Rehabilitation

A loan in default status can be rehabilitated by making nine “reasonable and affordable” on-time payments in the same ten month period. You can only miss one payment and each payment must be received within twenty days of the due date to be considered on-time.

The process of rehabilitating your student loan(s) is difficult because the amount of the “reasonable and affordable” payments are determined by the loan holder and the loan holder is supposed to sell your loan in the end. These actions may not be well-defined, however, or easily enforced.

By rehabilitating your student loans and getting out of default, you should become eligible again for grants and loans if you go back to school.

If you succeed in getting the lender to agree to a rehabilitation, structuring the “rehabilitation” correctly, and making the required payments, you could avoid collection procedures such as a tax refund interception, federal benefit offset or wage garnishment (if it is not already too late).

Don’t start to rehabilitate your loan(s) without a formal agreement for the collection activies to stop. Otherwise, a tax refund interception (administrative offset) or wage garnishment could occur.

If you just want to become eligible again for grants and loans, you would only need to make six payments (within 15 days of the due date) as part of a “reasonable and affordable” repayment plan. Afterwards, however, you would probably still be in default.

Borrowers must be careful to negotiate a successful loan rehabilitation or consider consolidation as an alternative from the get-go.

Collection fees on the balance of each loan are incurred and granted to the lender. You pay for them when they are added to your loan balance, up to 18.5% of the total.

Start by making a formal request for rehabilitation. Write a letter (and keep a copy) and mail it to the collection agency or loan guarantor. Send the letter certified with return receipt requested.

Then, complete their required forms and make sure you receive a written agreement that outlines the payment plan and states that it is actually a plan for rehabilitation.

Make sure that your letter (and the agreement you receive) include a clause that successful rehabilitation will result in the end of collection efforts, including tax refund and/or federal benefit offsets as well as wage garnishments and/or court-ordered judgements.

For loan rehabilitations that occur after August 14, 2008 you will not be able to obtain a second rehabilitation if you default again. According to Department of Education rules, only one rehabilitation per defaulted loan is allowed.

Therefore, you may want to rehabilitate before consolidating because you would still be able to rehabilitate the consolidated loan if you default again.

After rehabilitation, in some cases, you may be able to request that a credit reporting agency remove the word “default” from your credit report.

Other rules apply. Separate rules exist for Perkins Loan Rehabilitation.