What Is Loan Rehabilitation and How Does It Work?
Navigate the process of loan rehabilitation to resolve defaulted federal student loans and regain financial standing.
Loan rehabilitation offers a structured path to resolve a defaulted federal student loan. This program brings a loan out of default, allowing borrowers to regain financial standing and access to federal student aid benefits.
Eligibility and Requirements for Rehabilitation
Loan rehabilitation is available for federal student loans, including those made under the William D. Ford Federal Direct Loan Program and the Federal Family Education Loan (FFEL) Program. A loan enters default when payments are not made for at least 270 days (about nine months). Rehabilitation becomes an option once a loan defaults.
To begin rehabilitation, a borrower must contact their loan holder or the debt collection agency managing the defaulted loan. They will establish a “reasonable and affordable” monthly payment based on income, expenses, and family size. This often requires documentation such as recent tax returns or income and expense forms. Payments could be as low as $5 per month, depending on the borrower’s financial situation. A written agreement is required to formalize this payment plan before the rehabilitation process can begin.
The Loan Rehabilitation Process
After establishing the initial agreement, the rehabilitation process requires consistent payment. A borrower must make nine voluntary, reasonable, and affordable monthly payments within a 10-consecutive-month period. Each payment is considered “on time” if received within 20 days of its scheduled due date for Direct and FFEL Program loans.
Maintaining this payment schedule is important for successful rehabilitation. Missing a payment or failing to make it on time can disrupt the process and may require the borrower to restart the payment sequence. While undergoing rehabilitation, the loan servicer or debt collector monitors these payments. Any involuntary payments, such as those from wage garnishment or tax refund offsets, do not count toward the required nine voluntary payments. Such involuntary collections may continue until at least five rehabilitation payments have been made or until the loan is no longer in default.
Loan rehabilitation is generally a one-time opportunity for a specific defaulted loan. If a borrower successfully rehabilitates a loan and then defaults on it again, they cannot use rehabilitation a second time for that same loan. However, starting July 1, 2027, regulations will allow borrowers to rehabilitate a loan up to two times.
Outcomes of Successful Loan Rehabilitation
Upon successful completion of the nine qualifying payments, the defaulted loan is removed from default status and returned to good standing. Successful rehabilitation removes the default record from the borrower’s credit history, which can positively impact their credit score. However, individual late payments preceding the default usually remain on the credit report for up to seven years.
Successful rehabilitation also reinstates a borrower’s eligibility for various federal student aid programs, including Federal Pell Grants and additional federal student loans. Borrowers regain access to federal loan benefits that were unavailable during default, such as deferment, forbearance, and eligibility for different income-driven repayment plans.
After rehabilitation, the loan is transferred from the collection agency to a new loan servicer and placed on a standard repayment plan. Borrowers can choose an alternative repayment plan, such as an income-driven option, to manage their payments.