Is a Student Rehabilitation Loan Right for You?

A student rehabilitation loan agreement allows you to avoid default status on a previously unpaid loan. The main advantage is the fact the default will be deleted from reports with all national credit bureaus. You will also regain loan benefits as if you never defaulted. These benefits include filing for deferment, forbearance or even bankruptcy to have the loans forgiven. Finally, you can avoid wage garnishment by rehabilitating your loan.

When Student Loan Rehabilitation is an Option

Direct loans, FFEL loans and Perkins loans are all eligible for rehabilitation. If you have recovered financially since defaulting on these loans, you can apply for rehabilitation to bring them current even if they have gone into default. You should note: it is far easier to be approved for deferral or forbearance before the default occurs, therefore avoiding default, then recovering once a loan has passed into default. Be proactive to avoid this situation. With an unavoidable default, however, this is the next best option.

What Rehabilitation Really Means

Rehabilitation is not easy. In all cases, you will be required to make at least 9 payments in full within 20 days of their due date, over a 10 month period. These funds go directly to the U.S. Department of Education. If your wages are garnished or payments are involuntarily secured, the payment does not count. You will not likely have more than one chance to rehabilitate a loan, so you have to ensure you can make these payments before entering the program. After you have completed these requirements, the following will occur:

  • Direct loans will be returned to the Direct Loan Servicing Center to be paid in full
  • FFEL loans will be purchased by another lender to be carried out in full
  • Perkins loans will continue to be serviced through the Department of Education

When Default is a Better Choice

A number of borrowers enter rehabilitation programs only to find they are right back where they started from. They have spent even more money on the loans, but they still end up defaulting. This situation occurs when borrowers do not fully budget for the repayment of the loans over a ten month period. Budgeting for this expense is the key to assuring your loan is rehabilitated. Budgeting means assuring you have at least three month's payment currently on hand. Budgeting also means making sure your debt obligations do not exceed over one half of your  monthly income. This means all debt obligations, not just student debt.

If you are uncertain for any reason whether or not you can afford to rehabilitate your loan, default may be the best option. While default will damage your credit, defaulting on student loans does not actually carry repercussions like forfeiting collateral. Your wages may be garnished, and you will be prohibited from securing student loans in the future. However, you will not lose your car, home or other possessions. Since most students are young when the default occurs, you will likely have a fair chance to recover your credit prior to seeking a mortgage or other large loan.

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