Borrowers who find their government student loan in default have the option of rehabilitating the loan. Through the federal loan rehabilitation program, the borrower and government student loan holder agree to a payment plan that repairs the loan’s status. This plan is spread out across 10 months and includes nine voluntary (and on time) payments.
Loan rehabilitation generally includes a signed agreement between the borrower and the lender specifying the terms of the loan’s repair. Money acquired from the payments is subtracted from the maximum repayment term of the loan.
The overall objective of rehabilitating a government loan is to remove it from default status. Upon successful completion of the program, the national credit bureaus are notified of the change in status. Delinquencies reported prior to the default remain on the borrower’s credit report. The borrower also regains Title IV Loan privileges, including the ability to use any remaining deferment or forbearance time.
Collection costs incurred during the rehabilitation and outstanding interest at the time the loan is rehabilitated is added to the loan’s current outstanding principal balance. In return, this increases the total amount the borrower owes.
Not all rehabilitation programs are the same. Keep in mind the terms of the program rely heavily on the type of government student loan that is in default. Specific information regarding Perkins loans can be obtained directly through the school’s financial aid administrator. For FFEL loans that go through a rehabilitation program, a participating lender must purchase assume and provide loan servicing for the debt.
Once a loan has made it through the rehabilitation process, the borrower is required to continue making on time payments to the lender. Depending on the repayment plan, these payments may be more than the payments due during rehabilitation.
To learn more about the government student loan program and how to rehabilitate a loan, visit the Department of Education website at www.ed.gov