Student Loan Rehabilitation to Get Out of Default

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student loan rehabilitation

Struggling with debt repayment is common these days. As the pandemic hit the economy, many people lost employment opportunities to afford debt repayment. Although repayment is stopped, millions of financially challenged borrowers will again be responsible for monthly loan payments once resumed. If payments are missed for a long period, borrowers can default on their loans. Default is risky because its negative consequences stay on credit reports for extended periods. Luckily, even if you default, you can get out of it and eliminate the default record from credit performance through student loan rehabilitation.

This guide explains to the borrowers what default is and what possible solutions are for such unwanted situations. We focus on rehabilitation as the most effective solution and discuss other strategies, like consolidation and full repayment.

What Happens When You Do Not Pay Student Debt?

A student loan is a type of student aid that requires repayment. Repayment is what makes student loans different from other financial aid programs, such as grants and scholarships. If you do not make payments for your student loans, you will face harsh consequences. 

First, when you miss a deadline for payment, your student loans become delinquent. This process continues until you repay the debt or take action to get out of delinquency. Getting student loan forbearance or enrolling in a new repayment plan can help you eliminate delinquent status. 

However, once you miss a deadline of 90 or more days, the loan servicer will inform significant credit agencies. Therefore, your credit score will decrease, and you can even risk defaulting on your loans.

What is Default? 

Student loan default happens when you ignore payments for a long period. If you default, your credit score becomes lower. Therefore, you will face challenges in many activities, such as getting a credit card, auto loan, consumer credit, etc. In addition, homeowners might not trust you while renting their houses, or insurance companies can avoid insuring your property due to unreliable credit performance. 

Depending on your loan type, default happens in different durations. For example, direct or FFEL loan borrowers face default if at least 270 days pass from their payments’ due dates. However, for Perkins loan borrowers, default can happen as soon as the borrower misses a payment. 

If you defaulted on your loans, or even before, while having financial difficulties, you need to contact your loan servicer. If the loan servicer is informed about your struggles, they can help you find a way out. Different strategies to get out of default exist, such as loan rehabilitation, consolidation, etc. We will discuss these strategies in the following sections.

Why is Student Loan Rehabilitation or Consolidation Necessary?

student loan rehabilitation

Rehabilitation and consolidation are the two most essential methods to get out of default status. While ignoring payments can be easy, the consequences of such irresponsible behavior are devastating. If you default on your loans and do not take any corrective action, you will face the below-mentioned adverse outcomes:

  1. You will be responsible for the entire balance immediately
  2. You will lose eligibility for forbearance or deferment, a new repayment plan, or other federal student aid.
  3. Credit score decreases 
  4. It becomes harder to buy a car, house, get a credit card, sell real estate, etc.
  5. Your tax returns or other federal benefits can be taken for the repayment
  6. Your income can be withheld to pay for student debt
  7. Your loan servicer/lender can sue you
  8. The school you took loans for can suspend your academic transcript, etc.

To avoid such horrible consequences of defaulting, you need to avoid it or eliminate it through student loan rehabilitation or consolidation.

How to Get Out of Default?

If your loans are in delinquent or default status, you need to contact your loan servicer immediately. Your loan servicer will inform you about the options. However, we also explain to you how to get out of student loan default in this section.

Student Loan Rehabilitation

Rehabilitation helps borrowers to get out of default status. This strategy is available to FFEL, Perkins, and Direct loans. If you want to rehabilitate your FFEL and Direct loans, you need to agree to make nine payments within 20 days of due dates. Your loan servicer decides how much you will pay each month. Keep in mind that all nine payments should be within a ten-month period.

Usually, 15% of your annual discretionary income is required by dividing over 12 months. Generally, discretionary income is what is left after deducting taxes and another necessary spending. Discretionary income is part of adjusted gross income exceeding 150% of the poverty guideline for student loan rehabilitation. If you do not know what adjusted gross income is, you can check your most recent income tax return. You will need to specify your state and family size for determining the exact amount. In other words, you will submit documentation for family size, location, and income to the loan service. 

