Guide to Student Loan Rehabilitation Programs

Melissa BrockUpdated December 14, 2022

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Loan rehabilitation can help you dig your student loan out of default. Default refers to a failure to repay a loan based on the terms you agreed to in your loan's promissory note. Most federal student loans default when no payment has been made in 270 days.Defaulting on student loans can have consequences for borrowers. You may face collection fees, garnished wages and income tax withholding, credit history damage, and even ineligibility for other financial aid programs.In this article, you’ll learn:

How student loan default rehabilitation works
The pros and cons of student loan rehabilitation
The steps to take to rehabilitate student loans
What happens after student loans are rehabilitated.

By the time you get done reading, you should have a clearer idea of whether student loan rehabilitation will work well for your needs.One note first on the topic of paying student loan debt: The U.S. Department of Education’s COVID-19 relief for student loans is ending this year. Student loan interest will resume starting on Sept. 1, 2023, and payments will be due starting in October.

What Is Student Loan Rehabilitation?

Student loan rehabilitation gives borrowers an opportunity to get their federal student loans out of default. (Note that if you have private student loans, they are not eligible for rehabilitation.) Rehabilitation also removes the default from your credit report, which can also help improve your credit score. Student loan rehabilitation also eliminates additional collection costs. Recommended: How to Pay Off Student Loans

How Does Student Loan Rehabilitation Work?

The first step to start the loan rehabilitation process is to contact your loan holder. You can log into Federal Student Aid to learn about your loan holder and their contact information.The rehabilitation process depends on your loan type. The William D. Ford Federal Direct Loan Program and Federal Family Education Loan (FFEL) Programs have different requirements compared to the Federal Perkins Loan Program.

Direct Loan or FFEL Program loans: The William D. Ford Federal Direct Loan Program is a federal student loan program where participating and eligible students and parents borrow from the U.S. Department of Education at participating schools. The Federal Family Education Loan Program is a former loan program that used to include Federal Stafford Loans, Federal PLUS Loans, Federal Supplemental Loans for Students (Federal SLS), and Federal Consolidation Loan programs. If you have these types of loans, you must agree in writing to make nine monthly payments within 20 days of a particular due date and make all nine payments over a period of 10 months consecutively.
Federal Perkins Loans: Perkins Loans, under the Federal Perkins Loan Program, were low-interest federal student loans for undergraduate and graduate students with real financial need. Students can no longer receive Perkins Loans and final disbursements were last permitted through June 30, 2018. Rehabilitating a defaulted Federal Perkins Loan involves making a full monthly payment each month for nine consecutive months and must make a full payment within 20 days of the due date. Your loan holder will decide your payment amount.

Your loan holder may collect payments on your defaulted loan through wage garnishment or by taking your tax refunds or other payments made by the government. You may have to continue making these involuntary payments but the nine voluntary loan rehabilitation payments don't count toward these payments. You may have to continue with these rehabilitation payments until your loans are no longer in default or until you have made some rehabilitation payments. Check with your loan holder for more information.Once you have made the required nine payments, you'll no longer have loans in default.Recommended: A Guide to Student Loan Forgiveness

Pros and Cons of Student Loan Rehabilitation

Let's take a look at the advantages and risks of refinancing a student loan. It's worth considering the pros and cons of loan rehabilitation before you make a decision about how to handle student loan default.

Pros of Student Loan Rehabilitation

First, let's look at the benefits of student loan rehabilitation:

Default status removed: As soon as you rehabilitate your loan, the default status comes off of it and any wage collection methods (such as wage garnishment) will stop.
Retain benefits: If you were eligible for benefits on the loan prior to default (such as deferment, forbearance, repayment plans, and loan forgiveness) you can retain these benefits after you successfully rehabilitate your loan.
Eligible for federal student aid: You'll also be eligible for federal student aid after you successfully rehabilitate your loan.
Removed from credit history: A rehabilitated loan will be removed from your credit history, though any late payments will still show on your credit history.

Cons of Student Loan Rehabilitation

Next, let's take a look at the downsides of student loan rehabilitation:

One-time option: If you rehabilitate a defaulted loan (and only federal loans are eligible), you can only use rehabilitation as an option once. Therefore, it's really important to have a plan for making repayments after rehabilitation.
Lengthier resolution: Student loan rehabilitation requires nine monthly payments within 10 consecutive months. Other methods, such as consolidation, might end up taking less time. Consolidation means that you combine several federal student loans into one bigger loan from a single lender.
Involuntary payments don’t count: The involuntary payments collected on your defaulted loan through wage garnishment or other government payments do not count toward your nine required payments.

4 Steps to Student Loan Rehabilitation

Let's take a look at the steps you can take to achieve student loan rehabilitation, including defaulting on your loans, negotiating a payment amount, signing a rehabilitation agreement, and keeping up on your payments after rehabilitation.

