Student Loan Rehabilitation Gets the Default Status Dropped

Student loan rehabilitation is a way to get your student loans out of default status. If you’re currently trying (unsuccessfully) to get student loan relief but aren’t eligible for any programs because you’re in default, student loan rehabilitation may be exactly what you’ve been looking for. 

When Does A Student Loan Go Into Default? 

There is a difference between a student loan being delinquent and being in default. As soon as you miss a payment, your loan is delinquent, but not necessarily in default. It’s like the difference between missing a class and being expelled. For many private student loans and student government loans, you have a defaulted loan when you don’t make a payment in 90 days. At that point, your loan service company will report your default to the major credit reporting bureaus. 

The William D. Ford Federal Direct Loan Program (often just called the Direct Loan Program) and the Education Loan Program (FFEL) loans wait 270 days before putting a loan into default. A Federal Perkins loan holder isn’t as patient and will put you into default if you miss one payment. In 2020, the Department of Education announced collection activity has stopped on defaulted loans and interest rates are set at 0% due to the Covid-19 national emergency. Under the CARES Act, this policy will be in place from March 13, 2020, through Sept. 30, 2020.

Why Should I Rehabilitate My Student Loan?

Rehabilitating your student loans can help you in several different ways. 

You Can Refresh Your Credit Record

When you achieve loan rehabilitation status on your student loan debt, your loan is taken out of default and the default is removed from your credit record. Your pre-default payment activity remains in your credit history. When you consolidate your loan debt without rehab, the default is not removed from your credit record. If you’re filing bankruptcy, chances are you won’t get your student loan discharged. But if the default is removed from your credit record, your credit score will benefit after your bankruptcy discharge.

Save Money!

Wage garnishments and tax refund garnishments for your student loan will stop after a successful loan rehabilitation. Collection agency activity and added collection costs and fees from collection activity will stop accumulating. 

You Can Go Back To School 

You can move forward with plans to go back to school. A default loan status prohibits you from taking out another federal student loan. After loan rehabilitation, you no longer have that prohibition stopping you from reaching your educational goals. Your loan is no longer in default. 

Who Can Get A Student Loan Rehabilitation? 

You can only get loan rehabilitation once, so if you had a student loan rehabilitation before, you won’t be able to get one a second time. If you were convicted of fraud in obtaining a federal student loan under Title IV of the Higher Education Act (HEA), you won’t qualify for rehabilitation. If your federal student loan is in default because you failed to establish eligibility for the loan, you won’t qualify for rehabilitation. For instance, if you never attended one class but you took out a loan for your education and then defaulted, you don’t  qualify for loan rehabilitation. The qualification requirements for a loan rehabilitation agreement are in the United States Code of Federal Regulations (Title 34 Section 682.405).

What Steps Do I Take To Rehabilitate My Student Loan?

To rehabilitate your student government loan you’ll determine your current loan holder, call them, sign papers, and make on-time payments. Sound simple? The steps are a little more detailed and time-consuming in real life. You’ll have some homework assignments. 

First Assignment: Find the Company Holding Your Loan

The first step to get a rehabilitated loan is to identify the company that is currently holding your loan. It’s not uncommon for the Federal Student Aid office to transfer a federal loan from one company to another. You could have a loan holder and a loan servicer. A loan servicer tends to be the middleman managing paperwork, but the Federal Aid office recommends contacting the loan holder. Government loans for education authorized under Title IV of the Higher Education Act of 1965 (HEA) include Stafford loans, Direct Loans, Perkins loans, PLUS loans, and others. Some loans are subsidized and some are not. You may have to call your  bank or school directly to determine the person you need to contact.

Fortunately, the Federal Student Aid website has a list of student loan providers and contact numbers. You can log in to your account to see the details on your loan. You can also call the Federal Student Aid Information Center (FSAIC) at 1-800-433-3243 to find the name of your loan holder. Expect to be on the phone for a while! 

Second Assignment: Tell Your Loan Holder You Want A Rehabilitation Plan and Discuss Payments

When you talk to the loan holder, 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 are going to look at your adjusted gross income (AGI). This amount should be on your latest tax return. 