To sum, you can get out of default status by making nine monthly payments within ten months. The amount of payment is calculated by the loan servicer. However, you can also roughly calculate your required payment amount.

How Rehabilitation Works?

If you want to utilize student loan rehabilitation, you need to send your latest tax return or tax transcript to the loan holder. For some borrowers, tax returns are outdated and do not reflect their current income. In such cases, it is better to fill out a student loan rehabilitation form and submit it.

A loan holder is the Education Department for Direct loan borrowers. Once you send these documents, the officials will calculate your monthly payment amount. Besides, you can submit this document via fax, too. 

When requesting your tax transcript, you can do it online. Keep in mind that a signature is not necessary. Generally, a copy of the Form 1040 tax return is enough, but it should be signed. Additionally, a digital signature is not acceptable. 

Sign and Return the Agreement

Now that you have sent your documents, the officials will review them and send you an agreement. The Education Department sends this agreement within ten days after receiving your documents. You will get the agreement by mail, and it will include some necessary information. For example, you can see how much you should pay monthly under student loan rehabilitation and other loan terms. If you are satisfied with the agreement, you need to sign it and again mail it to the loan holder. 

Start Repayment

Next, you need to start making nine payments within ten months to get out of student loan default. All your payments should be made within 20 days of the due date. Once you complete repayment, the Education Department will send information to credit reporting companies and ask for the removal of the default from your history. As a result, your credit score can increase again. 

Please, keep in mind that you can only rehabilitate a loan once. Hence, after student loan rehabilitation, make sure you repay your debt on time to avoid another default case. 

What if I cannot Afford Rehabilitation?

When you get a rehabilitation agreement, you might not be happy with the monthly payment amount. In this case, you can ask the loan holder or Education Department to calculate the payment amount again. Therefore, you need to provide income information and complete a rehabilitation form. In some cases, the new amount will be based on the income left after deducting your necessary spendings. Later, you need to choose any of the two payment amounts to start the rehabilitation process. 

However, generally, student loan rehabilitation is affordable. For example, if your income is low, your rehabilitation amount can be as low as $5. 

Voluntary Payments

student loan rehabilitation

What counts for student loan rehabilitation is voluntary payments. These payments are made by borrowers voluntarily. On the other hand, there exist involuntary payments. During default, the ED can collect your student debt payments through wage garnishment or Treasury offset. 

Wage garnishment happens when your employer withholds some portion of your earnings for the payment of student loans. Meanwhile, treasury offset occurs when the officials collect debt payments through income tax refunds and other government benefits, such as Social Security.

If you decide to rehabilitate a loan, involuntary payments can continue. In other words, your wage or benefits can be withheld. However, these involuntary payments do not count for student loan rehabilitation. You need to make voluntary payments from your earnings so that your payments qualify for rehabilitation.

Keep in mind that involuntary collection continues till you get rid of default status.

What about Perkins Loans?

Student loan rehabilitation also applies to Perkins loans. Again, you need to make nine payments within 20 days to get qualified. The monthly payment depends on the loan holder. However, Perkins loans might not be held by the Education Department. Instead, your school can be your loan holder. In all cases, contact the organization where you received Perkins loans for more information on rehabilitation.  

COVID-19 and Rehabilitation

Due to the COVID-19 pandemic, borrowers are not required to make payments for their federal student loans. This federal student aid benefit is expected to expire in February 2022, when the repayment process will resume. 

As mentioned before, student loan rehabilitation requires nine-month worth of repayment. Therefore, if you want to apply for rehabilitation, your payments will not start until repayment is resumed. In other words, you will still start repayment in February, whether or not you apply for rehabilitation.

Advantages of Rehabilitation

Student loan rehabilitation will help you get out of student loan default. Hence, all negative consequences of default will be eliminated. Once again, you will:

  • Get eligible for student aid benefits
  • Qualify for a new repayment plan
  • Get default status deleted from credit performance
  • Increase credit score
  • Avoid wage garnishment or Treasury offset

Default status will no longer appear in your credit history. However, it will still indicate the late payments you did not make on time before the default. Additionally, keep in mind that rehabilitation can be used only once. You cannot enjoy this benefit on the same loan again. 

