July 10, 2019

Student Loan Rehabilitation

Read more about Student Loans

The cost of education has student loan debt at an all-time high. If you're struggling to keep up, student loan rehabilitation could help you. See if you qualify in our guide.

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What Is Student Loan Rehabilitation?

Loan rehabilitation is a 9- to 10-month process for getting your federal student loans out of default. It involves making consecutive on-time payments through a program offered by a rehabilitation loan holder or collection agency.

Private loans, however, are not governed by the same rules as federal student loans. The availability of rehabilitation depends upon your lender and the contract you signed when you obtained your student loan.

Always contact your lender if you fear that you will default on your student loans.

How to Begin Rehabilitation

You can apply for the rehabilitation program by contacting your lender, loan servicer, or collection agency to start the process. To rehabilitate your loans, you must agree to make nine voluntary monthly payments (as determined by your loan holder).

These payments must:

  • Be made within 20 days of their due date
  • Occur over 10 consecutive months

Interest will accrue during the rehabilitation process. Collection fees may also be added to the amount owed.

That means that even though the rehabilitation payment may be much lower during the rehabilitation process, the overall amount of the loan could increase significantly.

To avoid collection fees, start loan rehabilitation within the first 60 days after your loans default, and then fully complete the program.

Payments Under Rehabilitation

Your rehabilitation loan holder is responsible for setting a reasonable monthly rehabilitation payment amount. Usually, the payment will be equal to 15% of your annual discretionary income, divided by 12.

Here are some things to remember:

  • Discretionary income is the amount of your adjusted gross income (reported on your most recent federal income tax return) that exceeds 150% of the poverty guideline amount for your state and family size.

  • Itemized deductions, such as college tax credits, interest paid on qualifying student loans, and personal exemptions, lower the adjusted gross income line on your tax return.

  • The minimum balance on your student loans must be at least $1,000 to qualify for rehabilitation.

  • Your lender will require you to provide proof of monthly income and income tax returns.

Rehabilitation Payment Calculation Example:
Your discretionary income (the amount of your adjusted gross income reported on your federal income) is $25,000. You are a family/household of 1.

The poverty guideline amount for your state and family size (1 person) is $14,380. 150% of $14,380 = $21,570

$25,000 (your adjusted gross income) - $21,570 = $3,430 (discretionary income minus 150% of your state's poverty guideline for your family size)

$3,430 x 15% = $514.50

$514.50/12 = $42.88 Rehabilitation Payment

What If I Can't Afford the Payments?

If needed, you can ask your loan holder for an alternative monthly payment amount. They may be able to base it on the amount that remains after you deduct your monthly expenses from your monthly income.

Your lender will require you to provide documentation of your income and monthly expenses. You might be approved for a much lower rehabilitation payment amount, but it cannot be less than $5.00.

What Happens After Loan Rehabilitation?

Once rehabilitation is complete, your student loans return to full repayment terms based on the remaining interest and principal balance owed.

The rehabilitating lender will establish a new repayment term of 10 years (up to 30 years for consolidated loans, MINUS the 9 payments you made during the rehabilitation period).

Your new monthly payment may be higher than the one you made during rehabilitation. If you cannot afford the newly established payment amount, you may qualify for income-driven repayment if you have federal student loans.

Keep reading to learn the pros and cons of student loan rehabilitation.

The Income-Based Repayment (IBR) consists of a payment that is 10% of your discretionary income (for student loans taken out after July 1, 2014).

Learn about the other types of affordable income-driven repayment options here. Take time to review your options. Some plans offer payments as low as $0 and forgive your loan balance after 20-25 years of repayment.

Advantages of Student Loan Rehabilitation

Obtain Additional Student Loans
After the 6th on-time payment is made during loan rehabilitation, you will again be eligible for federal financial aid.

Remove Negative Marks from Credit Report
Default is removed as soon as the rehabilitation program is completed. However, delinquencies remain on your credit report for 7 years.

Reduced Collection Costs
If you started the rehabilitation process more than 60 days after the loans defaulted, collection fees may continue. But the fees may reduce significantly—as low as 16% in comparison to 18%-24% outside of the rehabilitation program.

Get Your Student Loans Back Into Good Standing
Your loans will return to repayment with full benefits of deferments, forbearances, some loan forgiveness programs, and original repayment terms will be reinstated (less the 9 months of payments made during the rehabilitation process).

Disadvantages of Student Loan Rehabilitation

Wage Garnishments Will Continue
Student loan payments obtained by wage garnishments, Treasury offsets, trustee payments, or income or asset execution do not satisfy the rehabilitation payment requirements.

For example, if student loan payments were being garnished from your wages prior to rehabilitation approval, you still need to make payments directly to the rehabilitation loan holder. This would be in addition to your garnishments, Treasury offset, trustee payments, or income or asset execution.

After the 5th on-time payment, any existing wage garnishments should cease. Speak with the Internal Revenue Service to determine if offsets will cease. You can also speak with your attorney about stopping trustee payments and income or asset execution.

No Paying Ahead
Advance and double payments aren't allowed in the rehabilitation process.

Default Status May Linger on Your Credit
It can take up to 10 months for default status to be removed from your credit report.

Collection agencies can and may continue to call while the loan is in rehabilitation.

Late Payments Prolong Rehabilitation
The rehabilitation program might restart if you make a late payment. That will delay the removal of negative marks from your credit report.

No Deferment or Forbearance Options
You must make regular on-time payments and cannot be approved for a deferment or forbearance until the rehabilitation program has completed.

