Defaulted Student Loan Rehabilitation: What You Need to Know

Defaulted student loan rehabilitation is a process that allows borrowers to get out of default and restore their eligibility for federal student aid. Defaulting on student loans can have serious consequences, including damage to credit scores, wage garnishment, and even legal action. However, rehabilitation can help borrowers get back on track and avoid these negative outcomes.

The process of rehabilitation involves making a series of payments over a period of time to bring the loan back into good standing. There are several options available to borrowers for getting out of default, including loan rehabilitation, loan consolidation, or repayment in full. Loan rehabilitation is often the best option for borrowers who want to restore their eligibility for federal student aid, as it allows them to make affordable payments over a period of time.

It’s important to note that not all defaulted loans are eligible for rehabilitation, and borrowers should consult with their loan servicer to determine their options. Additionally, there are deadlines for enrolling in rehabilitation programs, so borrowers should act quickly to avoid further consequences. Overall, defaulted student loan rehabilitation can be a helpful tool for borrowers who are struggling to make payments and want to get back on track.

Understanding Defaulted Student Loans

Defaulted student loans are loans that have not been paid for a long time. Federal student loans are considered to be in default when payments have not been made for 270 days. When a loan is in default, the borrower loses eligibility for deferment, forbearance, and other benefits. Defaulted loans can also lead to wage garnishment, tax refund interception, and legal action.

There are several reasons why a borrower may default on their student loans. These include financial hardship, unemployment, and unexpected life events. It is important to note that defaulting on a loan can have serious consequences, and it is important for borrowers to take action to get their loans back in good standing.

One option for borrowers with defaulted student loans is rehabilitation. Rehabilitation is a process that allows borrowers to get their loans out of default by making a series of on-time payments. After making nine payments within a 10-month period, the loan is considered to be out of default.

It is important to note that rehabilitation is only available for federal student loans. Private student loans do not have a rehabilitation option. Additionally, borrowers can only use rehabilitation once per loan. If a borrower defaults on the loan again, rehabilitation will not be an option.

Overall, it is important for borrowers to understand the consequences of defaulting on their student loans and to take action to get their loans back in good standing. Rehabilitation is one option available to borrowers with federal student loans who have defaulted, but it is important to explore all available options and choose the one that is best for their individual situation.

Eligibility for Loan Rehabilitation

Qualification Criteria

Loan rehabilitation is a one-time opportunity for borrowers to get their defaulted federal student loans back in good standing. To qualify for loan rehabilitation, borrowers must meet the following criteria:

• The loan must be in default, which means it is at least 270 days past due.
• The borrower must agree to make nine monthly payments within 20 days of the due date over a period of 10 months. The payment amount is based on the borrower’s income and expenses and is calculated as 15% of the amount by which the borrower’s adjusted gross income exceeds 150% of the poverty guideline for their family size and state of residence.
• The borrower must provide the loan holder with documentation of their income and expenses, such as pay stubs, tax returns, and bills.

Once the borrower successfully completes the rehabilitation program, the default status is removed from their credit report, and they become eligible for benefits such as deferment, forbearance, and income-driven repayment plans.

Application Process

To apply for loan rehabilitation, borrowers should contact their loan holder or the Department of Education’s Default Resolution Group. The loan holder will provide the borrower with information about the rehabilitation program, including the payment amount and due date, and the documentation required to complete the program.

Borrowers should be aware that they can only rehabilitate a defaulted federal student loan once. If they default on the loan again after completing rehabilitation, they will not be eligible for another rehabilitation program. However, they may still be eligible for other options to get their loans out of default, such as consolidation or repayment in full.

The Rehabilitation Process

Payment Calculation

To rehabilitate a defaulted federal student loan, the borrower must make nine on-time payments over a period of ten consecutive months. The monthly payment amount is calculated based on the borrower’s income and expenses. The payment amount is typically 15% of the borrower’s discretionary income, which is the difference between the borrower’s adjusted gross income and 150% of the poverty guideline for the borrower’s family size and state of residence.

Agreement Terms

The borrower must sign a Rehabilitation Agreement with the loan servicer to participate in the rehabilitation program. The agreement specifies the terms and conditions of the program, including the payment amount, due date, and consequences of default. The borrower must also provide documentation of income and expenses to verify the payment amount.

Completion of Rehabilitation

Once the borrower has made all nine payments on time, the loan servicer will transfer the loan to a new servicer, and the loan will no longer be in default. The borrower will regain eligibility for federal student aid, deferment, forbearance, and income-driven repayment plans. The borrower’s credit report will also be updated to reflect the rehabilitation and the removal of the default status.

It is important to note that the rehabilitation program can only be used once per loan. If the borrower defaults again after completing the rehabilitation program, the borrower will not be eligible for another rehabilitation and will have to choose another option, such as consolidation or repayment in full.

Consequences of Non-Completion

Defaulting on student loans can have serious consequences, and failing to complete the rehabilitation process can make things even worse. Here are some of the potential consequences of not completing the rehabilitation process:

Continued Default Status

If a borrower fails to complete the rehabilitation process, their loans will remain in default status. This means that the borrower will continue to face collection efforts, wage garnishments, and other consequences of default. In addition, the borrower’s credit score will continue to suffer, making it difficult to obtain credit in the future.

Legal Repercussions

If a borrower fails to complete the rehabilitation process, they may face legal action from their loan servicer. This could include a lawsuit to collect the full amount of the loan, as well as any interest and fees that have accrued. In addition, the borrower may be responsible for the loan servicer’s legal fees.

It is important for borrowers to understand the consequences of not completing the rehabilitation process and to take steps to avoid defaulting on their loans in the first place. This may include exploring alternative repayment options, such as income-driven repayment plans or loan consolidation.