How to Rehabilitate a Defaulted Student Loan

If you are among the 4 million Americans who have defaulted on student loans you might find the government deducting money from your paycheck and lenders placing negative marks on your credit report.

Student loan default is a growing problem. The default rate for student loans within two years of the first payment was 9.1 percent, according to a 2012 report from the Department of Education. The default rate among those within three years of their first payment was 13.4 percent.

When you default on a student loan, it also means you’re not eligible for loan modification, deferment, forbearance, repayment plans, forgiveness or consolidation until you rehabilitate your loan.

Direct, FFEL, Perkins, Stafford, PLUS, Grad PLUS, Consolidation, SLS, HPSL and NSL – are eligible for rehabilitation.

You can rehabilitate your loan by contacting your collection agency to attempt to freeze your garnishments and begin negotiations with your lenders. Once an agreement is reached between all parties, payment arrangements are set up directly with the lender.

The traditional rehabilitation process is based on a nine-month plan; however, it can last as little as 4 months or as much as 12 months, depending on the lender.

There is much to be gained once your student loans have been rehabilitated:

  • It puts your loan back in good standing.
  • It makes you eligible for deferment, forbearance, consolidation, forgiveness and alternative repayment plans.
  • You are eligible for additional loans and financial aid.
  • You are no longer subject to collections activity or legal issues over your loan.
  • It will stop wage garnishments.
  • Your credit report will reflect positive progress in loan repayment. Negative marks on your credit from the defaulted loans will be removed.

It’s important to know that this is a one-time opportunity. If you fail to meet the program requirements, you do not get a second chance at rehabilitation.

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Step One: Start the Rehabilitation Process

Student loans go into default when no payments have been made for nine consecutive months. Once the loan has reached the default stage, you must start the rehabilitation process before more damage is done.

The monthly payment plan you negotiate for rehabilitation of your loan must be reasonable and affordable for you. It is generally calculated at around one percent of the outstanding balance, but could be lower, if you show financial hardship.

If the lender turned your account over to a collection agency, you can try to negotiate with the collection agency. The negotiated rate also will include collection charges, which could be as much as 18.5 percent, added to the loan balance.

Step Two: Make Timely Payments

Loan rehabilitation is successful only if you stick to the negotiated plan. In other words, you cannot miss a single payment. If you have a Perkins Loan, you must make nine payments in nine months to rehab those loans.

Payments are on-time when the loan agency (or collection agency) receives payment within 20 days of the due date. Perkins Loans payments are due 15 days from the due date. The monthly payment must equal the rate in the agreement. If it is a penny less, it can be considered a missed payment.

Qualified military service members or civilians affected by family members in the military are allowed to miss a rehabilitation payment. People in this group must resume their payments when their service obligations are completed.

Step Three: Trust, But Verify

Your loan is considered rehabilitated when you complete the agreed-upon monthly payment plan. At that time, the default will be removed from your credit history.

Loan rehabilitation is a valuable way out, but you must be prepared.

Remember that rehabilitation this is a one-time option. There is no recourse if you default a second time. After your loans are rehabilitated, you will then be eligible for Student Loan Consolidation.

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Cecillia Barr

Cecillia Barr is a graduate of the University of Central Florida. She blogs about her extensive knowledge on student loans in order to help others reduce their debt and live financially independent lives.

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