How to Rehabilitate Student Loans

You’re not alone if you’ve defaulted on your student loans. This happens to more than a million people every year. Depending on your loan type, you may have several options to rehabilitate student loans and get past this speed bump. 

Federal student loans offer a clear path to rehabilitate your loans, whereas private student loans can be murkier. 

If you’re not sure what type of loans you have, check your credit report to see what loans are listed. Your Federal Student Aid account will show all your federal loans.

In this guide:

• Why rehabilitate student loans?
• How to rehabilitate defaulted student loans
• How to rehabilitate multiple student loans
• Pros and cons of student loan rehabilitation
• Alternatives to student loan rehabilitation

Why rehabilitate student loans?

Regardless of loan type, life can be more difficult if you’re in student loan default. Once you default on student loans, they become immediately due in full—a cruel irony considering you already have trouble paying them.

You’ll deal with anxiety-inducing collection efforts. It could also damage your credit, which can make it tougher to do any of the following:

• Get a job
• Find housing
• Get approved for new credit

Student loan default can also have specific consequences depending on if you have federal or private student loans.

Federal student loans

If you have federal student loans, the government can garnish your wages, tax return, or Social Security payments. You’ll also be ineligible for future federal student loans and benefits such as income-driven repayment plans or forbearance. 

That sounds dire, but you have a way out if you have federal student loans. The government offers a federal loan rehabilitation program that allows you to get back on track, regain eligibility for loan benefits, and even repair some of the damage to your credit. 

Private student loans

Private student loan lenders may sue you in court to garnish your wages, withdraw money from your bank account, or even place a lien on your home and foreclose on it. You’ll have to pay late fees and maybe even court costs. 

There’s no defined path to rehabilitate defaulted private student loans. The rules of private loan rehabilitation—and whether it’s an option—depend on the contract you signed with your lender.  

How to rehabilitate defaulted student loans

First, it’s important to distinguish between delinquent and defaulted student loans.

Your loan is considered delinquent when you’ve missed a payment by even one day. Lenders typically report delinquency to the credit bureaus after you are 30 days late. It gets more serious when lenders consider your loan in default.

The time it takes to move from delinquent to default varies depending on the loan. For federal student loans, you have 270 days to catch up before your loan is in default. Private student loan lenders set their own rules. Certain lenders consider loans in default after a single missed payment.

Since private lenders make their terms, they also set the stage for options to rehabilitate your loans once they default. Ask your lender about your choices, if any, and how they work. 

How to rehabilitate federal student loans

Any federal student loans granted after June 30, 2010 are Direct Loans, and rehabilitating them is more straightforward. Here’s how it works:

1. Contact your loan servicer. This can be scary, but your servicer is there to help you. Tell it you want to investigate your loan rehabilitation options. 
2. Send your servicer your last tax return. A tax transcript will also work. Your servicer will use this to calculate a monthly payment amount you can afford based on 15% of your discretionary income, which is defined as the difference between your annual income and 150% of the poverty guideline for your family’s size and location.
3. Sign the loan rehabilitation agreement. Your servicer will send you a loan rehabilitation agreement to sign within 10 days. 
4. Make nine on-time payments. These will be more affordable—not your previous loan payments. If you apply for rehabilitation while federal loans are in COVID-19 forbearance, you won’t have to make any payments for it to count. 
5. Regain access to federal benefits. After your last on-time payment, your loans are no longer in default. You’ll get access to everything you had before—including the chance to sign up for an income-driven repayment plan if you can’t keep up with your payments. 
6. Check your credit report. The Department of Education will remove any default record from your credit report, although the late payment marks will stay. Even so, this will help your credit score, so double-check to ensure the default is removed.   

How to rehabilitate multiple student loans

If, like many borrowers, you have more than one federal student loan, you’ll need to apply to rehabilitate each separately. Private student loan lenders’ rehabilitation programs vary, so you’ll need to contact your lender for the details. 

Once you apply to rehabilitate your federal student loans, you must be vigilant to follow through. If you default a second time on those loans, you won’t be eligible to rehabilitate your loans again. 

If you run into problems during the rehabilitation process, contact your loan servicer and ask it to recalculate your payment amount. 

Suppose you have trouble making payments after rehabilitating your loans. You can ask your lender to place your loans in forbearance (for short-term income pitfalls) or on an income-driven repayment plan (for long-term financial difficulties). 

Pros and cons of student loan rehabilitation

Consider these important points if you’re considering rehabilitating defaulted federal student loans to get back on track:

Pros

• Remove the record of default from your credit report 

• Stop collection efforts when rehabilitation is complete

• Easier-to-manage payments during the loan rehabilitation process

• Regain federal benefits such as income-driven payment plans and loan forgiveness

Cons

• Loan rehabilitation takes nine months

• Must sign a separate loan agreement for each defaulted loan

• Lose eligibility to rehabilitate loans if you default a second time

• Doesn’t stop wage garnishment or tax return withholding during the process

Remember: These points apply to federal student loans. Private student loan rehabilitation programs operate on a case-by-case basis, so contact your lender to determine what’s available. 

Alternatives to student loan rehabilitation

Loan rehabilitation is just one of several available options. 

Consolidation

If you have at least one other federal student loan in addition to your defaulted one, you can consolidate them into a new loan. To qualify, you must make at least three full, consecutive on-time payments or sign up for an income-driven plan for your consolidation loan. 

Consolidating your federal loans allows you to speed up bringing your loans out of default. However, you won’t get the record of default scrubbed from your credit report as you do with loan rehabilitation. 

Consolidation can potentially lower your overall payment. And it can impact your credit score. At first, it can lower your score because you are closing out lines of credit (your loans). However, if you are able to better manage your consolidated payments, it can raise your credit score in the long run.

Pay in full

If you get an inheritance or other large windfall, you can pay off your loans. However, it’s easy to understand why more borrowers don’t take advantage of this offer. 

Bankruptcy

If you’re in the small number of borrowers who qualify to have student loans discharged in bankruptcy, this could be an option. Given the complexities, it’s wise to consult with a lawyer.

Negotiate a settlement

If you have private student loans, you can try to negotiate a debt settlement with your lender. It may be more willing to work with you on this because it’s harder to recoup the money than for federal student loans. 

Default

The last option is to follow through with default. If you do nothing, lenders will continue collection efforts. Private student loan lenders lose the right to sue you for the debt after a few years, depending on your home state’s statute of limitations. Federal student loans have no statute of limitations. 

If your unpaid private student loans are past the statute of limitations, you still owe the debt. Lenders can try and collect on it, albeit not through the courts. That unpaid debt can follow you forever, so it’s best to consider the options above and treat default as a last resort.