Student Loan Consolidation vs. Rehabilitation

Rehabilitation is not the only way to get out of default. Another common strategy for eliminating default is student loan consolidation. Consolidation allows borrowers to pay out a defaulted loan with a new federal loan. 

Generally, consolidating loans is easy. However, when in default, you need to satisfy further requirements. For example, you can agree to repay the debt through Income-driven repayment plans to qualify for consolidation. Alternatively, similar to student loan rehabilitation, you can make several voluntary, on-time payments. However, different from rehabilitation, you need to make only three months’ worth, consecutive payments. 

Once you satisfy any of these requirements, you can consolidate your loans. The loan holder will again determine the payments for consolidation. Yet, this amount will be reasonable and affordable. 


Sometimes, borrowers need to reconsolidate their existing consolidation loans for FFEL or Direct loans. In this case, you need to add one loan that satisfies the requirements mentioned above. If there are no other loans, you cannot consolidate and get out of the loan. Instead, you can use student loan rehabilitation to eliminate default. 

Additionally, you can reconsolidate without another loan if you agree to make payments under Income-driven repayment plans. 

Lastly, if you face wage garnishment or Treasury offset, you need to get this process suspended before applying for consolidation.

Benefits of Consolidation

Similar to student loan rehabilitation, you will get out of default status through consolidation. You will again gain eligibility for federal aid programs, such as loan forbearance, deferment, changing repayment plans, etc. However, different from rehabilitation, default records will not be removed from your credit history. It will still appear as a part of your credit performance. 

The advantage of consolidation over rehabilitation is that it happens faster. You do not need to take nine months to get rid of the default. Hence, loan consolidation can be preferable if you look for a quick solution. 

Full Payment

student loan rehabilitation

Sure, another option for getting rid of default is paying the outstanding debt fully. When defaulted, the whole balance, principal and interest, become immediately payable. However, it is understandable that if you cannot afford monthly payments and default, you will be struggling to pay the whole balance. Hence, it is better to consider student loan rehabilitation or loan consolidation to avoid default status. Besides, you can contact your loan servicer and consult about your options before making a decision.

Avoiding Default Status

Till now, we have discussed what default is and how to get out of default status. We discussed several options, like student loan rehabilitation, consolidation, and full payment.

However, default is not desirable, and even if you get out of it, its negative impact can stay on your credit performance. Hence, it is more beneficial if you avoid defaulting in the first place. 

If you notice that you cannot afford payments and you miss them, immediately contact your loan servicer. The loan servicer’s responsibility is to provide the help you need to choose an effective student aid option during financial difficulties. 

Besides, when you take a student loan, make sure that you take the money you need. Any excess debt amount should be returned so that no additional interest is generated. In this way, your loans can become more affordable. 

Moreover, as a responsible borrower, you should keep track of your payments, specifically if you have multiple loans. In this way, you notice any problems beforehand, and you start acting on them fast. 

What Are My Options if I cannot Repay Student Debt?

It is necessary to consult a loan servicer during financial challenges. However, sometimes, loan servicers can misguide borrowers. Hence, it is advisable to do your research and know the options. 

One of the best debt resolution strategies for people in need is enrolling in Income-driven repayment plans. These plans are based on your earning level and family size. Therefore, if your earning is extremely low, you can even qualify for $0 monthly loan payments. 

Additionally, you will get loan forgiveness once your payback period is completed through Income-driven plans. For example, if your payback period is 20 years, you will receive complete forgiveness on the remaining debt balance after 20 years long repayment is made.

Contact a Debt Specialist

Even if you do your research, it can be hard to understand the terms and processes of student aid programs. You might find it hard to understand the programs and check their requirements against your qualifications. In this case, getting help from student loan specialists can be helpful.

Debt experts, like those in Forget Student Loan, have years of experience. They helped thousands of borrowers struggling with repayment to find an effective and affordable way out of student debt challenges. Contact us now for a free consultation to check your options.