1. Default on Federal Student Loans

When you don't make your scheduled student loan payments for at least 270 days, you're in default under the William D. Ford Federal Direct Loan Program or the Federal Family Education Loan Program.To begin the loan rehabilitation process, you must find your student loan holder, which in this situation may be a servicer or another type of company. For example, your defaulted loans may be with a collection agency, which is a company that helps lenders and creditors recover funds that are in default. It depends on the stage your default is in. Check your studentaid.gov account if you don't know which holder to contact.Your loan holder should help you decide on whether rehabilitation is right for you by walking through the pros and cons with you.

2. Negotiate a Reasonable Payment Amount

If you decide on rehabilitation, the loan holder should start out with the amount you would pay under the Income-Driven Repayment (IDR) plan formula. Income-based repayment is a payment plan that considers your income and family size.Rehabilitation payments must be “reasonable,” which typically means 15% of your discretionary income divided by 12, although it could be lower. Discretionary income is the difference between the adjusted gross income and 150% of the poverty guideline for your state and family size. It is possible to negotiate an alternative payment depending on your overall income.President Joe Biden has announced the creation of the Saving on a Valuable Education (SAVE) Plan, which replaces the existing Revised Pay As You Earn (REPAYE) Plan. Borrowers on the REPAYE Plan will automatically get the benefits of the new SAVE Plan.The SAVE Plan, like other income-driven repayment (IDR) plans, calculates your monthly payment amount based on your income and family size. The SAVE Plan provides the lowest monthly payments of any IDR plan available to nearly all student borrowers.Starting next summer, borrowers on the SAVE Plan will have their payments on federal undergraduate loans cut in half (reduced from 10% to 5% of income above 225% of the poverty line).

3. Sign a Rehabilitation Agreement

If the loan holder confirms your ability to enroll, the loan holder will send you a loan rehabilitation agreement. Review the terms and the payment amount of your rehabilitation agreement. Return the agreement with your signature. Don't make payments until you've signed, otherwise these payments may not count toward your rehabilitated loans.

4. Keep Up Your Payments

You must make nine payments on time over a 10-month period. Remember, payments must be voluntary and all payments must post within 20 days of each due date. Continue to make payments until you pay off the loan according to the repayment plan your holder establishes.Recommended: Debt Consolidation vs. Personal Loans

What Happens After Student Loans Are Rehabilitated?

At this point, your biggest question is probably, "What happens after student loan rehabilitation?"Once the rehabilitation period concludes, your rehabilitated student loans come out of default. As soon as you're in good standing, your loan will usually go to a new loan servicer. You won't have the same monthly payment as you did when you were making payments under the student loan rehabilitation program. Instead, you'll make payments to your student debt under the standard repayment plan. This means you'll make fixed monthly payments for 10 years (or up to 30 years if you have a direct consolidation loan). You make fixed payments throughout the repayment period. If you aren't sure you'll be able to afford your new payments, you can apply for an income-driven repayment plan such as SAVE. Recommended: Average Student Loan Debt in the United States 2023-2024

The Takeaway

If you have federal student loans that are in default, you may want to consider all your options before you decide on whether student loan rehabilitation makes sense for you. It may be a way for you to clear your default status, help improve your credit history, and retain some student loan benefits.However, you may want to see if other options are available, such as loan consolidation, personal loans, or declaring bankruptcy, depending on your situation, and explore those.

3 Student Loan Tips

Once the pandemic-related pause on federal student loan payments ends, going back to making payments may be hard on budgets. One solution is to refinance to a lower interest rate, longer loan term, or both, depending on your situation. (The tradeoff is that you’ll be forfeiting federal benefits such as repayment programs.) Find and compare your student loan refinance options.
Paying extra each month on your student loan can reduce the interest you pay and so lower your total loan cost over time. (The law prohibits prepayment penalties on federal or private student loans.)
Depending on their income, qualified borrowers can deduct the interest they pay for student loans, both federal or private, up to $2,500 per year. The deduction phases out for modified adjusted gross incomes of $70,000 to $85,000 for single individuals and $145,000 to $175,000 for people married and filing jointly.

Frequently Asked Questions

What does rehabilitating student loans mean?

What does it take to qualify for student loan rehabilitation?

Are there downsides to student loan rehabilitation?

iStock/Deepak Sethi

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About the Author

Melissa Brock

Melissa Brock is a higher education and personal finance expert with more than a decade of experience writing online content. She spent 12 years in college admission prior to switching to full-time freelance writing and editing. Her work has appeared on Yahoo Finance, Entrepreneur, Investopedia, The Balance, FinanceBuzz, The Journal of College Admission, MarketBeat, College Finance, Rocket Mortgage, LeverageRx, Benzinga, Morty, Ally, and more.

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