Guide to Student Loan Rehabilitation Programs
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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.
What Is Student Loan Rehabilitation?
How Does Student Loan Rehabilitation Work?
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.
Pros and Cons of Student Loan Rehabilitation
Pros 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
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
1. Default on Federal Student Loans
2. Negotiate a Reasonable Payment Amount
3. Sign a Rehabilitation Agreement
4. Keep Up Your Payments
What Happens After Student Loans Are Rehabilitated?
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.
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