Getting a student loan to help manage the expenses like tuition fees, living costs, etc, is not an easy task. Not only do students struggle to pay them off while they are still in school but they also end up falling behind on their payments and going into default.
Graduates defaulting on their payments mean not being able to make them for 270 days or more. Unfortunately, defaulting on federal student loans is very common.
Federal loan default is a serious problem that should be taken seriously otherwise it can have steep consequences. Two of which being wage garnishment and damaged credit.
Since student loan debt cannot be cancelled or discharged in bankruptcy, the effects can be long-lasting. However, you can choose to get out of default through the student loan rehabilitation program which is not available for federal loan borrowers and not the private ones.
Please note that the student loan rehabilitation CARES Act is providing relief to federal loan borrowers during the coronavirus pandemic by suspending payments until the end of 2020 and setting the interest rates at 0%. The collection efforts on defaulted loans have been halted and wages are no longer being garnished.
Keep on reading to find out how the program works and what happens after student loan rehabilitation.
Table of Contents
- 1 What is Student Loan Rehabilitation?
- 2 How Does Loan Rehabilitation Work?
- 3 How to Calculate Your Rehabilitation Payment?
- 4 What if you Cannot Afford the Calculated Payment?
- 5 Benefits of Student Loan Rehabilitation
- 6 Drawbacks of Student Loan Rehabilitation
- 7 What Happens After Student Loan Rehabilitation?
- 8 Alternatives to Loan Rehabilitation
- 9 The Bottom Line
What is Student Loan Rehabilitation?
Since the consequences of a student loan default can be pretty serious, it is important to get out of default as quickly as you can. To aid with this, the student loan rehabilitation program was created by the U.S. Department of Education.
According to the terms of student loan rehabilitation, you agree to make 9 monthly payments within 20 days of the due date during 10 consecutive months. Once you fulfill these requirements, your loans will no longer be in default and all the other measures like wage garnishment will end.
How Does Loan Rehabilitation Work?
In order to rehabilitate your federal loan debt, you need to follow the steps below.
1. Contact your loan servicer and start the process of rehabilitating your loan. If you are confused about who your loan servicer is, you can call the Federal Student Aid Information Center and use the online National Student Loan Data System to find who your loan servicer is.
Once you have called your loan servicer, you can tell the representative that you are in default and want to rehabilitate your loan which will require you to fill out a student loan rehabilitation form.
In order to rehabilitate your loan, your loan servicer will set the monthly payment to an amount that is 15% of your discretionary income, This is the difference between your adjusted gross income and 150% of the poverty guideline set for your state and family size, which will be divided by 12.
You will be required to provide documentation of your income by your loan servicer. You can provide a W-2 or pay stub.
How low your payment is varies depending on your income and family size. It is possible for you to qualify for a payment as low as $5.
You would be required to agree to the payment amount in writing. You will then have to pay this amount monthly and make nine payments within 10 consecutive months. This gives you the free pass to miss a payment if you need to and still stay on track for rehabilitation. However, if you miss more than that, you will no longer remain eligible.
2. If you successfully complete all the required payments within the 10 month set period, your loans will cease to be in default. All wage garnishments, collections activity and Treasury offsets will stop as well.
The record of the default will be removed from the credit report. However, the late payments that have been reported earlier before the loan was even in default will still be present on your report.
How to Calculate Your Rehabilitation Payment?
The amount you would have to pay under the student loan rehabilitation program will be 15% of your discretionary income when divided by 12. This discretionary income is the difference between your adjusted gross income and 150% of the poverty guideline for your family size and state.
For example, you are married and living in South Carolina with no children and a household income of $45,000. In South Carolina, the poverty guideline for a family of two will be $17,240 and 150% of that guideline will be $25,860.
If you subtract the $25,,860 from your household income of $45,000, you will get your discretionary income which is $19,140.
Under student loan rehabilitation, your payments will be 15% of the discretionary income divided by 12 which would make your monthly payment to be $239.25.
What if you Cannot Afford the Calculated Payment?
If the payment you have to make is more than what you can afford, you can request your loan servicer who can then calculate your loan payment using an alternative method that would consider your monthly expenses such as household expenses, medical bills, etc.