Multiple Rehabilitations Aren't Allowed
Your student loans are only eligible for rehabilitation once. You may be eligible for consolidation to remove the default status on your loans.

Keep reading to understand what happens when loans default and other ways to get your loans out of default status.

What Is Default Status?

Student loans that go unpaid for 270 days fall into default status. Here's what you can expect:

Once the loans enter default status, they become immediately due in full. This is referred to as acceleration.

When the loan is accelerated, the original repayment terms are no longer available, and you lose access to deferment and forbearance options.

Collection Agencies
Lenders commonly transfer defaulted student loans to collection agencies. So, you might lose the ability to communicate with your original lender.

High Interest
Defaulted student loans also continue to accrue interest daily, which can be costly since you're not making payments to offset it.

Credit Score
Delinquent payments and defaulted loans are reported to credit agencies. Your borrowing power will suffer when your credit score is damaged.

If you do not bring your loans out of default status, recovery of the debt will still happen through wage garnishments, tax refund, and federal payment offsets.

Get in touch with your lender or servicer BEFORE your student loan payments go delinquent. You can review what options are and hopefully avoid default entirely.

Contacting your lender may prevent them from taking additional action like notifying the credit bureaus or sending your debt to collections.

Alternatives to Bring Student Loans Out of Default

Pay Off Your Loans
You can always pay off your loans to get them out of default status. But coming up with the cash to pay off the loans may not be the quickest or easiest route.

Student Loan Consolidation
Loan consolidation allows you to combine outstanding federal loans as well as loans in default status. You then pay one monthly payment, rather than multiple payments due on several loans.

The Department of Education pays off your current loans and starts one larger loan. There is only one interest rate associated with the new loan, which is often lower than your original interest rates.

Before you consolidate, you must make arrangements to bring your loans current. Typically, that means making 3 on-time payments in a row.

There are pros and cons with consolidation. One downside? You cannot be enrolled in school more than half-time. Learn more about consolidating student loans here.

You have to know who holds your student loans in order to consolidate or rehabilitate when you're in default. Read on to get started.

Who Holds My Student Loans?

Student loans are often sold to other lenders after the papers are signed. Your student loans may also be serviced by a company that is not your original lender.

Depending upon the type of student loan you acquired, federal or private, there are several key ways at no cost to you to track down your loans.

If you have Perkins loans, contact your school to learn who holds your loans.

Find Your Federal Student Loans
The National Student Loan Data System (NSLDS) is the U.S. Department of Education's (DOE) database site which houses federal student loan records. This is an online tool for you to find and keep track of your federal student loans.

To set up access on the NSLDS site, borrowers are required to use an FSA ID. You will be asked for your Social Security number and contact information. Your FSA ID will be used to confirm your identity when accessing your financial aid information and can also be used for signing future federal student aid documents.

The NSLDS site lists loan balances and transactions that may be up to 120 days old. Use the site to determine your loan servicer. Then, contact the servicer to determine if they have your loans or what collection agency your loans have been transferred to.

The NSLDS database does not contain:
  • Private loan information
  • Older loans (such as loans originated 30 years ago)
  • Loans that are not Title IV-eligible loans, such as medical or nursing school loans

If you have older loans, medical, or nursing school loans that are not in the NSLDS database, and you do not know who your lender is, see the steps below for contacting the financial aid office. Or, you can check your credit report.

Find Your Private Student Loans
Loans generated by private lenders typically do not offer rehabilitation programs. But it is important to contact your lender to see what programs they may have in place to get your loans out of default status.

You might run into a bit more difficulty when looking for information on private student loans. There is no national database for private student loans.

Begin your private student loan search by:

  • Contacting your original lender.
    The lender may still hold your loans in-house. If not, they will be able to point you in the direction of the lender your loan was sold to.

  • Contacting the financial aid office.
    If you do not know who your lender is, contact the financial aid office at the school you attended.

  • Checking your credit report.
    If you do not find the student loan on your credit report, contact your credit agency to determine how you can pull a credit inquiry without affecting your current credit score.

    A hard credit pull may drop your score by several points and the inquiry will reflect on your credit report for about two years.

How does rehabilitation affect my credit score? Read on to learn how rehabilitation, default, and delinquencies on your student loans affect your credit score.

Rehabilitation and Your Credit Score

When the rehabilitation program is completed, the default notation will be removed from your credit report. Negative history, such as the delinquencies reported prior to default, will remain on your credit report for up to seven years.

Student loans remain on your credit report until they are paid off, whether delinquencies are reported or not.

  • Delinquencies reported on a student loan can stay on a credit report for seven years.

  • Delinquencies reported on a Perkins student loan can stay on your credit report until the loan is paid in full, even if it is longer than seven years.

  • Defaulted federal student loans remain on a credit report for seven years from the date the default started.

Federal student loans are usually not reported to credit agencies until they are at least 90 days delinquent. Private student loan delinquencies are reported when payments become 30-45 days delinquent.

A collection agency or the federal government may continue to pursue collection of defaulted student loans, and this will be reported to the credit agencies. But the longest a delinquency can be reported is seven years.

Bottom Line

If you end up defaulting on your federal student loans, you can avoid further collection action and damage to your credit report by considering loan rehabilitation.

Loan rehabilitation involves making consecutive on-time payments through a program offered by a rehabilitation loan holder or collection agency.

You also have other options to get your loans out of default. You can:

  • Pay your loans off. But shelling out that much cash might not be a realistic solution.

  • Consolidation is a great option to combine your loans. You can obtain a lower interest rate and monthly payment, including loans that are in default status.

Write to Mary Humphrey at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

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