How student loan rehabilitation works

Defaulting on your student loans can be a scary prospect, as it carries some significant consequences and can damage your credit for years. However, it may be possible to rehabilitate your student loan debt.

If you have federal loans, your loan servicer might agree to reduce your monthly payments. In exchange, you agree to follow a structured repayment plan. Once you’ve made the required number of on-time payments, your loan is rehabilitated and the default is removed from your credit report. However, your history of late payments will remain on your report. 

For private loans, rehabilitation varies by lender and may be more difficult to achieve.

How federal student loan rehabilitation works

The process for rehabilitating your federal student loans depends on the type of loans you have.

Rehabilitating Direct Loans and FFEL Program Loans

Rehabilitating a Direct Loan or Family Federal Education Loan (FFEL) begins with contacting your loan servicer to discuss repayment options. 

If you’re eligible for rehabilitation, you’ll submit a copy of your latest federal income tax return. The loan servicer uses this information to determine a reasonable monthly payment amount, which is typically set at 15% of your annual discretionary income, divided by 12. If you can’t afford that amount, you may qualify for a smaller payment after providing additional documentation about your monthly income and expenses. 

Within 15 days, the loan servicer will send an agreement outlining the terms of your new repayment plan, including your reduced payment amount, any waived late fees or penalties, and a structured repayment plan. Sign and return the paperwork if you agree with terms. As part of this contract, you must make nine payments — within 20 days of the due date — during a consecutive 10-month period. 

After you complete these requirements, your loan is considered rehabilitated.

Rehabilitating Perkins Loans

The process for rehabilitating a Perkins loan is similar to other types of federal student loans. Start by contacting your loan servicer — which may be your school — to discuss your eligibility and repayment options.

Your loan holder will determine your new monthly payment amount and send a form outlining the terms of repayment. If you accept the repayment plan, you’ll make a full monthly payment within 20 days of the due date for nine consecutive months. Once complete, the lender will remove the record of the default from your credit report.

Pros and cons of student loan rehabilitation

Rehabilitating student loans comes with a lot of benefits, but the process has drawbacks, too.

Pros

• Restores your eligibility for other federal benefits. While your student loans are in default, you can’t apply for an income-driven repayment plan, student loan forgiveness or additional federal financial aid. Rehabilitating your loans can open these options up for you.
• Can improve your credit score. After completing a rehabilitation program, the lender will remove the default status from your credit report, which could improve your credit score.
• More affordable payments. When you rehabilitate Direct or FFEL Program loans, your payments are designed to be affordable based on your income.
• Stops costs of collection: While collection fees can be charged on your nine qualifying rehabilitation payments, once that process is complete, collection fees no longer apply. Collection fees also cannot be capitalized — or added to your loan’s balance — if you rehabilitate your debt.

Cons

• It’s not a quick fix. Rehabilitating your student loans requires making nine consecutive monthly payments.
• Your monthly payments may increase afterward. After rehabilitating the loans, your monthly payments will return to their normal levels. This can make it challenging to keep up with payments while managing other financial obligations, though enrolling in an income-driven repayment plan could help.
• Late payments stay on your credit report. While the lender will remove the default from your credit report, it will still show any late payments leading up to the default. Those late payments may continue to negatively impact your credit score.

Good to Know: Thanks to temporary COVID-19 initiatives, federal student loans in default can be restored to good standing through the Department of Education’s Fresh Start program. This process can:

• Stop collections on your debt
• Remove the default status from your credit report
• Restore your eligibility for income-driven repayment, deferment, forbearance and forgiveness programs
• Restore your eligibility for other government loans

This opportunity is separate from student loan rehabilitation, and you must contact your loan servicer to sign up. Find full directions and FAQs on the Federal Student Aid site.

How to manage payments after federal student loan rehabilitation

Once you’ve completed the loan rehabilitation process, you must resume making regular monthly payments on your loans to keep them in good standing. This means your monthly payments will likely increase — and potentially be much higher than the amount you paid under the rehabilitation plan.

If a higher loan payment would stretch your budget and put you at risk for default again, you have options.

Sign up for an income-driven repayment plan

An income-driven repayment (IDR) plan allows federal student loan borrowers to make payments based on their ability to pay. These plans base your monthly payments on a percentage of your discretionary income, making them more affordable and manageable. They also offer forgiveness for any remaining balance at the end of your repayment period. 

There are several plans to choose from, though not every type of federal student loan qualifies for every type of repayment plan. Federal Student Aid’s Loan Simulator can help you compare options and costs.

Refinance your loans

Refinancing student loans is a process that allows you to combine your existing student loan debts into one new loan — possibly with a lower interest rate or smaller monthly payment. This can make your monthly payments more affordable and manageable.

But when you refinance your federal student loans, you lose the benefits associated with them, such as access to IDR plans, loan forgiveness and deferment and forbearance options. For that reason, you should weigh all of your options carefully before refinancing. 

Generally, private refinancing lenders offer less repayment assistance than what’s available with federal student loans. As refinancing is not reversible, be sure you won’t need federal assistance benefits before committing to this strategy.

Student loan consolidation vs. rehabilitation

Another option to get your federal education debt out of default is to consolidate your loans. 

Federal student loan consolidation involves taking out a Direct Consolidation Loan to pay off your existing federal debt. In contrast, rehabilitation allows you to keep your existing loans and instead work with the lender to develop a repayment plan that fits your budget.

If you are in default on your student loan payments but don’t necessarily need lower monthly payments, consolidation may be the better option. Consolidation can make it easier to keep track of your student loan payments, as you only have one lender to deal with instead of several. Consolidation is also faster, as it only requires three consecutive, on-time payments on your defaulted loans before you consolidate. 

However, this process will not remove the default record from your credit report. You are also ineligible for consolidation if your wages are currently being garnished.  

STUDENT LOAN REHABILITATION VS. CONSOLIDATION: GETTING OUT OF DEFAULT

Can you rehabilitate private loans?

Unfortunately, private student loans don’t have the same rehabilitation options as federal student loans. Some lenders will work with you by adjusting your repayment plan, but the requirements and process vary by lender.

If your private student loans are in default and you want to get back on track, contact your loan servicer to discuss your options.