The loan payment calculator will look at the poverty guideline for your state based on your family size to get a number that is 150% of the poverty guideline. For a Federal Family Education Loan (FFEL) and William D. Ford Direct Loan Program (Direct Loan), they will subtract your AGI from the poverty guideline number and multiply that by 15%. Then they will divide that number by 12 to get 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 (34 CFR Section 682.405). If you think the amount is too high, you can ask for a lower rehabilitation payment. 

You can get your estimate before you call by doing the math. Let’s say your adjusted gross income is $40,000 per year and you have a family of 4. For 2020, the federal poverty guideline is $26,200. (The amounts have changed since then; the calculation remains the same.) First, we take $26,200 multiplied by 150% (or 1.5) to get $39,300. Then we subtract that number from your income. The difference between $40,000 and $39,300 is $700. Then, we take 15% of $700, which is $105. Then, we divide $105 by 12 to come up with a monthly payment of $8.75.

If your wages are garnished or if the IRS keeps your tax refund (tax offsets) for student debt payments, keep in mind these payments do not contribute to loan rehabilitation payments! Make sure you consider a realistic affordable payment. Once you make 5 out of the 10 payments, you should be able to stop the wage garnishment, so discuss this with your loan holder if your wages are being garnished. 

Third Assignment: 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. In that agreement will be a deadline for an objection or confirmation of the rehabilitation agreement. If you miss the deadline, the rehab deal will be dead. 

Fourth Assignment: Make Your Rehab Student Loan Payments

You’ll have to make 9 out of 10 payments to get your student loan rehabilitated, and student loan payments must be made within 20 days of the due date. Your wage garnishment should be able to stop after you make 5 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!)  A Perkins loan requires nine consecutive months of payments to be made within 20 days of the due dates. 

What Happens After My Student Loan Is Rehabilitated?

After you’ve made 9 out of 10 payments, your student loan default no longer applies, and your loan status is officially rehabilitated. You’ll qualify for other payment methods to manage your loan balance. This means you’ll qualify for deferments, forbearance, and loan forgiveness options. Your loan won’t show up as a default on your credit report and you’ll qualify for financial aid again. Wage and IRS garnishments for your student government loan will stop. 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. 

Options Based on Income to Pay Your Student Loan

After the rehabilitation process is complete, you can look into income-driven student loan repayment options to finish paying off your loan. The calculations are similar to the rehabilitation program, but the percentages and terms are different. 

The Revised Pay As You Earn Repayment Plan (REPAYE Plan) and The Pay As You Earn Repayment Plan (PAYE Plan) looks at 10% of your discretionary income instead of the 15% the rehabilitation program does. The REPAYE and PAYE are both for 20-year terms. Are you a graduate student? The REPAYE allows five more years for graduate studies. 

An Income-Based Repayment Plan (IBR Plan) percentage depends on when you took out your loan. New borrowers can get a rate of 10% of their discretionary income, old borrowers pay 15% of discretionary income. Whether you’re old or new depends on whether you took out your loan before or after July 1, 2014. 

The Income-Contingent Repayment Plan (ICR Plan) looks at two options, and the lesser amount is your repayment option. Option one is 20% of your discretionary income. Option two compares your payments to a 12-year fixed-payment period, adjusted for income. 

You can find more information about these payment options on the Department of Education’s Federal Student Aid website. They have a loan simulator to help you compare payment options. 

Loan Consolidation for Students

Under Title 20 of the United States Codes, qualifying students have the option of loan consolidation. To qualify for loan consolidation for your student debt, your loan must be in repayment status, which means your loan must be in good standing. Student loan consolidation will give you a fixed interest rate and let you put all your loans together into a new loan. You’ll have one monthly payment. A government loan servicer will not charge a fee to consolidate your loans, but other loan servicers may ask for an extra fee.

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 in the course of time.

Can Bankruptcy Help With My Student Loan?

You can drop your debt without dropping out of class. Bankruptcy can work in tandem with a student loan rehabilitation program, private student loans, and income-based repayment plans. Bankruptcy alone can’t get rid of your student debt, but it can relieve you of other debt, such as credit card debt and medical bills—debt that prevents you from paying down your student debt. 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. If you’re interested in learning more about bankruptcy, visit Upsolve’s Learning Center for more information on debt relief and learn how to get a clean slate in life without the burden of debt.