How to Use the Federal Student Loan Rehabiliation Program to Get Your Loans Back on Track!

The Federal Student Loan Rehabilitation Program offers borrowers who have defaulted on their student loans a way to get out of default, and back into repayment, but it does something even better than that, because it also removes the default status from your credit report as well.

In fact, if you’re trying to choose between Federal Student Loan Consolidation and Rehabilitation, then this is one of the biggest issues to consider: while a consolidation can bring your loans out of default status, it won’t repair your credit.

On the contrary, a rehabilitation will accomplish both goals, getting your loans out of default and back into repayment status, while also repairing your credit score by removing the default from your credit report.

For that reason alone, I recommend pursuing a rehabilitation over a consolidation, especially if you care about your credit score, or need it to be good to access other types of lending (mortgages, car loans, etc.).

Quick Links to the Specific Rehabilitation Topics

To help you quickly get to the information you really want, here’s an outline of all the topics covered in this comprehensive guide to rehabilitation:

If you have any other questions about the rehabilitation process, or student loans in general, you can post them in the Comments section below and I’ll do my best to get you a response within 24 hours.

Get Help With Your Loans!

If you're truly struggling with student loan debt, then you should consider paying a Student Loan Debt Relief Agency for help. Why? Because the people working at these companies deal with student loans all day, every day, and they're your best chance at figuring out how to get your loans back under control.

For help with Federal Student Loans call the Student Loan Relief Helpline at 1-888-906-3065. They will review your case, evaluate your options for switching repayment plans, consolidating your loans, or pursuing forgiveness benefits, then set you up to get rid of the debt as quickly as possible.

For help with Private Student Loans call McCarthy Law PLC at 1-877-317-0455. McCarthy Law will negotiate with your lender to settle your private loans for much less than you currently owe (typically 40%), then get you a new loan for the lower, settled amount so you can pay off the old loan, repair your credit and reduce your monthly payments.

I've spent 10 years interviewing debt relief agencies, talking to all sorts of "experts", and these are the only two companies that I trust to help my readers. If you have a bad experience with either of them, please make sure to come back and let me know about it in the Comments!

What are the Benefits of Rehabilitation?

There are huge benefits to rehabilitating your Federal student loan, the biggest of which is that it removes your loan from default status, and places you have into repayment.

Some people may not think that’s a big deal, but one little known fact is that rehabilitating your loan instantly restores your eligibility for all of the amazing Federal Student Loan Forgiveness, Discharge, Defertment & Forbearance benefits that aren’t available to people with loans in default.

And that’s not all, because rehabilitating a Federal student loan also offers the following additional benefits:

  • Rehabilitating a loan gets it out of default, which restores your eligibility to take out new Government-backed loans, grants, and other forms of Federal financial aid.
  • The loan default is removed from your credit report, improving your credit score and making you eligible for things that require good credit, like car loans, apartment rentals, jobs, etc.
  • As soon as you’ve finished rehabilitating your loan by making the required 9 monthly, reasonable, and affordable payments, you’ll once again be eligible for Federal financial assistance.

But it’s not all sunshine and lollipops in the land of rehabilitation either, because there are some limitations to the process that you’ll want to be aware of before deciding that this is the right move for you.

What are the Limitations of Rehabilitation?

Every cloud has a silver lining, but every rainbow also has a darkside as well, and there are a few limitations to the Federal loan rehabilitation process that you’ll want to think about before pursuing this path.

Make sure to keep the following in mind before initiating the rehabilitation process:

  • Rehabilitation can only be done once per loan. The exception to this rule is if you rehabilitated a loan prior to August 14, 2008. If you did, you can rehabilitate that loan one more time.
  • Lenders typically add collection costs to the new loan balance, but as of a new rule established in July, 2014, they can only add up to 16% of the unpaid principal and accrued interest at the time of the sale of the loan.
  • The Department of Education claims it won’t charge fees for Direct Loans, but allows student loan servicers to charge fees if they want to, so make sure to ask if you’ll have any fees added after your rehab is complete.

