How Does Federal Student Loan Rehabilitation Work?

There could be financial advantages

Woman looks at federal loan statement while holding a tablet and leaning on a countertop.

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After you miss more than nine months of student loan payments, your loan will go into default. Defaulting on student loans can lead to serious financial consequences such as damaged credit history, wage garnishment, the loss of future financial aid, and loss of forbearance options.

Student loan default can be stressful, but there are ways to get back on track, including loan consolidation and student loan rehabilitation.

What Is Student Loan Rehabilitation?

Student loan rehabilitation is available to students who took out a direct federal loan or a Federal Family Education Loan (FFEL), missed 270 days of payments, and now have a federal loan or loans in default.

Student loan rehabilitation is a program that only applies to defaulted federal student loans, not private loans. Student debtors pay nine income-based monthly payments over 10 months, within 20 days of the monthly due date. A defaulted Perkins loan requires full monthly payments over the course of nine months.

How to Calculate Your Loan Rehabilitation Payment

How do you know what your monthly student loan rehabilitation loan payment would be? Get a calculator to figure out your monthly student loan payment.

  Process Example
Step 1 Calculate your adjusted gross income based on last year's tax return You're single with no dependents living in New Jersey and your AGI is $40,000
Step 2 Find the federal poverty guideline amount for your family size and state  New Jersey's federal poverty guideline amount is $12,490
Step 3 Multiply the federal poverty guideline amount by 150% or 1.5 $12,490 x 150% (or 1.5) = $18,735
Step 4 To find your "discretionary income," subtract Step 3 from your AGI $40,000 - $18,735 = $21,265
Step 5 Next, multiply your discretionary income by 15% (or 0.15) to find the annual payment $21,265 x 0.15 = $3,189.75
Step 6 Divide annual payment number by 12 (for 12 monthly payments) $3,189 / 12 = $265.81, your monthly loan rehabilitation payment

Appealing Your Loan Rehabilitation Payment

If you still can’t afford your monthly payment after completing this calculation, you may be able to ask your loan provider to offer a more affordable monthly payment. You have the chance to appeal the monthly payment with documentation.

Depending on your income, you could potentially pay as little as $5 per month. You’ll need to fill out the Loan Rehabilitation: Income and Expense Information form.

Once your loan is in default, you have one chance to rehabilitate the loan and get back on track to loan repayment. You can only rehabilitate your federal student loans once.

Benefits of Student Loan Rehabilitation

Once your loan is rehabilitated, there are benefits to enjoy.

More Repayment Options

Once you go forward with loan rehabilitation, you’ll become eligible for loan deferment, loan forgiveness, forbearance, federal student aid, and repayment options. 

Cleaner Credit History

The record of your default on a rehabilitated loan will no longer show up on your credit history. However, late payments reported by your loan servicer before you defaulted will still appear for up to seven years.

Collections Stop

Your wages and tax refunds will no longer be garnished by the Treasury Department. 

Loan Rehabilitation vs. Loan Consolidation

Student loan rehabilitation and loan consolidation can both help you get out of student loan default, but one might be better for your situation.

With consolidation, you roll all your current federal student loans into one new loan; you must have more than one. Applying to consolidate a loan may take about 30 minutes, but you may not have access to as many repayment plan options unless you first make three voluntary, on-time payments before consolidation.

Your loan default won’t be removed from your credit history if you consolidate your loan. 

With rehabilitation, you’re continuing to make payments toward your original loan. Your default will eventually be removed from your credit report if you rehabilitate your loan.

Is Rehabilitating a Student Loan Right for You?

It can be overwhelming if you’ve fallen behind on your loan. Consider asking a few key questions to help determine if student loan rehabilitation is a good fit for you. 

  • Are you willing to work with a loan servicer to determine reasonable monthly payments based on your income?
  • Can you commit to these monthly payments until the loan is out of default, even if it means possibly making some payments while your wages are being garnished?
  • Are you only paying one loan or do you have several that could be consolidated?

How to Apply for Student Loan Rehabilitation

To get started with your application for student loan rehabilitation, contact your student loan holder or servicer. Not sure who your student loan servicer is? Log in to your account on the Federal Student Aid website to access your servicer’s contact information. 

In your application, you will be asked for your personal expense and income information including payment history on both private and federal student loans that you might have. 

The loan rehabilitation process can take several months to complete. 

After your loan is rehabilitated, your servicer might change. Loans are often sold or transferred to new servicers. At that point, you’ll be asked to select an affordable payment plan, such as an income-driven repayment plan.

The Bottom Line: Staying Out of Default

After rehabilitating your loan, ensure your loan repayment stays on track. Consider signing up for an income-driven repayment option that fits the size of your paychecks. 

Track your loans through the Federal Student Aid website to stay on top of what you owe and use a budgeting app to stay financially organized each month. Stay in touch with your loan servicer to get all relevant loan information and stay up-to-date with payments. 

All of these actions may help contribute to a healthy loan repayment process and, eventually, financial freedom.