Rehabilitate Defaulted Student Loan: Steps to Take

Rehabilitating a Defaulted Student Loan

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Rehabilitating a defaulted student loan can seem daunting, but it is crucial for regaining financial stability. Defaulting on a student loan can lead to serious consequences, including credit score damage, wage garnishment, and even legal action. However, there are options to help borrowers get back on track.

Options for Loan Rehabilitation

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Loan Rehabilitation

One option is loan rehabilitation, which involves making nine monthly payments over ten consecutive months. After successfully completing the rehabilitation process, the default status is removed from the borrower’s credit report, and they may become eligible for additional federal student aid. It is essential to note that loan rehabilitation is available only once per loan, so timely payments are crucial to avoid future defaults.

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Loan Consolidation

Another option is loan consolidation, which combines multiple federal student loans into one loan with a single monthly payment. This can simplify payment management and help avoid default. However, consolidating a defaulted loan does not remove the default status from the borrower’s credit report.

Understanding Defaulted Student Loans

Definition and Consequences of Default

Defaulting on a student loan occurs when a borrower fails to make payments as agreed in the loan agreement. This can lead to severe consequences such as credit score damage, wage garnishment, and legal action. Typically, defaulted loans are transferred to a collection agency, which will attempt to collect the debt. If the borrower cannot pay, legal action may follow.

Eligibility for Rehabilitation

Not all student loans are eligible for rehabilitation. Only federal student loans, like Direct Loans and Federal Family Education Loans (FFEL), qualify. Private student loans are not eligible for rehabilitation. Borrowers with defaulted federal student loans have three options to get out of default: loan rehabilitation, loan consolidation, or full repayment of the debt.

Steps to Rehabilitate a Defaulted Student Loan

Assessment of Loan Status

Before starting rehabilitation, borrowers should assess their loan status by checking their credit report or contacting their loan servicer. They need to note the loan amount, current status, and any collection fees added to the balance.

Contacting the Loan Servicer

Borrowers should contact their loan servicer to discuss the rehabilitation process and determine the best plan for their situation. The servicer will provide information about available rehabilitation plans and eligibility criteria. Borrowers should also inquire about additional fees or charges during the rehabilitation process.

Evaluating Rehabilitation Plans

Borrowers should evaluate the rehabilitation plans offered by the loan servicer to determine the best option. Plans may include a standard plan requiring nine monthly payments within ten months or an income-driven plan based on the borrower’s income.

Making Qualified Payments

Once a rehabilitation plan is chosen, borrowers must make the required payments on time. Payments must be made in full within the specified timeframe to qualify for rehabilitation. Ensuring the availability of necessary funds to avoid missing any payments is crucial.

Benefits of Loan Rehabilitation

Credit Score Improvement

Loan rehabilitation can significantly improve a borrower’s credit score. Completing the rehabilitation process removes the default status from the credit report, which helps improve the credit score over time and makes qualifying for other credit easier.

Regaining Financial Aid Eligibility

Rehabilitation also helps borrowers regain eligibility for federal financial aid. Defaulting on a federal student loan disqualifies borrowers from further federal aid until the default is resolved. Completing rehabilitation restores eligibility for federal financial aid, which is particularly beneficial for those returning to school.

Stopping Wage Garnishment

Rehabilitation can stop wage garnishment imposed by the government to collect defaulted loan debt. Completing the rehabilitation process halts garnishments, providing financial relief and allowing borrowers to focus on stabilizing their finances.

Challenges and Considerations

Financial Management Post-Rehabilitation

Post-rehabilitation, borrowers must manage their finances responsibly. This includes making regular, on-time payments to avoid future defaults. Creating a budget ensures affordability of monthly payments while covering other expenses.

Potential Tax Implications

Borrowers may face tax implications if eligible for loan forgiveness after making nine consecutive on-time payments. Loan forgiveness might be considered taxable income by the IRS. Consulting a tax professional is advisable to understand potential tax consequences.

Eligibility Limitations for Future Rehabilitation

Borrowers who have completed the rehabilitation program may not be eligible to rehabilitate the same loan again if they default in the future. It’s crucial to maintain timely payments and manage finances responsibly to prevent another default.


Rehabilitation of a defaulted student loan requires careful planning and execution. Borrowers should assess their loan status, contact their loan servicer, evaluate available plans, and make timely payments. Successfully rehabilitating a loan can improve credit scores, restore financial aid eligibility, and stop wage garnishment, helping borrowers regain their financial footing and avoid future defaults.