Should You Rehabilitate Your Student Loans

Nov 02, 2023 By Susan Kelly

The staggering amount of student loan debt carried by today's graduates is a major contributor to the staggering number of borrowers who fall behind on their payments. A graduate loan default occurs when a borrower fails to pay for 270 days or longer.

Regrettably, default on government loans is prevalent. The U.S. Department of Education reports that as of September 2019, 10.1% of federal student loan borrowers who began payments in a given year had defaulted within three years.

Potential Repercussions of Federal Student Loan Default

If you have a federal student loan and you skip a payment by even one day, you will be considered late by your loan servicer. If you are 90 days or more behind on your payments, your loan servicer must notify the main credit agencies, putting you in danger of default.

What Exactly Is Rehabilitating Student Loans?

Student loan default has severe consequences. Thus it's crucial to rectify the situation as soon as feasible. U.S. Department of Education's rehabilitation program for defaulted student loans provides borrowers with a systematic approach to getting their loans back on track.

As part of the student loan rehabilitation program, you've committed to writing to make nine monthly payments that are "voluntary, reasonable, and affordable" within 20 days of the due date, for a total of 10 months and student loan default rehabilitation.

Methods Used in Rehabilitating Loans

Only federal direct and FFEL loans are eligible for debt rehabilitation. Take these measures to begin the process of debt rehabilitation.

Make A Call To Your Loan Servicer

It would help if you got in touch with your loan servicer to get things rolling. The Federal Student Aid Information Center or the National Student Loan Data System on the internet will help you locate your loan servicer if you are still determining who it is.

Accept The Terms of Payment

Your loan servicer will determine your monthly payment based on your discretionary income and the number of months remaining in the rehabilitation period, which in this case will be 12. Typically, loan servicers will ask for proof of income through a W-2 or recent pay stub. Depending on your salary and family size, a payment as low as $5 may be feasible.

Complete All Necessary Financial Obligations

Completely resolving loan default status during the 10-month grace period requires timely payment of all principal, interest, and fees. Wage garnishments and Treasury offsets will cease, as would all other collection efforts. The default will be deleted from your credit report. Your credit record will show the late payments that were made before the loan went into default and student loan rehabilitation form.

Guidelines For Figuring Out Your Rehab Benefits

Fifteen percent of your discretionary income is what you owe monthly for the Student Loan Rehabilitation Program. To calculate your disposable income, subtract your adjusted gross income from the federal poverty level for your family size.

Let's pretend Jeff got married and settled down in South Carolina. He makes $45,000 a year and doesn't have any kids. The poverty threshold in South Carolina is $17,240 for a family of two, and 150% of that amount is $25,860.

After a Student Loan is Rehabilitated, What Happens Next?

If you can get your loans back on track and out of default, the servicing of those loans will normally be handed off to a new loan servicer.

If your servicer places you on the conventional repayment plan instead of the student loan rehabilitation agreement, your monthly payment will differ. Unlike your previous monthly payment, this one won't be determined by your discretionary income, which will likely be substantially higher and student loan rehabilitation program.

Remember that you now have access to income-driven repayment programs if you are having trouble making your monthly payment.

Possible Substitutes for Loan Refinancing

Although student loan rehabilitation is the best option for getting out of default, this is not always the case for some people. Two alternative options exist for dealing with Debt:

Consolidating Debt

For this strategy, you pay off your defaulted Debt in full by making three consecutive, voluntary monthly payments. Once you accomplish this, you'll be able to combine your debts with a straight consolidation loan and enter into a repayment plan based on your income.

Some restrictions apply to this approach:

  • You will be unable to combine your Debt until the garnishment order on your earnings is terminated, or the judgment is overturned.
  • Defaults on loans are still reported to credit bureaus even after consolidation.

Pay The Full Price

You can get out of default by doing something as seemingly unattainable as paying off your loans. Some people borrow from relatives or friends to settle their accounts, but this strategy might have tax consequences. Refinancing your student loans is another option for paying off your Debt and getting out of default.

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