Student Loan Rehabilitation:
All you need to know!
The consequences of student loan bankruptcy are so severe that it is essential to get out of default as soon as possible. The US Department of Education has created a student loan rehabilitation program as an organized path to get out of default.
Also Read: Student Loan Refund
Under the terms of student loan rehabilitation, you agree in writing to make a 9-month “voluntary, affordable, and reasonable payment for ten consecutive months within 20 days of the due date. If you meet these requirements, the loan will no longer default, and wage foreclosures and other dealings will end.
Also Read: Private Student Loan Forgiveness Program
How to rehabilitate a student loan?
To rehabilitate your student loan, follow these steps:
Contact the federal loan owner: Depending on your loan and how long they are defaulting, it could be a servicer, a debt collection agency, or another company. If you don’t know your contact information, please log in to your studenttaid.gov account.
Accept the payment amount: Rehabilitation payments must be “reasonable”. This usually means 15% of discretionary income. However, if you cannot afford to pay that amount, you can request another payment based on your overall financial situation. Alternative payments can be as low as $ 5 per month.
Sign the rehab contract: To repair a defaulted loan, you must submit a written agreement. Do not start payment until you officially start this process. It may not be counted in rehabilitation.
Pay as needed: Student loan rehabilitation requires nine timely payments within 20 days of the due date over ten months. Payment must also be voluntary. For example, money seized from a tax refund does not count as a payment. Please note that the months spent in the current auto-tolerance for federal student loan borrowers count towards student loan rehabilitation.
Also Read: Joe Biden Student Loan Programs
Consequences of Federal Student Loan Default
If you miss the federal student loan payment for a day, your loan will expire, and the loan manager will think you delinquent. If your account has arrears for more than 90 days, your loan manager will report to the three main credit bureaus (TransUnion, Equifax, and Experian) and you will have bankruptcy risk.
- If you do not pay as planned for more than 270 days, Federal Family Education Loan (FFEL) and direct loans, the program loans are considered a default. The consequences can be severe and include the following effects:
- Your loan will accelerate. The total unpaid loan balance and accrued interest must be fully paid immediately.
- Disqualification for federal loan benefits. You will no longer be subject to an income-based repayment plan and will not be able to delay payments due to deferment or forbearance.
- you will be no longer entitled to other assistance. As long as your loan defaults, you are not eligible for a federal loan or grant.
- The loan provider reports the default status to the credit agency. Reporting your defaults can damage your credit and make it difficult to qualify for other loans such as credit cards and car loans.
- The loan manager can withhold tax refunds and federal benefits. If you are eligible to repay or benefit, the loan manager can repay part of the loan by confiscating the money through the treasury compensation.
- Your manager can garnish your salaries and can contact your employer to garnish your salary. In other words, part of your salary will be withheld to repay your loan.
- Your loan manager can take you to court. In this case, you will have to pay legal fees, legal fees, and reminders.
Also Read: Federal Loan Service
Advantages of Student Loan Rehabilitation
By default, rehabilitation of student loans has several benefits:
- Your payments may be decreased. Because your rehabilitation payment is based on your family size and discretionary, your payments can be pretty low. Some borrowers qualify for returns as low as $5.
- The loan default can be eliminated from your credit report. Unlike other ways of getting out of default, completing the student loan rehabilitation process subtracts the loan default from your credit report.
- You will reclaim federal benefits. Once you have finished the student loan rehabilitation program, you will be eligible for federal benefits like forbearance and income-driven repayment plans.
- Wage Treasury offsets and garnishment will end. If your loan manager has seized your tax refund or federal benefits, that will end when you complete the rehabilitation process successfully.
Disadvantages of Student Loan Rehabilitation
- This is your one-time chance. Student loans can only be rehabilitated once. If you make the loan default again, you cannot choose to cancel the student loan.
- It takes a long time to clear the default. Student loan repayments require nine consecutive months of repayment before the end of the default period. Other methods (such as consolidation) may be faster.
- Involuntary payments are not counted as rehabilitation. The nine payments required for rehabilitation do not include involuntary payments (such as withholding tax).
What happens after your student loan is recovered?
When your loan is rehabilitated and deviates from the default value, your loan is usually transferred to a new loan manager.
Also Read: Student loan Forgiveness
According to the student loan rehabilitation contract, you will not receive the same monthly payment. Instead, the service staff places you under the standard repayment plan. It can be much more expensive because your new monthly payment is not based on discretionary income.
If you cannot make monthly payments, please remember that you already have an income-based repayment plan. Applying for an income-based repayment plan may result in a reduction in monthly payments.