Rehabilitating Your Private Student Loans to Get Out of Default

One way to get out of default on a private student loan is to “rehabilitate” it by making good faith payments—if your lender offers this option.

One way to get out of default on a private student loan is to “rehabilitate” it by making a specific number of good faith payments. Unfortunately, while borrowers with federal student loans are entitled to a rehabilitation program under federal law, private lenders don’t have to offer rehabilitation options. The terms of your loan contract—or the lender’s policies—primarily dictate whether you can rehabilitate a defaulted private student loan.

You should be aware, though, that if you get the option to rehabilitate a defaulted private student loan, you need to be careful not to revive an expired statute of limitations.

When Unpaid Student Loans Go Into Default

If you don’t pay your student loans, you’ll go into what's called “default.” Once a loan is in default, the lender can demand full payment of the entire outstanding loan balance. The lender may start the collections process, send your debt to a collections agency, or sue you, as well as report the default to the credit reporting bureaus.

But when does default happen? On most federal student loans, you go into default after 270 days (about nine months) of missed payments. If you have private student loans, however, the timing of when a loan goes into default varies. Review your loan contract to find out exactly when default happens. If you haven’t made a payment over the period set out in your loan terms, then your loan will go into default. Sometimes, a private student loan goes into default when it’s overdue for a few months, though some lenders consider a loan in default after the first missed payment.

What’s Loan Rehabilitation?

A loan rehabilitation program allows a borrower who has defaulted on a student loan to make a certain number of consecutive on-time payments to show a renewed ability and willingness to repay the loan. (The lender establishes the number of payments you'll have to make.)

You can rehabilitate your federal student loans and, in some cases, your private student loans.

While borrowers with federal student loans get the opportunity to rehabilitate a defaulted loan under federal law, private student loan lenders aren’t required to offer loan rehabilitation programs. Some private student loan lenders, though, offer rehabilitation options. (To learn more about how federal student loans are different from private student loans, see Overview of Student Loans.)

You Might Be Able to Improve Your Credit With Rehabilitation

If you rehabilitate your federal student loans, the lender will remove the default from your credit history (though not your history of late payments). When it comes to private student loans, the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155), which President Trump signed into law on May 24, 2018, offers some minimal assistance to borrowers who rehabilitate a defaulted private student loan and want to improve their credit.

Part of the Economic Growth, Regulatory Relief, and Consumer Protection Act amends the Fair Credit Reporting Act to allow a student, after successfully completing a loan rehabilitation program for a private student loan, to ask the lender to remove the default from the consumer’s credit report. However, the legislation doesn’t require the lender to remove the default from the report, even after the borrower completes the program and makes this request. Also, any history of late payments before you entered default status might remain on your credit report.

Still, citing this law could convince a lender to remove some negative information from your credit report. Talk to an attorney if you need help asking your lender to change the way it reports your debt to the credit bureaus.

Caution: Be Sure You Understand the Risks Associated With Rehabilitating a Private Student Loan

Rehabilitating your private student loan could pose a risk though, depending on the circumstances. If you start making payments under a rehabilitation program after the statute of limitations has run on your private student loan, you might revive the limitations period.

As a result, you could trigger a restart of the collections period on an old debt that you could no longer be sued over and subject yourself to a collection lawsuit. (To learn more, see Is there a statute of limitations for private student loans?)

Getting Help

To find out more about available rehabilitation or repayment options for a private student loan, ask the lender and review your loan contract.

If you need help interpreting a private student loan contract, want assistance negotiating a workout or settlement with a private student loan lender, or have questions about whether rehabilitating your loans is a good idea in your situation, consider consulting with an attorney.

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