- Student loan rehab is a process of getting out of default that also removes the default from your credit, unlike consolidation, which resolves the default but keeps the record.
- You can rehabilitate your loans by making 9 on-time payments on your loans subject to the rehab agreement.
- Payments are based on income, and are typically set at 15% of discretionary income, with alternatives available for borrowers who cannot afford this amount.
As federal student loan collections resume, millions of borrowers who fell behind during the pandemic-era pause once again face wage garnishment, forfeited tax refunds, and damaged credit. For already distressed borrowers, the path back to good standing is more important than ever.
There is one option that stands out to many: Student loan rehabilitationa program that allows borrowers to remove default from their federal loans (and credit report) after a series of on-time payments.
Compared to student loan consolidation, rehab can provide long-term credit benefits, but it also comes with strict rules and timelines that borrowers must understand before enrolling.
What is student loan rehabilitation?
Student loan rehabilitation is one of the primary ways to bring in a Defaulted Federal Student Loan Get back into good shape. When a loan is rehabilitated, the default status is removed, collections stop, and borrowers regain access to federal student aid, including Pell Grants, federal loans, and work-study.
To begin requalification, the borrower must enter into a formal agreement with the loan holder (bank). US Department of Education) and make the required number of voluntary payments on time.
For most borrowers with Direct Loans or loans from the Federal Family Education Loan (FFEL) program, requalification requires the following:
- Nine payments on time
- It was completed within 10 consecutive months (Allows a missed month)
Once these payments are completed, the loan is transferred to a new loan servicer, the default is cleared, and the borrower can choose to enroll in the income-based repayment plan option.
How are monthly payments calculated?
Under a standard rehabilitation agreement, the required monthly payment is calculated as 15% of the borrower’s annual discretionary incomedivided by 12. Discretionary income is generally defined as income in excess of 150% of the federal poverty guidelines for the borrower’s household size.
Because the calculation is based on income and family size, monthly payments may vary widely. For some borrowers, payments may be manageable. For others, especially those with low or unstable income, the standard formula may still be too high.
Borrowers who cannot afford the proposed payment can request Alternative payment amount By providing detailed information about income and expenses. Housing, medical bills, and other essential costs are taken into account, and the adjusted payment may be lower.
The most reliable way to estimate payments (and request adjustments) is to work directly with the government’s default provider.
How to register for rehabilitation
Most borrowers in default will work with Default solution setthe Department of Education unit that manages defaulted federal student loans.
Borrowers can confirm their loan holder by logging in StudentAid.gov And check the “My Loan Services” section. FFEL borrowers may instead see a guaranty agency listed.
To request a rehabilitation agreement, borrowers must provide income documentation, usually one of the following:
If you are married but file taxes separately, documentation may be needed for both spouses.
Once the documents are received, the Department of Education generally mails the recertification agreement within approximately 10 business days. This letter states the payment amount, due dates, and terms. The agreement itself is not delivered electronically (although we hope this will change soon).
Rehabilitation versus integration
Borrowers in default typically have two main exit options: rehabilitation or consolidation. There is a third (technical): full payment. But if that third is doable, you probably won’t default.
Consolidation resolves the default faster (sometimes within weeks) but… It does not remove the default notation from the borrower’s credit record. The rehabilitation process takes longer, but the credit benefit is stronger: Once complete, history of default is deleted from credit reports, although late payments prior to default may remain.
For borrowers focused on rebuilding credit, qualifying for a mortgage, or reducing long-term financial damage, rehabilitation is often the preferred route, if they can manage the required payments.
What will happen next?
Once all required payments have been made, the loan is officially removed from default and transferred to a new loan servicer. Borrowers receive an email confirmation within approximately 30 days.
At that point:
Borrowers may also request a written letter confirming that their loan is no longer in default, which colleges sometimes require before disbursing aid.
Using the Federal Post-Rehabilitation Loan Simulator can help borrowers compare repayment plans and avoid slipping back into delinquency.
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