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    What Is Student Loan Rehabilitation & How Does It Impact Your Credit?

    What Is Student Loan Rehabilitation & How Does It Impact Your Credit

    One in four Americans carries student loan debt. Moreover, the average unpaid loan balance comes in at $37,172. Americans as a whole carry a total of $1.55 trillion in student loan debt, resulting in an average monthly payment of $393 per month.

    When coupled with other bill payments and monthly expenses, it’s no surprise that student loans are one of the most commonly defaulted on forms of arrears.

    Luckily, there’s a process called loan rehabilitation. It can help a debtor get their student loans out of default and paid off.

    What Is Student Loan Rehabilitation?

    A student loan rehabilitation program is a payment plan offered to anyone who’s defaulted on their federal student loan. It allows the debtor to take part in a clearly laid out and realistic plan that’ll lead to the paying off of their student loan. Should the debtor successfully pay off their overdue balance, loan rehabilitation will eliminate the default from their credit report.

    Who Can Use Student Loan Rehabilitation?

    Anyone who’s defaulted on a federal student loan can use student loan rehabilitation. Private student loans, such as those issued by banks, can’t be rehabilitated. Therefore, these loans must be paid off through more traditional means.

    Anyone entering into a rehabilitation program must also have a stable source of income that’ll allow them to make the required payments. One requirement of the program is that monthly payments must be reasonable. This payment usually amounts to 15% of one’s discretionary income. Individuals whose employment situation won’t allow them to make the required payments will likely be denied.

    How To Enroll In A Student Loan Rehabilitation Program

    1. Contact loan holder: The first course of action is to contact the one’s federal loan holder. The loan holder is then legally obligated to discuss the pros and cons of both loan rehabilitation and debt consolidation. The debtor can then decide which option works better for them
    2. Agree to a payment plan: Should the debtor choose loan rehabilitation, they’ll then be presented with a payment plan, usually 15% of the monthly discretionary income. Should the debtor feel that they’ll be unable to reliably pay the presented amount, then they may ask for what’s known as an “alternative payment.” This can be as little as $5 per month
    3. Sign the agreement: Once a monthly payment has been agreed upon, the debtor must formally sign the agreement. Student loan rehabilitation programs typically follow a nine of ten rule. This is a rule that effectively allows the debtor to miss one out of every ten payments without breaking the terms of the agreement
    4. Make payments: Once the agreement has been drawn up and signed, the debtor must stick to their payment obligations. This is especially important considering that loan rehabilitation is a one-chance opportunity, meaning that if they fail to make their payments their debt will go back into default. They won’t be able to enter into a rehabilitation program for the same debt again

    Pros And Cons Of Student Loan Rehabilitation 


    • Unlike debt consolidation, these programs don’t charge interest, meaning the arrears won’t increase in cost
    • Should the debtor complete the program, the default will be removed from their loan. This could have a major positive impact on their credit score
    • By law, monthly payments must be “fair and reasonable.” This means that most individuals have little to no issue making their monthly payments


    • Should the debtor fail to make their monthly payments, the loan will go back into default. They won’t be allowed to enter the program again for the same debt
    • If the debtor defaults or opts out of the program, there may be high cancelation fees

    What About Private Student Loans?

    This program is only available for federal student loans. Any loan that was granted by a private lender won’t be eligible. For those in this situation, a consolidation loan is the next best option

    This option may not seem as attractive. However, it’ll allow borrowers to bring their arrears out of default and begin repairing their credit score.

    The Bottom Line

    A student loan rehabilitation program is an excellent option for those who have defaulted on their student loans. It offers affordable payments, a realistic payment plan, and the ability to have a default wiped from one’s credit report. That being said, it’s important to keep in mind that each person only gets one chance at loan rehabilitation. If they fail to complete the program, they won’t be able to enroll again.

    For those individuals who are looking for a way to bring their private student loans out of default, a debt consolidation loan is likely the best option.