Student Loan Rehabilitation to Get Out of Default

Get out of default on a federal student loan by rehabilitating it.

One way to get out of default on a federal student loan is to rehabilitate it by making good faith payments. Getting out of default is important if you want to qualify for certain federal repayment plans, borrow new loans to go back to school, or improve your credit rating.

How Student Loan Rehabilitation Works

With loan rehabilitation, you make nine voluntary, reasonable, and affordable loan payments within 20 days of the due date over a period of ten consecutive months.

What's "reasonable and affordable"? The payments must be reasonable and affordable based on your total financial circumstances. A “reasonable and affordable” payment is equal to 15% of your annual discretionary income, divided by 12. Discretionary income is the amount of your adjusted gross income—taken from your most recent federal income tax return—that is more than 150% of the poverty guideline amount for your state and family size. You'll have to provide documentation about your income to your loan holder.

If you can't afford this amount, ask your loan holder to calculate an alternative monthly payment for you. The payment will be based on the amount of your monthly income that remains after reasonable amounts for your monthly expenses have been subtracted. To rehabilitate your loan, you have to select one of the two payment amounts, which could be as low as $5 depending on your income.

What's a "voluntary" loan payment? Rehabilitation payments must be voluntary—that is, they can't be payments towards your loan that come from a garnishment or tax refund offset. If your payments are currently made through garnishment, you will have to contact your loan servicer and attempt to set up a voluntary payment plan.

You can rehabilitate defaulted loans only once. If you rehabilitate a loan and then default again, you can't rehabilitate it another time. And be aware that curing a default through rehabilitation will increase your loan’s principal balance.

Rehabilitation Costs

When you default on a federal student loan, federal regulations allow the Department of Education to add up to 18.5% of your outstanding principal and interest amount to your loan balance as collection fees. The sooner you get out of default status, the lower those collection fees will be.

Rehabilitation and Your Credit Report

If you rehabilitate a loan, credit reporting agencies will remove any mention of the default from your credit report. However, any history of late payments before you entered default status will remain on your credit report.

Benefits of Rehabilitating Your Student Loans

Once you rehabilitate your defaulted loans, you once again become eligible for benefits like deferment, forbearance, a choice of repayment plans, and loan forgiveness, and you’ll be eligible to receive federal student aid.

How to Rehabilitate Your Student Loan

To begin the loan rehabilitation process, contact your loan holder. If you don't know who your loan holder is, log in to “My Federal Student Aid” to find out.

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