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.

You might be able to get out of default on a private student loan by "rehabilitating" it—that is, making a specific number of good-faith payments. Federal law gives borrowers with federal student loans the legal right to a rehabilitation program, but private lenders are unfortunately under no such obligation to provide this kind of program. And most don't 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. If rehabilitation isn't an option for you, you might be eligible for alternatives, like a repayment plan or a loan modification.

Though, if you do get the option to rehabilitate a defaulted private student loan, you need to be careful not to revive an expired statute of limitations.

Do I Have Private Student Loans or Federal Student Loans?

Federal student loans are loans that the Department of Education makes or guarantees. These loans usually have names like Direct, Stafford, PLUS, or Perkins loans. Federal student loans are the most common type of student loans.

On the other hand, private student loans come from a bank, credit union, state student loan agency, college, or university. These kinds of loans are sometimes called "alternative" or "institutional" loans.

When Do 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, and report the default to the credit reporting bureaus. (If you're in default on a student loan and the lender sends it to a debt collector, it's important that you know your rights. Under the federal Fair Debt Collections Practices Act, for example, it's against the law for a collector to harass, abuse, or make false statements to you.)

But when does default happen? Most federal student loans go into default after 270 days, about nine months, of missed payments. However, if you have private student loans, the timing of when a loan goes into default varies. Many private student loans go into default when the borrower is 120 days delinquent. Or you might go into default after you miss just one or two payments. You can also default on a private student loan for other reasons like if you declare bankruptcy, become insolvent, or default on another loan with that lender. 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.

What Is Loan Rehabilitation?

A loan rehabilitation program allows a borrower who has defaulted on a student loan to make a specific number of consecutive on-time payments to show a renewed ability and willingness to repay the loan. You can rehabilitate federal student loans to get out of default and, sometimes, 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. Most don't. Some private student loan lenders, however, offer rehabilitation options. If you get the opportunity to rehabilitate your private student loan, the lender establishes the number of payments you'll have to make.

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, a federal law offers some minimal assistance to borrowers who rehabilitate a defaulted private student loan and want to improve their credit.

Under this law, which was an amendment to the Fair Credit Reporting Act, you may ask the lender to remove information about the default from your credit report after successfully finishing a loan rehabilitation program for a private student loan. You may rehabilitate and ask the lender to remove the default only one time per loan. (15 U.S.C. 1681s-2(a)(1)(E)).

But the legislation doesn't require the lender to remove the default from the report. 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 how it reports your debt to the credit bureaus.

Other Potential Options for Getting Out of Default

The process for getting out of default on private student loans is different than for federal loans. Again, with federal student loans, you get the legal right to various programs, like rehabilitation, as well as consolidation, for getting out of default. Private lenders don't have to offer the same options. Some lenders provide similar programs, though, so it's a good idea to check with your lender.

One issue is that many private student loan lenders charge off loans after the borrower is 120 days delinquent on the loan, although this period varies from lender to lender. Once private student loans are charged off, many private student loan lenders won't work with borrowers to help them get out of default.

If your lender is willing to work with you to get out of default, you might be able to set up a repayment plan. Or you might be able to pay a lump-sum to settle the debt for less than you currently owe. Also, private lenders have more flexibility than federal student loan servicers to rework your loan. So, your lender might be willing to offer you a modification to change the terms of the loan, like the interest rate or term length.

Getting Help

To find out more about available rehabilitation or repayment options for a private student loan, ask your lender and review your loan contract. If you have questions about the statute of limitations for your private student loans, need help working out a settlement or other repayment option for your private student loans, or have questions about whether rehabilitating a particular loan is a good idea, talk to a debt relief attorney who deals with student loans.

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