If you have a federal student loan default status, you could be eligible for a student loan rehabilitation program. Defaulting on student loans will hurt your credit score.
Like everyone else, you can get into a tight situation where you have to prioritize some expenses and debts over others. Paying off your federal student loans might not be a priority at that moment. But defaulting student loan payments can have negative consequences.
Lucky enough for you, the federal government can offer you a one-shot redemption scheme to get back on track with your student loan payments. This scheme is called student loan rehabilitation.
What is a student loan rehabilitation program?
Student loan rehabilitation is a program put in place by the federal government(US) to offer defaulters of federal student loans a single opportunity to get out of the default state. It takes 9 to 10 months to get out of the default status. After making 9 to 10 on-time monthly payments, you will successfully get out of the default state.
The monthly payment amount you have to make for nine or ten months should be agreed upon by you and the lender. Once you get out of the default stage, any negative balance(Default Status) added to your credit history will be removed.
Note: Student loan rehabilitation is for borrowers who defaulted payments on federal students loans. So if you have a private student loan, you won’t be eligible for rehabilitation.
How does student loan rehabilitation work?
You need to undergo a process to rehabilitate your student loan and get out of the default state. This process is put in place by the Department of Education in the United States. Follow the steps below to help you start and get out of the rehabilitation phase.
1. The first step is to contact your loan servicer. What if you don’t know your loan servicer? You can create an account and log in to the Federal Student Aid’s website. Once you are in your account, click on the “View Loan Servicer Details” link.
2. Once you know who your loan servicer is, you will need to apply for a rehabilitation student loan. You will have to send them a copy of your most recent tax return. This tax return document enables your loan servicer to calculate your new payment, which is 15% of your monthly discretionary income. What if the payment amount is too much for you to handle? In this case, you can request a financial hardship form.
3. Your loan servicer will send you the student loan rehab agreement. Review the terms and conditions, then sign and return the agreement. Make sure you can manage the payment amount stipulated in the agreement.
4. Start making on-time monthly payments. You will have to make nine consecutive payments within ten months. Try as much as you can to pay within 20 days of each payment due date. Once you complete the payments, your student debt goes to a new loan servicer. Your new loan servicer will place you under the Standard Repayment Plan.
How to qualify for a student loan rehabilitation program?
For you to qualify for a student loan rehabilitation program, there are two criteria you must fulfill.
1. You have a federal student loan debt: The student loan rehab program is for borrowers with federal student debts. If your student loan is from a private lender, you are not qualified for this program.
2. You have defaulted the repayment of your federal student loan debt: You have to be a federal student loan defaulter. Rehabilitation is to help you get on track with your debt repayment if you default. So if you haven’t defaulted on your federal student loan payments, you won’t be eligible for this program.
What happens after student loan rehabilitation?
Once you have made the 9-10 on-time monthly payments during your student loan rehabilitation process, you will be out of the default state. Your student loan will be transferred to a new loan service provider who will place you under a standard repayment plan.
You should note that you are eligible for student loan rehabilitation only once. So if you default again after the rehab program, your only option would be a student loan consolidation.
There are benefits can enjoy after you complete your student loan rehab program. These benefits are;
- Removal of your default status, which helps repair your credit by updating your credit record at the credit bureau.
- You will be free from administrative wage garnishment, treasury offsets, and other debt collection efforts.
- You regain access to federal financial aid.
A student loan rehabilitation program can help you get out of a debt collection nightmare that could quickly damage your credit score. This program is only available if you have a federal student loan. With a private student loan, you should consider student loan consolidation.