Get Out of Debt Guy

What Happens When I Rehabilitate My Student Loan?

Posted February 21, 2014

WRAL Reader Question

Dear Steve,

What happens when defaulted borrowers complete the 9 month rehabilitation process and do not fully repay their loans.

What is the payment amount after they rehabilitate the loan? Will the terms stay the same or will they increase to payment amounts?


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Dear Joe,

For the sake of this answer I'm assuming you are referring to federal student loans.

Student loan rehabilitation is a process that allows you to get a delinquent loan out of default and have the negative history removed from your credit reports. However, delinquencies (late payments) reported before the loan defaulted will not be removed from your credit report.

To rehabilitate your loan you would need to make payments, you and the servicer have agreed to. Typically these are the regular full payments you would have had to pay. And you need to make nine of these full on-time payments to get the rehabilitation benefit.

However in July of 2014 the rules will change and you'll only need to make five payments and those payments can be based on your income instead of your full payment.

Once you have successfully completed a rehabilitation program you are then eligible for all available options such as loan forgiveness, and will be eligible for more federal student loans.

The bad side of the rehabilitation process is the loan may be charged a default or collection penalty of up to 18.5 percent of the loan balance. This will be added on top of what you owe and so following rehabilitation the loan payment may be higher. 

Another option is to consider a federal student loan consolidation program where your final payment can be income based. You would need to coordinate this with your loan servicer and make made several payments.


Steve Rhode
WRAL Get Out of Debt Guy

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About this Blog:

Steve Rhode has had careers in opthalmology, real estate and as the head of a nonprofit debt counseling firm. On his blog, he offers hard-won, free advice about getting out of debt, consolidation and making the right choices as you manage your money.