Student Loan Rehabilitation: How To Get Out of Default

When Does a Student Loan Go Into Default? 

If you miss one student loan payment, your loan won’t usually fall into default status right away. First, your loan will be considered past-due — also called delinquent. If you make up the missed payment or arrange something with your lender, you can get out of delinquency. If you continue to miss payments for multiple months, you risk going into default. 

The timeline for this varies based on the type of loan you have:

• For many private student loans, your loan goes to default status when your payment is 90 days delinquent. At that point, your loan servicer will report your default to the major credit reporting bureaus, which can cause your credit score to fall.

• If you have a federal Direct Loan, Direct Consolidation Loan, or Federal Family Education Loan (FFEL), you get 270 days before your loan falls into default after missing payments.

• If you have a federal Perkins Loan, your loan holder may deem your loan “in default” after just one missed payment.

  • For a Perkins Loan, a missed payment is a payment made after the due date — even by just one day.

To learn more about the difference between delinquency and default and how they work with different types of loans, read our article: Student Loan Default: What Is It? What Can I Do About It?

How Do You Rehabilitate Student Loans?

To rehabilitate your federal student loans, you need to gather some information about your income, figure out who your current loan holder is, call them, sign papers, and make on-time payments. 

Here’s an in-depth step-by-step guide to rehabilitating your defaulted student loans.  

Step 1: Gather Information: Figure Out Who Your Loan Holder Is & Find Your Recent Tax Return

To start the rehabilitation process, you first need to identify the company holding your loan. It’s not uncommon for the Federal Student Aid office to transfer a federal loan from one company to another. Also, your loan holder may or may not also be the loan servicer. 

What’s the difference?

• A loan holder owns your loan (and may or may not do the work of managing or “servicing” it).

• A loan servicer manages the paperwork related to your loan and is often the point of contact for student loan borrowers.

If your loan holder and servicer aren’t the same company, the Federal Aid office recommends contacting the loan holder for student loan rehabilitation. The easiest way to figure out your loan holder is by logging in to your account on StudentAid.gov to see the details on your loan. You can also call the Federal Student Aid Information Center (FSAIC) at 1-800-433-3243.

To learn more, read our article: How To Get Your Federal Student Loan Info From the NSLDS.

Before you call your loan holder to discuss rehabilitation, you’ll want to find your most recent tax return or pay stubs. The lender will ask about your income and family size to calculate your new payment under the rehabilitation repayment plan.

Step 2: Tell Your Loan Holder You Want a Rehabilitation Plan and Discuss Payments

When you talk to the loan holder (lender), tell them you’re interested in loan rehabilitation. They will ask you for information about your household size and income to determine your discretionary income. To determine your rehabilitation monthly payment amount, they look at your adjusted gross income (AGI). This amount should be on your latest tax return. 

How Your Repayment Amount Is Calculated

To figure out your rehabilitation payment, the lender will consider your income and family size and compare it to the poverty guidelines for your state. There’s a complicated formula to figure out your monthly payment. You don’t need to understand it to apply for rehabilitation, but if you’re curious, here’s how it’s calculated:

If you have a Federal Family Education Loan (FFEL) or a federal Direct Loan, the lender will:

• Calculate 150% of the federal poverty guideline for your household size

• Subtract your adjusted gross income (AGI) from that number

• Multiply that by 15%

• Finally, divide that number by 12 to determine a monthly payment amount 

If the amount is less than $5.00, you’ll only have to pay $5.00 per month. This calculation is regulated under a federal law called the Loan Rehabilitation Agreement. If you think the amount is too high, you can ask for a lower rehabilitation payment. The goal is to get a monthly payment you know you can make so you can finish the rehabilitation program and get out of default.

Remember: If your wages are being garnished or if the IRS keeps your tax refund for overdue student loan payments, these payments are not considered loan rehabilitation payments! Once you make five out of the 10 required payments, you should be able to stop the wage garnishment. Tell your loan holder if your wages are being garnished.

Step 3: Sign Your Payment Agreement and Mail the Documents

The loan holder will take information over the phone, but you’ll have to mail in proof of your income. If you want to request a lower payment, you’ll have to complete a Loan Rehabilitation: Income and Expense Information form and fill out more information about your expenses. You’ll have to agree to a monthly payment plan and confirm the agreement in writing. 

Within 15 days, the loan agency will send you a written rehabilitation agreement with a confirmation of your rehabilitation agreement. The agreement will contain a deadline to object to or confirm the rehabilitation agreement. It’s important to respond to confirm or reject! If you miss the deadline, the rehabilitation agreement won’t go forward.