These three limitations are vital to understand before agreeing to rehabilitate your loans, because the repercussions can be dramatic, so don’t start the process until you’ve considered and research each of these to make sure that they won’t ruin things for you.

How to Get Started Rehabilitating Your Loan

You’ll need to request student loan rehabilitation from your loan holder. This is typically going to be a collection agency since your loan has to be in default to rehabilitate in the first place, but sometimes it’ll be your loan servicer, especially if you act immediately after defaulting, and before your loan gets sold to a debt collection agency.

Keep in mind that collectors may try to make you pay an unaffordable amount in order to rehabilitate the loan, but that Federal law regulating the rehabilitation process states that you only have to pay “what is reasonable and affordable”.

And while there isn’t a definition of what “reasonable and affordable” means, there is also no minimum amount the loan holder must charge you to allow you to rehabilitate, so don’t let them trick you into thinking you have to pay at least $XXX, as this is untrue.

It’s basically a negotiable amount that you can work out with the loan holder, and which you’ll need to argue heavily in order to get the best deal.

One final thing to keep in mind is that your loan holder must discuss the pros and cons of loan rehabilitation and loan consolidation with you, as long as you ask for the information, and they’re obligated to tell you the truth about everything too.

How The Loan Rehabilitation Process Works

I’ll explain this process in two ways; first, the quick and dirty version, which is just the overview summary of how loan rehabilitations work, and then secondly, the loan and detailed version, which goes through everything comprehensively.

The Quick Explanation of How Loan Rehabilitation Works

In order to rehabilitate a defaulted Federal Direct or FFEL loan, you must make 9 monthly payments within 20 days of their due date, over a 10 month consecutive period of time.

It’s 10 months rather than 9 months because there’s a “9 out of 10” rule, which says that you can miss one month as you’re attempting get your loans back out of default. Basically, you get a little wiggle room.

Active duty military personnel are allowed to interrupt the 10 month consecutive period and then pick it up again after they come back from active duty, but everyone else has to abide by the 10 consecutive months requirement.

Rehabilitation for Perkins Loans is a bit different and requires 9 monthly payments over a 9 month consecutive period (meaning you can’t miss a single payment for 9 months straight).

Once you’ve successfully issued those 9 payments in full, and on time, within the 10 consecutive months period, your loans are taken out of default and placed back into repayment.

The Comprehensive Explanation of How Loan Rehabilitation Works

First, everything I wrote above in the Quick Explanation still applies, but now, let me add a few details to the process so that you can understand all the little nuances of how this rehabilitation thing works:

  • If you decide to rehabilitate your defaulted loans, your loan holder is going to determine how much those 9 monthly payments should be using a formula  that calculates your payment at 15% of your disposable income, which is similar to the formula used to determine payment amounts under the Federal Student Loan Income-Based Repayment Plans. Note that you’re not actually getting enrolled in an IBR plan at this point, but that the lender is just using an IBR formula to figure out what you’re monthly payments should be set at. After your Direct Loan is successfully rehabilitated, you’ll then be allowed to choose to enroll in whichever Federal Student Loan Repayment Plan you want to use.
  • If you’re not happy with paying 15% of your disposable income and want it lowered you can use this form to provide more detail about your unique financial situation, but keep in mind that you lender will have to approve your application, and that you’ll need to be extremely clear about why that 15% amount of disposable income is unaffordable for you.
  • Obviously, in order to do all this loan holder will need your AGI (Adjusted Gross Income) in order to determine what 15% of your disposable income actually is, so make sure that you can provide your lender with proof of income before you even ask them to help you go through the rehabilitation process.
  • If your loan holder suggests that you make a “good faith” payment prior to the submission of your documentation, it’s up to your whether you want to make it or not. Some lenders make it sound like this is required, but you are not required to make a “good faith” payment in order to apply for loan rehabilitation. If you do make the “good faith” payment, however, then make sure that it is set to an amount at least as much as your required 9 monthly loan payments, and demand that it be counted as the first monthly payment, otherwise you’ll end up paying more than you really had to – the “good faith” payment, PLUS the 9 monthly payments required for rehabilitation.
  • Within 15 days of coming to an agreement with your loan holder on an affordable monthly repayment amount, you’ll receive a written version of the agreement which you’ll need to sign and return. This is like a contract stating that you’re entering the rehabilitation process, and that you agree to make those 9 monthly payments in full and on time, and that in return for doing that, your lender is going to move your loan back into repayment.
  • Borrowers who are having their wages garnished can have the garnishment lifted after they make five monthly payments toward the rehabilitation. Don’t forget to disclose the fact that you’re wages are being garnished during your initial conversation with your lender so that this is taken into account when your loan holder determines what’s an affordable payment for you.
  • Keep track of when your 9 monthly payments are finished and your loan is supposed to come out of default. At this point you are able to choose from any of the repayment plans that were available to you prior to the default, and you’ll want to have a plan in place for which repayment plan you’re going to use as soon as you’re eligible.
  • After your loan is rehabilitated you will probably get assigned a new loan servicer. Ask your loan holder who that is going to be and then contact them in advance, while you’re working on making the 9 required loan payments so that you can arrange to get on the best repayment plan for your financial situation as soon as you’re eligible for it.