You will be required to fill out the Loan Rehabilitation: Income and Expense Information Form and also provide the relevant documentation as proof of your expenses and income.
Benefits of Student Loan Rehabilitation
There can be some pros of rehabilitating your student loan when they are in default such as:
- You might have to make reduced payments. Since your loan rehabilitation payments are based on your discretionary income and family size, you might be required to make low payments. Some borrowers can even end up qualifying for payments that start as low as $5.
- You can also remove the loan default from your credit report unlike other ways of getting out of default which do not give you the opportunity to clean your credit report. However, when completing the student loan rehabilitation process, you can remove the loan default from your credit report.
- You would have regained the federal benefits that you would have lost when you were in default. But after successfully finishing the student loan rehabilitation program, you can be eligible for federal benefits such as income-driven repayment plans and forbearance.
- Wage garnishment, collections activity and treasury offset will end. If your loan servicer has seized your federal benefits or tax refund, they will no longer be able to do so when the loan rehabilitation process is completed successfully.
Drawbacks of Student Loan Rehabilitation
- Student loan rehabilitation programs are more of a one time opportunity as you cannot opt for the program if you fall into default again.
- It takes longer to get out of default with student loan rehabilitation. This program requires nine monthly payments within the 10 month set period before the default ends. If you want a faster method to get out of default, you might want to consider consolidation.
- Your involuntary payments would not count towards rehabilitation. If you make any involuntary payments, such as wage garnishments, they would not count towards the nine required payments that are needed for the student loan rehabilitation program.
What Happens After Student Loan Rehabilitation?
Once you have successfully completed student loan rehabilitation and you are now out of default, your loans will be transferred to a new loan servicer.
You will no longer have the same monthly payment that you had under the student loan rehabilitation agreement. Instead, your servicer will place you under a new standard repayment plan. This new monthly plan will not be based on your discretionary income which is why it might end up looking much more expensive than your student loan rehabilitation agreement.
If you cannot afford your new standard repayment plan, do not forget you are now also eligible for income-driven repayment plans. If you want to make your monthly payments more affordable, you can apply for an income-driven repayment plan.
Alternatives to Loan Rehabilitation
Even though student loan rehabilitation is a useful strategy for getting out of default, it might not be for everyone. For people who do not want to use the student loan rehabilitation program to get their loans out of default, can use these other strategies.
With loan consolidation, you are required to make three consecutive voluntary monthly payments that will be for the full required amount that is on your defaulted loan. Once you do that, you are consolidating your debt with a direct consolidation loan. You also agree to repay the new loan under an income-driven repayment plan.
So if your wages are being garnished, you will not be able to consolidate your loans until the garnishment order is lifted and the judgement has been vacated.
Loan consolidation will also not help you remove the default status from your credit report.
2. Pay the full amount.
To pay your loans in full may sound impossible but it is a way to end your default status. Some people choose to pay off their balance by borrowing money from friends or family even though there are student loan rehabilitation tax refund implications you should consider before you take this approach.
However, another way you can pay off your loans and get out of default is to refinance your loans. This is not an easy task since a student loan default can lead to a damaged credit. But if you have a cosigner who has good credit, you can both apply for another loan which you might qualify for that you can use to pay off the defaulted loans.
However, there can be drawbacks of using the student loan refinancing method.
Once you refinance your loans, they will become private loans. Which means you will permanently lose out on the benefits of a federal loan. You will no longer be qualifying for federal perks like income-driven repayment plans or federal forbearance. This is why you need to think about your options carefully before you take this approach.
The Bottom Line
So what happens after student loan rehabilitation mainly depends on you ensuring that your loan repayments stay on track. You can even consider signing up for an income-driven repayment option that would fit the size of your paycheck if that seems like a good option to you.
You can keep a track of your loans through the Federal Student Aid website so you can stay on top of what you owe. You can even choose to use a budgeting app in order to stay financially organized while making payments each month. Or you can stay in touch with your loan servicer in order to get all the relevant loan information you need to stay up-to-date with your payments.
All of these actions will only help contribute to a healthy loan repayment process that will eventually lead you to financial freedom.