What Happens After Student Loan Rehabilitation?
Understand the essential post-rehabilitation process for federal student loans, ensuring a smooth transition to good standing and successful long-term repayment.
Federal student loan rehabilitation offers a pathway for borrowers to bring their defaulted loans back into good standing. This process typically involves making nine voluntary, reasonable, and affordable monthly payments within a 10-month period. Successfully completing rehabilitation aims to resolve the default status, restoring a borrower’s eligibility for various federal student aid benefits and improving their financial standing. The journey does not conclude with the final rehabilitation payment; rather, it transitions into new phases of loan management and repayment. This article explains the steps and changes that occur after successful student loan rehabilitation.
Confirmation of Rehabilitation Completion
Student loan rehabilitation is complete once the required nine on-time payments are made. Typically, the loan holder or the Department of Education will send official notification confirming the rehabilitation’s completion. This communication usually arrives in the form of a letter, often within 30 days of the final qualifying payment. The notification confirms the loan is no longer in default and may also provide details about a new loan servicer, if the loan has been transferred, along with initial information regarding the rehabilitated loan’s status.
If official notification is not received within a reasonable timeframe, borrowers should proactively contact their loan servicer or the Department of Education’s Default Resolution Group. Borrowers can also check their loan status through the National Student Loan Data System (NSLDS), which is now part of StudentAid.gov, to verify that the default status has been updated.
Impact on Default Status and Credit History
Upon successful completion of student loan rehabilitation, the loan is officially removed from its default status. This change carries significant benefits for the borrower, as it ends collection activities such as wage garnishment and the offset of tax refunds or other federal payments. The borrower regains eligibility for federal student aid, including access to future federal loans, and can once again access various repayment benefits like deferment, forbearance, and different repayment plans.
A primary benefit of rehabilitation is the removal of the default record from the borrower’s credit history. While the default notation is deleted, the historical record of late payments that occurred prior to the loan entering default typically remains on the credit report for up to seven years. Despite this, the removal of the default status itself can positively impact a borrower’s credit score over time, aiding in credit repair. Borrowers are encouraged to obtain free copies of their credit reports from all three major credit bureaus—Equifax, Experian, and TransUnion—approximately 30 to 90 days after rehabilitation completion to confirm that the default status has been accurately updated or removed.
Establishing New Repayment Terms
After a federal student loan is successfully rehabilitated, it is typically transferred to a new loan servicer or assigned to a new loan holder. The new servicer will establish new repayment terms for the rehabilitated loan.
Borrowers will have various federal repayment plans available to them:
Standard Repayment Plan: Typically involves fixed monthly payments over a 10-year period.
Graduated plans: Start with lower payments that gradually increase over time.
Extended plans: Allow for a longer repayment period, up to 25 years, often resulting in lower monthly payments.
Income-Driven Repayment (IDR) plans (e.g., Income-Based Repayment (IBR) or Income-Contingent Repayment (ICR)): Adjust monthly payments based on a borrower’s income and family size, potentially resulting in payments as low as $0 per month.
When choosing a repayment plan, borrowers should consider their current income, family size, overall loan balance, and desired repayment timeframe. For IDR plans, borrowers will need to provide documentation of their income and expenses to their servicer. If a borrower does not proactively select a repayment plan, the loan may be automatically placed on a Standard Repayment Plan, which could result in a significantly higher monthly payment than they made during rehabilitation.
Maintaining Loan Good Standing
Maintaining a rehabilitated student loan in good standing is important to prevent future default. The most direct way to achieve this is by consistently making timely payments according to the chosen repayment plan. Payment history is a significant factor in credit scores, and regular, on-time payments contribute positively to a borrower’s financial standing.
Borrowers should maintain open communication with their loan servicer, especially if they anticipate difficulty making payments. Should financial hardship arise, options such as deferment or forbearance may be available to temporarily postpone or reduce payments. These options can provide relief during challenging times and help prevent re-default. For those on Income-Driven Repayment plans, it is important to annually review and update income and family size information with the loan servicer. This annual review ensures that payments remain appropriately calculated based on current financial circumstances, helping to keep the plan affordable and the loan in good standing.