by Aidan Kang, CFA
Senior Writer
UPDATED: September 03, 2021

If you’re facing student loan problems, you’re not alone. You’d probably be surprised or even shocked to know that 1 million people default on student loans each year. When your student loan goes in default and you continue to ignore it, not only are you still liable to pay the entire amount, but you’ll also have to pay for the interests and fees that will pile up.

Defaulting on a student loan also means that the full loan amount will become immediately due, you will lose eligibility for further financial aid, and worse, the default status will also harm your credit score.

But do you know that there is a way to get your loan out of default and erase that default status on your credit report? This program is called student loan rehabilitation.

What Is Student Loan Rehabilitation?

A student loan rehabilitation is a program that can help you get your federal student loan out of default. A student loan default can show up on your credit for seven years and could continue to affect your credit score. If you go for student loan rehabilitation, this default status is removed and only the late payments reported by lenders will remain in your credit history.

The rehabilitation process takes 10 consecutive months where you have to make 9 voluntary, monthly, and on-time payments within 20 days of the due date. Once you complete these payments, your student loan will once again return in good standing.

Another benefit is that after these 10 months, you are eligible for income-driven repayment plans to help you manage your monthly payments or you can also apply to temporarily postpone the payment collection through loan deferment or forbearance.

How Does Student Loan Rehabilitation Work?

If you think that loan rehabilitation is the best option for you, follow the steps outlined below to apply for the program.

1. Your Student Loans Must Be In Default

A student loan typically enters default after 270 to 330 days of non-payment or 9 to 11 months. If you haven’t reached 270 days yet, it’s possible that your loan is only considered delinquent. A loan is delinquent once you miss a single payment but these are usually reported to credit bureaus after 90 days of non-payment.

If you have a delinquent loan, you can still retroactively apply for loan deferment or forbearance to postpone the payments. However, if your loan is already in default, you’re not eligible for these two options anymore.

You can check this information with your loan servicer. You can contact the Federal Student Aid Information Center (FSAIC) at 1-800-433-3243 to know who your loan servicer is and get the accurate status of your loan.

You can also log in to this website to view your loan servicer details and get their contact information.

2. Come Up With A Payment Term Agreement With The Loan Servicer

When agreeing to the payments, make sure that you have the capability to meet the amounts set to successfully complete the loan rehabilitation in 10 months. 

If you’re under wage garnishment or your salary is being deducted automatically, this may not immediately stop and will not count toward the loan rehab payments. 

The rehabilitation payments must be voluntary payments so that money should be outside what is already being garnished automatically.

3. Check The Repayment Plan After The 10-Month Loan Rehabilitation Period

Before agreeing to have your loan rehabilitated, it’s not enough to know how much you’ll pay for the first 10 months. Remember that your goal is not only to get out of default but to not suffer a default once again. For you to do this successfully, you have to make sure that you can make all succeeding payments once your student loan is already out of default.

Having this information will help you determine whether you need to either save money in advance to make the monthly payments or apply for a deferment or forbearance to postpone the payments.

4. Meet All Payments During The 10-Month Period

After agreeing to a loan rehabilitation plan, meet all the payments on time. This is why it’s important to ensure that you have the ability to pay the amount determined by your loan servicer. 

How Much Do I Pay For Student Loan Rehabilitation?

With a loan rehabilitation program, you will pay an amount determined by your loan holder during the 10-month period. This amount can be quite low which will depend on your income. According to the Student Aid website, you can pay as low as $5 monthly under a student loan rehabilitation agreement.

This is because the payment amount is calculated by taking 15% of your yearly “discretionary income” and dividing that by twelve. To learn what your discretionary income is, you have to subtract 150% of the poverty guideline for your family size and state of residence from your annual income.

For example, the poverty guideline for a household with 4 people in 48 states is $26,200 and 150% of that is $39,300. If you have an annual income of $40,000, your discretionary income is $700. You then have to take 15% of $700 which is $105 and divide that by 12, giving you $8.75.

This is just an example of how your monthly payment is calculated, however, other factors may come into play like your spouse, dependents, other taxable income, and more. It is best to use the loan simulator at the Federal Student Aid Website to give you a better idea.

What If I Can’t Afford the Calculated Payment?

Ask your lender if they can calculate your loan payment by using a different method that takes into account other factors such as your medical bills and other monthly expenses. Fill out the Loan Rehabilitation: Income and Expense Information Form and submit the necessary supporting documents.

Why Is Student Loan Rehabilitation Program A Good Option?

