Student loan rehabilitation allows you to rehabilitate your defaulted federal student loans through a structured payment plan. If you complete the plan, your loan is taken out of default, which stops collection activity on the loan and allows you to participate in the various borrower benefits and protections offered by federal student loan servicers. As of 2011, your minimum balance at the end of the payment plan must be $500 for the loan to be rehabilitated and purchased by a new lender.
Student Loan Default
If you don't make your monthly student loan payments for 270 days (nine months), your student loan goes into default. A defaulted student loan negatively affects your credit, and you may be subject to wage garnishment and seizure of your federal tax refunds and other federal benefits. You won't be able to take out any additional student loans while your loan is in default, and you won't be eligible for deferments or forbearances as you are when your account is in good standing.
Student Loan Rehabiltation
Unfortunately, federal student loan rehabilitation is available only for federally guaranteed loans, not private student loans. If you are in default on private loans, contact your lender to find out if it has any options for bringing your account current. It may suggest that you rehabilitate the loan. Student loan rehabilitation allows you to set up a payment plan with payments that you can afford. If you complete the payment plan successfully, and you have a balance of at least $500 at the end of the plan, a new lender can purchase your loan and you can begin one of the standard repayment plans offered by federal lenders. Student loan rehabilitation is a one-time opportunity: If you default on your loan or loans after rehabilitation, you cannot rehabilitate your loan a second time.
Completing the Payment Plan
To qualify for rehabilitation of your student loan, you must complete a payment plan. For the rehabilitation of most federal loans, you must make nine payments within 20 days of their due dates over a period of 10 months. (If you have defaulted on Perkins Loans, the rules are stricter: You must make nine on-time payments over the next nine months.) After you complete the payment plan, the remaining balance on your loan is eligible to be purchased by a new lender.
Avoiding Default
Student loan servicers offer several options to help you avoid defaulting on your loans: If you don't default, you won't need to go through the rehabilitation process. Federal law obligates student loan servicers to work with you to come up with a repayment plan that you can afford. If your income is very low or you currently are in school or unemployed, you may qualify for a forbearance or deferment, which means you won't have to make any payments on your loans for a period of time. Contact your loan servicing company when you realize that you may miss a payment and ask for information about your options. After your account goes into default, you won't have these options, so acting quickly is the best way to protect yourself from student loan collection actions.
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