income, debts and his ability to repay.

A few of the consequences of entering into a student loan default are as given below.

  • The collection activity is limited to all those who are required by law and also communications that support the law.

  • The initiation of administrative wage garnishment process is limited.

  • Federal and state funds may be protected or other federal payments by the US Department of Treasury.

  • Restoration of eligibility for future title IV federal financial aid is performed. This also includes federal grants.


What happens behind the rehabilitation process?

A few of the processes that happen under the rehabilitation process are as given below.

  • After consenting to the rehabilitation agreement, you are obligated to make 9 monthly on-time payments, within 10 months. No extra payment has to be made to speed up the process. Failing to fulfill the terms of rehabilitation agreement, your loans will remain in default.

  • The process of rehabilitation would be complete once the lender purchases the loan. This may not happen immediately after the qualifying payments are made.

  • ECMC then sends a request to the National Consumer Reporting Agency regarding the deletion of trade-line from your consumer report. The loan information would then be stored in the National Student Loan Data Systems. These processes happen within 45 days of the loan being transferred to the eligible lender.

  • If a delay is experienced in updating your loan on NSLDS, then you can contact the loan holders for help.


Types of loans eligible for Loan Rehabilitation

Only Federal Student Loans are eligible for loan Rehabilitation.

These Federal Student Loans include:

  • Federal Perkins Loans

  • Federal PLUS Loans

  • Federal SLS

  • Federal Stafford Loans

  • Federal Grad PLUS loans

  • Federal Consolidation Loan

  • Health Professions Student Loan

  • Nursing Student Loan


Type of Rehabilitation

Depending upon the frequency of monthly payments there are three different types of rehabilitation.

They are as given below.

  • Regaining eligibility for consolidation

  • Regaining Eligibility for Federal Student Aid

  • Removing default from credit history  

Regaining Eligibility for Consolidation

Under this program, the number of payments to be made are 3 and the payments are to be made within 15 days of the due date.

Regaining eligibility for federal student aid

Under this plan, the number of payments to be made is 6 and the payments are to be made within 15 days of the due date.

Removing Default from Credit History

The number of payments to make is 9 out of 10 and the payments are to be made within 20 days of the due date.


Negotiation with Collection Agencies and Guarantee agencies

Collection agencies and guarantee agencies receive payment based on commission. This creates pressure to seek the highest possible monthly payments from the borrower. A full commission will be earned if the monthly payment exceeds a certain percentage of the outstanding balance. 

Loan Balance

Calculated Monthly Payment

< $7,500

1.29%

< $9,999

1.14%

< $19,999

1.00%

< $ 39,999

0.87%

Greater than $ 40,000

0.76%

Federal Perkins Loans

1.15%


Student Loan Rehabilitation FAQs

1. Is Rehabilitation a good idea?

Rehabilitation is definitely a good idea for those who have defaulted their loans and is searching for a way out from it.

2. What is the duration of Student Loan Rehabilitation?

9 monthly payments are to be made within 20 days of the due date for a duration of 10 consecutive months.

3. How does loan rehabilitation affect credit?

When it comes to credit score, rehabilitation has an edge over consolidation when it comes to the credit report.

4. What is the main purpose of rehabilitation?

Rehabilitation is done basically for three purposes including regaining eligibility for consolidation, regaining eligibility for federal student aid and removing the default from credit history.

5. Are private loans eligible for student loan rehabilitation?

No. Only federal student loans are eligible for student loan rehabilitation.

6. What duration of non-payment of loan is considered as a default?

If loans are not paid for 270 days, then the loan is considered to default.

7. Are multiple student loan rehabilitation available?

No. Student loan rehabilitation is available only once and if a default happens after the first rehabilitation, then it would not be possible to rehabilitate the loan again.

8. Which other program helps to overcome student loan default?

Student loan consolidation is one other program that helps to overcome student loan default.

9. Can the loan holder continue to contact the borrower even after the borrower has signed a rehabilitation agreement?

Contacts, but very limited contacts can be made by the lender.

10. How to disagree to a rehabilitation payment that the lender has chosen for you?

The possible way to disagree is by convincing the lender that you are aware of reasonable and affordable pay to keep pushing until they give it to you.