Step 4: Make Your Rehabilitation Student Loan Payments

If you have a federal Direct Loan or FFEL, you have to make nine out of 10 student loan payments to get your student loan rehabilitated. These must be made within 20 days of the due date. (A Perkins Loan requires nine consecutive months of payments to be made within 20 days of the due dates.) 

If your wages are being garnished because of student loan default, you should be able to stop the wage garnishment after you make five out of 10 payments. 

If you have a change in your financial circumstances, you can request a change in your monthly payment amount, but you’ll have to submit documents for proof. (Request a change before the payment due date!)  

Who Is Eligible for Student Loan Rehabilitation? 

You can only get loan rehabilitation once in your lifetime. If you have defaulted on a Direct Loan, an FFEL, or a Perkins Loan, you can receive loan rehabilitation. 

You cannot receive student loan rehabilitation if:

• You were convicted of fraud in obtaining a federal student loan under Title IV of the Higher Education Act (HEA)

• Your federal student loan is in default because you failed to establish eligibility for the loan

  • For instance, if you never attended a class but took out a loan for your education and then defaulted

Why Should I Rehabilitate My Student Loan?

Rehabilitating your student loans can help you reach your financial goals in many different ways. First, it may help boost your credit score. Second, it can put more money in your pocket by stopping collections (and fees) and wage garnishment. Third, it can help you regain eligibility for student aid if you’re going back to school. 

Student Loan Rehabilitation Can Help You Improve Your Credit Record

When you achieve loan rehabilitation status on your student loan debt, the default is removed from your credit record. But your pre-default payment activity (late payments) will remain in your credit history for seven years from when they were first reported. Nonetheless, achieving loan rehabilitation can help to raise your credit score. 

Student Loan Rehabilitation Can Save You Money!

A successful loan rehabilitation will stop any wage garnishments or tax refund garnishments from happening. Collection agency activity and added collection costs and fees from collection activity will also stop accumulating as well. This will help you not only save money but also protect the money you already have. 

Student Loan Rehabilitation Can Help You Go Back To School 

You can move forward with plans to go back to school. Defaulted student loans prohibit you from taking out another federal student loan, but after loan rehabilitation, you no longer have that stopping you from furthering your education if you so choose. 

What Happens After My Student Loan Is Rehabilitated?

After you’ve made nine out of 10 payments, your student loan default status gets dropped, and your loan is officially rehabilitated. You’ll regain access to different payment plans and methods to manage your loan balance, including deferment and forbearance, loan forgiveness programs, income-driven repayment plans, and other repayment options.

Also, your loan won’t show up as a default on your credit report, and you’ll qualify for financial aid again. 

Remember, you can only use the loan rehabilitation process one time, so make the best of it! Before you start the process, review your options for paying down the rest of your student debt. 

Loan Consolidation for Students Loans in Default 

Loan consolidation is essentially taking out a new loan to pay off multiple federal student loans. To qualify for student loan consolidation, the loan must be in repayment status (or “good standing.”) A consolidated student loan will have a fixed interest rate, and once your loans are consolidated, you’ll have just one monthly payment. 

There are, however, a few disadvantages to consider about loan consolidation. For one, your defaulted loan will permanently stay on your credit history, as opposed to loan rehabilitation where the default status is removed. Also, unlike loan rehabilitation, you have to make three consecutive, on-time monthly payments (paid in full) on your defaulted loan in order to have your choice of income-driven repayment (IDR) plans. 

Taking time to compare loan rehabilitation payments with income-based payment plans and the advantages of a consolidation loan could save you a good sum of money over time.

I’ve Tried Everything, but I Still Can’t Pay My Students Loans. What Are My Options?

Living with debt can feel overwhelming. If you’ve already made efforts to manage and repay your student loans but feel like you aren’t making any progress, you may want to consider bankruptcy.  

Contrary to popular belief, if you meet certain requirements, bankruptcy can erase your student loan debt.

You’ll need to prove that repaying your student loans would cause you undue hardship — meaning you’re unable to maintain a minimal standard of living. You will also need to prove that you have made efforts in good faith to repay your student loans.

Start Upsolve’s free student loan discharge screener now to see if you’re eligible to file bankruptcy to discharge your student loans.

If you’re struggling to repay your student loans, filing bankruptcy could be a great choice for you. Bankruptcy can work in tandem with a student loan rehabilitation program, private student loans, and income-based repayment plans to help you get back on your feet and regain financial freedom. 

You can talk to an attorney about filing bankruptcy or you can file bankruptcy on your own. If you decide to file for Chapter 7 bankruptcy, Upsolve’s web app is like your personal teacher guiding you along the way as you complete your bankruptcy forms for filing with the court.