Rehabilitate a Loan

What is it?

Loan rehabilitation offers you the chance to remove your federal student loans from default. To rehabilitate, you and your loan holder (or the Department of Education if you have a defaulted Direct Loan) must agree on a reasonable and affordable payment plan for nine (9) payments over a ten month period (Perkins Loan requires nine (9) consecutive monthly payments). In most cases, you sign a rehabilitation agreement specifying payments and responsibilities. A loan is rehabilitated only after you have voluntarily made the agreed-upon payments on-time and the loan has been purchased by a lender. Outstanding collection costs may be added to the principal amount.

Why would I want to do this?

• Rehabilitating your loan(s) removes the default status of previously defaulted loans at completion of the process. National credit bureaus are notified when the loan is no longer considered in a default status.
• The 9 voluntary on time payments you make while rehabilitating your loans will be subtracted from the maximum repayment term of your loan.
• After the loan has been rehabilitated, you regain the balance of all benefits of the Title IV loan program, including any remaining eligibility for deferment or forbearance, from the date of the rehabilitation.
• You regain the flexibility you need to choose a loan repayment plan that works best for you. Repayment plans available to other borrowers with the same loan type may be available to you, depending on your qualifying status.
• Once you have completed your rehabilitation plan, and you keep your loans in good standing, you will not again be subject to administrative wage garnishment, income tax refund offset, or other penalties that can be imposed on defaulted loans.

What else do I need to know?

• The amount of your monthly payment after rehabilitation may be more than the amount you paid while you were rehabilitating your loans.
• Any interest outstanding at the time your loan is rehabilitated will be added to your current outstanding principal balance (capitalized), increasing the total amount you owe. Collection costs may also be added to your principal balance, increasing the total amount you owe.
• Delinquencies reported before the loan(s) defaulted will not be removed from your credit report.
• To rehabilitate your Perkins loan, you must establish a repayment agreement with the school from which you received the Perkins loan. Contact your school directly to find out more.
• For FFEL loans, at the completion of the schedule of rehabilitation payments, a participating lender must agree to purchase the defaulted loan and assume servicing of your loan. You must continue making payments during this time.