Student Loan Rehabilitation is not a phrase you like to hear when talking about college loan repayment, because it suggests that the repayment part hasn’t been happening and the loans have gone into default. If a student has not made monthly payments, and the loan holder has made a good faith effort to make contact and collect on the loan, then after 270 days, the loan may be placed into a default status.
Once in default, several things may happen. The loan may be “accelerated”, which means that the entire loan, including principal and interest becomes due in a single payment. Also, you will no longer entitled to any deferments or forbearance. If you are in default on any Title IV student loan, you will not be eligible for any additional Title IV federal student aid until you have made at least six consecutive months of acceptable payments.
Next, the guaranty agency will attempt to get payment in several ways. State and federal income tax refunds may be taken as well as a portion (15%) of any Social Security benefits that may be involved. If you are a Federal employee, they may garnish 15% of your disposable pay directly. Private employers may also be required to deduct this from your paycheck. Collection efforts will continue either by assigning your debt to a collection agency, or even taking legal action against you.
Beyond all that, credit agencies will be notified of the default and your credit rating will suffer. Negative credit ratings can stay on your credit report for up to seven years and will adversely impact your ability to get loans or credit.
Loan rehabilitation means bringing your loan out of default and getting back to regular on time payments. For FFEL or Direct Student Loans, this means making at least nine monthly payments within twenty days of the due date within ten months to the Department of Education. Once this happens, your loan may be sold back to an eligible lending institution. For Perkins Loans, you will need to make twelve on time, monthly payments before the loan is brought out of default. You will continue to make payments to the Department of Education until the loan is paid off.
Avoid default at all costs. If you find yourself unable to make your monthly payments, contact your lender. They may be able to assist you in finding a way to keep your loans current. If you qualify, forbearance or deferment may apply to you. These would both allow you a period of time without making payments.
If not qualified for deferment or forbearance, you may still have a couple of alternatives that will keep you from default. You may be able to choose a plan that bases payments on a percentage of you total income. If you’ve taken a low paying job, this may help you by lowering your payments to an affordable amount.
Another possibility is a graduated payment plan, which allows you to begin with a lower payment which will rise as time goes on. Since your salary should increase over time, this may be another good option.
If you haven’t already done so, then consider a student loan consolidation. Consolidating can often lower your payments through a lower interest rate and by extending payments over a longer period of time.
The key to student loan rehabilitation is avoiding it. Contact your lender as soon as you realize you are going to fall behind. Also, let them know if anything changes in your life, like your address or school. It is in their best interests to help you keep up your payments, but they can’t if you don’t keep them updated.