Here are the benefits of signing up for student loan rehabilitation:

  • Your loan will get out of default and will be in good standing again.
  • The monthly payment amount during the 10 months is relatively low which will give you a much-needed relief if you are in a difficult financial state. This will also give you time to save money to make
  • The default status will be removed from your loan in your credit report and this can help you rebuild your credit again. A good credit score could help you score better deals when making financial transactions like car loans, mortgages, and even getting a cell phone plan.
  • Payment collection will stop whether from wage garnishment or treasury offset. This may continue until you complete rehabilitation payments for a few months or until the loan is no longer in default.
  • You will stop getting calls from collection agencies. Calls and messages from debt collectors can drain so much of your energy and can cause stress and anxiety. Having these dealt with can give you the mental and emotional relief you need.
  • You’ll be eligible for federal loans benefits like deferment, forbearance, income-driven repayment plans, and loan forgiveness.
  • You will be eligible to apply for federal student aid. This is beneficial if you’re planning to go back to school and get another student loan.

What Disadvantages Does Student Loan Rehabilitation Have?

Student loan rehabilitation isn’t without drawbacks. Here are some of them:

  • The process takes 10 months to get out of default, which is three times longer than a loan consolidation that only takes up to 3 months. If you are in a hurry to get your student loan out of default, 10 months may be too long for you.
  • You have to make sure you can afford to pay the agreed amount for 9 months or you already have money saved beforehand.
  • You can only apply for loan rehabilitation once. It is a one-time opportunity. If you default again, you have to look for other options.
  • Paying a small amount like $5 does not really make a difference in your total loan amount and is just dragging the length of time you need to pay off your loan.
  • The interest and fees associated with a loan rehabilitation could increase your debt amount. In a CNBC article, a woman who successfully completed her student loan payments under a rehabilitation program was surprised to see that her debt amount went from $10,845 to $15,279!

Am I Eligible For A Student Loan Rehabilitation?

If you have a federal student loan under the William D. Ford Federal Direct Loan (Direct Loan) Program or the Federal Family Education Loan (FFEL) Program, you’re eligible to apply for loan rehabilitation.

This option is only available for federal student loans, which means that if you have private loans, you cannot apply for rehabilitation. You have to contact your private lender directly to check what your options are.

If you decide to rehabilitate your federal student loans, you can only do it once. If you have previously applied for rehabilitation and then defaulted again, you cannot apply anymore. You have to go with another option, such as a consolidation loan.

What Happens After The Student Loan Rehabilitation Period?

After completing the required payments during the 10-month loan rehabilitation period, the default status in your credit report will be removed. This could help improve your credit score, but take note that the impact may not be that significant, especially if you have other debt defaults on your credit report.

After the 10-month period, your student loan debt will not go away nor will you keep paying the low amount you were paying during the rehabilitation period. You now have to pay the loan amount in the set monthly rehabilitation payments. 

To ensure that you can manage the amount, apply for the income-driven repayment plan. This type of payment plan allows you to meet your monthly loan obligations by paying an affordable amount which is calculated based on your income and family size. For people with low income, this amount could even be as low as $0 a month.

There are currently 4 income-driven repayment plans available. Generally, the monthly payment is 10% of your discretionary income. The repayment period is 20 to 25 years and if your federal student loans are still not fully paid after this period, the remaining balance in your defaulted loans will be forgiven.

  • REPAYE Plan – Revised Pay As You Earn Repayment Plan
  • PAYE Plan – Pay As You Earn Repayment Plan
  • IBR Plan – Income-Based Repayment Plan
  • ICR Plan – Income-Contingent Repayment Plan

FAQs About Federal Student Loans Rehabilitation

What are the differences between student loan rehabilitation and loan consolidation?

Both loan rehabilitation and loan consolidation are methods to get your student loans out of default but they work very differently.

Loan consolidation is a much faster process than loan rehabilitation as you can get your student loan out of default from 30 to 90 days. You have a choice to either make three consecutive, voluntary, monthly, and on-time full payments or agree to go for an income-driven repayment plan to fix your defaulted loan.

While a loan consolidation may seem like the easier way out, the downside is that the defaulted loan status will not be removed from your credit report. It will stay in your credit history for seven years.

Will defaulted loan rehabilitation remove late payments from my credit report?

Student loan rehabilitation won’t remove late payments from your credit history. However, it will get rid of the defaulted loan from your credit report and bring your loan in good standing.

Can I rehabilitate my student loans more than once?

The rehabilitation of a student loan only happens once. You can’t use this option anymore if you redefault on your loan. But you may be qualified for a student loan consolidation.

Is A Student Loan Rehabilitation Right For Me?

If you already default on a federal student loan, loan rehabilitation is possibly one of the best options for you. While you may have to pay additional interests and fees, it is still much better than keeping your loan in default and just ignoring it, hoping that the loan will eventually go away. It is better to take control of your student loan problems as early as possible.

If you are currently under financial stress, loan rehabilitations allow you to get your loan out of default without having to pay a huge amount in the first 10 months. This gives you some breathing room when it comes to your cash flow.

Loan rehabilitation is also a good idea if the student loan default is the only factor hurting your credit score. It is great for people who will otherwise have excellent credit if this default status is removed.