Student Rehabilitation Loans Explained

Student rehabilitation loans are designed to help you get a student loan out of default and back into good standing. To do so, you have the chance to "rehabilitate" the loan, meaning you may be offered an opportunity to start making payments again. It is not easy to rehabilitate a loan; all payments must be made in full on time for a number of months. Student rehabilitation loans are not actual loans designed to help you pay back student debt. Rather, it is just a term to describe the process of bringing debt current.

Rehabilitation of Federal Loans

Federal student loans are the most common to offer rehabilitation opportunities. Direct loans, FFEL loans and Perkins loans all have rehabilitation options. To qualify, a borrower must pay all debts within 10 days of their due date for at least 9 months. The loan that was once in default will come back to current. The lender will delete the default report from all credit bureaus. You will have a clean slate and be eligible for the same services you were eligible for prior to your loan entering default. Any wage garnishment will also cease immediately. Federal loans, though they can be rigid in their structure, offer the most opportunity for a borrower to recover from a detrimental default.

Rehabilitation of Private Loans

Private lenders may not be as willing to extend rehabilitation options to a student borrower in default. However, all lenders look to mitigate losses associated with defaulted loans. If a lender has a chance to get your loan current and profit on it in the future instead of paying legal fees to settle the debt now, the lender will likely take that option. In order to receive a chance to rehabilitate a private loan, then, you have to show the lender you can continue to make loan payments in the future. Your situation will have to change in some way to show the lender this will be possible. For example, if you defaulted because you lost your job, you may inform the lender when you get a new income source and attempt to rehabilitate your loan. 

Alternatives to Rehabilitation

Once a loan has entered the delinquent phase, it can be very challenging to avoid default. It is even harder to prevent negative consequences if a loan is allowed to actually enter default. Therefore, it is always better to speak to a lender immediately when you fear you may not be able to make your loan payment or payments. Most student lenders will offer deferment options for you to hold off on payments for a period of time. Though interest still accrues in most deferral periods, you will gain some much needed breathing room to determine if you can continue paying your loan in the future. If you do not feel you can make loan payments in the long-run, then contacting the lender to refinance the loan may work to your favor. Reducing your interest rate or extending the length of your loan can make the loan more affordable.

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