Rehabilitation

If the borrower’s loans are on default, s/he can have the loans rehabilitated. To qualify for rehabilitation, the borrower has to agree to make 9 monthly payments during a period of 9 to 10 months to the designated collection agency that’s handling their loans. Interruptions in the consecutive payments is allowed if the borrower works for military service for example. The 10-month payment periods serves as a leeway should the borrower miss at least his/her payment for one month and still remain within the rehabilitation program.

Rehabilitation is an option for both Direct and FFEL loans. Once the rehabilitation is complete, the loans will be removed from default status and the borrower would be eligible for other loans. Borrowers may be eligible for new Federal assistance if they were able to make six monthly payments. Nevertheless, borrowers should still finish the entire rehabilitation program to completely remove the default status on their loans.

One Chance at Rehabilitation

You are only allowed to rehabilitate your loans once–there are no second chances. If you have rehabilitated loans prior to August 14, 2008 and that loan goes back to default, then rehabilitation can be done again. But once that happens, rehabilitation will be subject to the one-time limit.

How to Rehabilitate Your Loans

To begin the loan rehabilitation application, borrowers should make a request to the loan holder, most likely the collection agency, that’s handling his/her account.

The collection agency or loan holder will discuss options with the borrower in terms of the amount that the borrower would pay for the 9 monthly payments. The collection agency would base this on the IBR computation which is about 15% of the borrower’s disposable income. Note that is just for computation purposes and it doesn’t mean that the borrower is qualified to do IBR while the loan is under rehabilitation.

To compute the 9 monthly payments based on IBR, the loan holder would need the borrower’s information and details about his/her income and expenses. The minimum payment for rehabilitation is $5. Also, the loan holder may ask the borrower to make “good faith payments” while final documentation of the borrower’s income is still pending. But the borrower has a choice to do this early or wait until the final amount for the payment is computed in order to start the 9 monthly payments.

What Happens After Rehabilitation

When you’re finished with the rehabilitation program, not only will your loans be removed from default but it will also revert to the original repayment plan or the loan holder may put back your loan under a standard repayment plan. If the holder returns your loans into standard repayment plan, you may encounter monthly payments that may not be affordable to you. So it’s important that you keep track of your rehabilitation period. Because once it’s done, you are expected to pay for your loans again.

Once you finish the rehabilitation, ask your loan holder about your new loan servicer. That way, you can request to the new loan servicer to apply for an Income-Driven Repayment plan so that repaying your student loans would be affordable to you.