How Does Student Loan Rehabilitation Work?

Adult student studying

The following is presented for informational purposes only and is not intended as legal advice.

When your budget isn’t working out, student loan payments can get pushed aside. Understandably, you may need to prioritize rent, utilities, and other immediate expenses over loan payments. However, pushing off payments for too loo long can have direct repercussions on your day-to-day finances, and there are better options than ignoring your loan payments altogether.

If your student loans are in default due to non-payment, you’re going to want to rehabilitate your loans in order to avoid some fairly dire potential consequences. Here’s what you need to know about the loan rehabilitation process.

Rehabilitation gets your loans out of default

Your federal loans can go into default once you fall 270 days behind on your payments, which can lead to severe consequences. In addition to continued collection calls and a ding to your credit, you’ll immediately owe the entire loan balance, can’t pick a repayment plan, and won’t be eligible for additional federal student aid.

You may even find that the government takes your tax returns and garnishes your wages to pay down your debts, which it can do without taking you to court (a requirement for private creditors).

Avoiding defaulting in the first place is the best option, and there are programs and options that make this possible on almost any budget. But if you’re already in default, the government also offers options for getting federal student loans back in good standing.

Loan rehabilitation is one of these, and it can put a stop to wage garnishment, end tax return offsets, and help get you on an affordable repayment plan.

The student loan rehabilitation program

You can apply for federal student loan rehabilitation by reaching out to your loan holder, which could be the U.S. Department of Education, your school, or a separate loan servicer. If you’re not sure who your loan holder (or holders) are, you can check online by logging into your My Federal Student Aid account.

You’ll then have to sign and send a rehabilitation agreement which covers the terms of your program. Once you begin, the rehabilitation program will require you to make nine payments within 20 days of their due dates during a consecutive 10-month period.

The payment amount can vary, but it’s generally 15 percent of your discretionary income. You can calculate this by subtracting your adjusted gross income (AGI) from your most recent federal tax return from 150 percent of the poverty guideline for a family of your size in your state. Those numbers are on the U.S. Department of Health and Human Services website.

For 2021, and in all states but Alaska and Hawaii, 150 percent of the poverty line is $19,320 for a family of one and $26,130 for a family of two. Check the table on the HHS website for a full breakdown of the poverty line across all household sizes, including Alaska and Hawaii.

If the monthly payment won’t be manageable, you can also work with your loan holders to find an alternative payment amount before signing your rehabilitation agreement.

You’ll need to submit an income and expense form that breaks down your monthly income, expenses, and family size. The loan holder may then lower your monthly payment amount, sometimes reducing it to just $5 a month.

After completing the nine payments, your loan will be taken out of default, and you’ll start making regular loan payments. Additionally, the default mark gets removed from your credit reports (although the late payments that led to the default will remain).

Your loans could be transferred to a new loan servicer at the end of the rehabilitation. Pay attention during the process and make sure you know who you’re paying and how much you’ll need to pay each month. If the amount is too high, you may be able to get on an income-driven plan that offers a more manageable monthly payment amount.

Loan rehabilitation is a one-time offer

If you’ve brought a loan out of default using the rehabilitation, you can’t rehabilitate the same loan again if you wind up back in default. Therefore, you’ll likely want to have some degree of certainty that you’ll be able to afford your monthly payments after rehabilitation.

Even then, an unexpected crisis could lead to missing loan payments in the future. Fortunately, the loan rehabilitation program isn’t the only way to get your loan out of default.

Alternatives to loan rehabilitation

There are two other options for getting your federal student loan out of default. You could pay the balance in full — although this isn’t a realistic option for many borrowers. Or, you may be able to consolidate your federal student loan(s) using a Direct Consolidation Loan. Essentially, you’re replacing your current federal loan with a new federal loan that isn’t in default.

In some cases, consolidation may be the best option because it can be a much faster process. However, consolidation won’t lead to a removal of the default mark on your credit history and may result in higher collection fees than rehabilitation.

Also, similar to rehabilitation, it may be a one-time option as you can’t reconsolidate a Direct Consolidation Loan unless you’re combining it with a different type of federal student loan.

If your loans are in default, you may be dealing with a variety of financial stressors and figuring out the best path forward isn’t always easy. MMI's certified student loan experts can walk you through your options and explain the pros and cons of each.

Tagged in Student loan options, Advice for students, Debt strategies, Debt collection

A corporate headshot of Louis DeNicola.

Louis DeNicola is a personal finance writer with a passion for sharing advice on credit and how to save money. In addition to being a contributing writer at MMI, you can find his work on Credit Karma, MSN Money, Cheapism, Business Insider, and Daily Finance.

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