How To Use Student Loan Rehabilitation To Recover From A Default

Federal student loan fault – what happens if a borrower misses payments for at least 270 days – has serious consequences. To resolve the default, a borrower has options that include immediate full repayment, loan consolidation, or loan rehabilitation.

For the majority student loan borrowers, immediate full repayment is not practical. On the other hand, consolidation and rehabilitation are the two main ways out of default on student loans. Each process has its advantages and disadvantages: Consolidation takes less time, but rehabilitation offers additional advantages that are not available through consolidation.

Here’s what you need to know about the student loan rehabilitation process.

Who can benefit from the rehabilitation of student loans

The rehabilitation of a student loan occurs when a defaulting borrower makes nine consecutive monthly payments on time in an amount set by the loan manager or holder.

[Read: Know How to Talk to Your Student Loan Servicer.]

This may be the right choice for those looking to get their student loans back in good standing and begin the process of restoring their credit. If you are successful in rehabilitating a loan, the default record is removed from your credit history. However, your credit history will always reflect any late payments reported by your loan holder before your loan went into default.

Federal Direct Loans and Federal Family Education Loans, or FFELs, are generally eligible for pardon. Private student loans, which generally offer less protections to borrowers than federal student loans, are not eligible for pardon.

How Federal Student Loan Rehabilitation Works

To begin rehabilitating a delinquent federal student loan, contact the loan holder, which for direct loans is the US Department of Education. You can find contact details on the department’s Federal Student Aid website in the “Who is my student loan officer? “ section.

Once in contact with your loan holder, you will sign an agreement to make nine affordable and reasonable monthly payments within 20 days of the due date for 10 consecutive months. These payments are considered voluntary.

Payments made via wage garnishmenti.e. when an employer is required to withhold part of your salary and send it as direct payments to the loan holder, or by Cash compensation – that is, when the government seizes part or all of your federal income tax refund – are considered involuntary and do not count towards pardon.

What is reasonable and affordable is determined by the loan holder, who sets your monthly payment amount at 15% of your annual discretionary income, divided by 12. Your payment can be as low as $ 5 per month depending on your income, which is based in part on your adjusted gross income as reported on your most recent federal income tax return.

Note that if you are married and file federal taxes separately, you must include your spouse’s income tax returns when applying for rehabilitation. In addition, if you have not filed a federal income tax return in the past two years or if your last income tax return does not accurately reflect your current income, you must submit a special form. income and expense form.

If your loan holder requests a monthly rehabilitation payment amount that is unaffordable for you, you can request a recalculation for an alternative monthly payment based on subtracting reasonable amounts from your income that represent your monthly living expenses. This monthly payment could be lower, and you must choose one of two payment amounts to begin the rehabilitation process.

It is important to note that either of the pardon payments can be much lower than the regular monthly payments that you will need to make when your loan is reinstated. The goal of rehabilitation is to prove to your loan holder that you can count on yourself to make regular and on-time monthly payments.

After your ninth successful pardon payment, all wage garnishments and tax refund garnishments will end. The Department of Education will ask credit bureaus to remove the student loan default from your account, which could increase your credit score.

[READ: Why Your Creditworthiness May Matter for Student Borrowing.]

Once your student loan is back in good standing, it’s crucial to stay up to date on your payments to avoid another default and additional collection costs added to the loan balance. Other benefits of completing rehabilitation are that you will regain your eligibility for Federal Student Aid and reimbursement options like postponement, tolerance, loan cancellation, and income-based repayment plans, which can mean a more affordable monthly payment based on a percentage of your income.

Federal Perkins loans can be rehabilitated through a slightly different process, which requires contacting the loan holder and agreeing to make nine consecutive months of full monthly payments within 20 days of the due date.

A word of caution regarding student loan rehabilitation

When rehabilitating a student loan, be aware that collection costs may be added to the loan balance. Charges are added to delinquent loans and may vary depending on limits imposed by the federal government.

Also, keep in mind that using pardon for federal student loans in default may not be a good idea for all borrowers. If you think you won’t be able to make your regular monthly payments after successfully rehabilitating the loan, you could risk defaulting again, which could have even more serious consequences.

[READ: When Getting Your Loans Out of Default Is a Bad Idea.]

It’s always a good idea to ask the loan holder for an estimate of what your monthly payment would be once your loan is back in good standing. Be sure to ask about income-based reimbursement options, as they are often more affordable.

The fine print

A delinquent federal student loan can only be rehabilitated once, except in cases where the previous pardon was processed before August 14, 2008.

A borrower may become eligible for federal student aid again after rehabilitation, but may lose it again under certain circumstances.

If your loan holder collects payments on your overdue student loan through payday garnishment or treasury compensation, this may continue throughout the rehabilitation process. Again, these payments do not count towards your required nine monthly payments.

A Note on COVID-19 Emergency Relief Benefits

In response to the coronavirus pandemic, the federal government has put in place emergency relief services for most federal student loan borrowers. This included suspending payments, setting the interest rate on eligible federal loans at 0%, and stopping payday collections and foreclosures. These benefits are expected to end after January 31, 2022.

If you were in the process of rehabilitating a delinquent student loan on March 13, 2020, when the relief period began, each month of suspended payments will still count towards the reclamation. Once the suspension of payments is completed, rehab payments must be received within 20 days of the due date to be considered on time.

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How To Use Student Loan Rehabilitation To Recover From A Default originally appeared on usnews.com