Student Loan Rehabilitation Program Explained
February 19, 2021

Student Loan Rehabilitation Program Explained

Loans enter default when borrowers fail to pay or miss multiple payments toward their loan balance over a specific period of time. Defaulting on student loans may present complications between a borrower and creditor and also leave borrowers in a sticky financial situation. When you’re in default on your federal student loans, you lose access to several repayment tools and other subsequent protections and benefits.

The federal government provides students in Arizona and across the country with two main options for bringing their federal student loans out of the default status: consolidation or rehabilitation. Consolidation is a process that allows borrowers to merge one or more loans into a single new loan with a fixed interest rate. On the other hand, rehabilitation is a process where borrowers are granted the resumption of eligibility for government financial assistance programs by undoing loan default. Additional information about the student loan rehabilitation program is explained below.

The Student Loan Rehabilitation Process: What Does It Look Like?

After establishing a rehabilitation agreement with your loan holder, you will be assigned a regular monthly payment that is generated at 15 percent of your discretionary income—the amount of money you have after all your necessities and expenses have been paid.

Within a strict period of ten consecutive months, you are responsible for making nine full monthly payments within 20 days of the due date proposed in your agreement. Once you have met these requirements, your loan default status will be eliminated. When loans are no longer in default, you should expect the following:

  • The default will be removed from your credit report; however, any delinquent payment history can remain for up to seven years.
  • Collection actions, such as wage garnishment and tax withholding, will stop.
  • You’ll recover lost and future federal aid eligibility.

Keep in mind that you are only allowed to rehabilitate your defaulted loans one time. This makes it incredibly important that you be able to afford the monthly payments presented to you. You can often negotiate a payment that is reasonable based on your circumstances. It’s also strongly recommended that you set up recurring bill payments to ensure you don’t forget or miss any of your financial obligations.

How to Pursue Student Loan Rehabilitation

To enroll in a student loan rehabilitation program, the first step is to reach out to your loan holder—a loan servicer, debt collection agency, or another government enterprise. If you are unsure who holds your defaulted loan, visit and log in to your account.

After speaking with your loan holder, they will calculate a monthly income based on your adjusted gross income (AGI) with respect to your family size. You will be required to complete those nine payments on time each month but may qualify for lower monthly installments after. At the closing of the rehabilitation period, your loan will take the status of “good standing.” You should continue to make your payments until your loan balance is zero.

Components of Student Loan Rehabilitation That You Should Understand

If your loans have fallen into default, student loan rehabilitation may appear as a logical solution to your debt. If you’re considering entering a student loan rehabilitation program, here’s a few critical components that you should know:

  • It takes nine months
  • Payments and debts may continue to be collected during the process
  • It may not improve your credit score if you have an unpaid principal balance and accrued interest
  • There may be collection fees involved
  • You can only rehabilitate one loan at a time
  • There’s a risk of defaulting your loans again
  • Only applicable for federal loans, not private

When it comes to debt, every decision you make can profoundly affect your current and future finances. Jumping into a program like rehabilitation or consolidation without understanding potential implications, setbacks, and other options may prove to be costly in your future endeavors.

Settle or Discharge Your Student Loans with McCarthy Law PLC

Student loan rehabilitation may be beneficial for some, but there’s only one chance at making it right—and even then, it doesn’t entirely remove the burden of having to pay off debt. With the insurmountable amounts of debt that many students bear, setting up a monthly installment plan and getting out of default may not have much of an impact on their overall financial struggles. A better alternative is one focused on the long-term—and that’s settling or discharging your student loans.

For private student loans, it may be the only option.  To learn more about your options, students in Arizona would benefit greatly from consult an experienced debt settlement attorney. The legal team at McCarthy Law is dedicated to helping those in debt get out the right way. Our student loan debt settlement programs make it simpler than ever to reach debt freedom. Find out if you’re eligible today by calling (855) 976-5777 or filling out a contact form for a consultation with one of our experienced debt settlement attorneys.


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