Rehabilitating Specific Types of Federal Loans

One interesting thing about the loan rehabilitation process is that there are some slight differences in the way it works for different Types of Federal Student Loans, so before you start your rehab, make sure to review the following list of loan types to determine exactly how your rehabilitation will go.

Rehabilitating an FFEL Loan

The process of rehabilitating an FFEL loan is the same as I’ve outlined above, and everything that you do will be identical to other types of loans, but the collection agency has an extra requirement tacked onto their part of the process once your rehabilitation is complete.

After an FFEL loan rehabilitation, the loan guarantor is required to find a buyer for the loan, which means that they need to transfer ownership of your loan from themselves to someone else, typically one of the big Federal Student Loan Servicing Companies.

However, this process can take time, and that’s something you’ll need to prepare for, because until your collection agency finds that new lender, you’ll be forced to continue making payments to them.

Eventually, they do need to get your loan transferred to a traditional servicer, and then you’ll handle everything related to your debt through that servicer instead of the collection agency.

Some people have reported waiting weeks, or even months for their new servicer to be arranged, but be aware that this process is supposed to be handled quickly and make sure that your collection agency is aware that you know these rules, otherwise they may try to drag their feet.

Rehabilitating a William D Ford (Direct) Loan

Everything is the same as I’ve outlined above for William D Ford (Direct) Loans Rehabilitation, except that there’s no “resale requirement” for Direct Loans, so the collection agency could keep the loan and continue to take payments from you for as long as they’d like.

However, they’re no longer in charge of setting the payment amounts, because as soon as your loan has been rehabilitated, you immediately become re-eligible for federal student loan benefit programs, including all of the different repayment plans.

If you’re going to rehabilitate a Direct loan, what you’ll want to do in advance is to review all of your repayment plan options so that you know which one will work best for you after the rehabilitation is complete, and as soon as that happens, you’ll want to enroll in that plan to make sure you’re getting charged the lowest monthly payment possible.

While you’re going through the rehabilitation process, what you should do is make your collection agency aware of your intention to sign up for whichever repayment plan you’ve chosen as being the best for your unique situation.

Rehabilitating a Federal Perkins Loan

Perkins Loans are exactly the same as everything I’ve outlined above, except for the aforementioned rule that rehabilitating a Perkins loan requires making 9 out of 9 payments, rather than 9 out of 10.

For whatever reason, Perkins loans are slightly harder to rehabilitate, requiring the “9 out of 9” rule, which means you can’t miss any of those payments if you want to get your loan back out of default status.

Student Loan Rehabilitation FAQ

Have questions about any specific parts of the student loan rehab process? If you don’t see yours listed below, please post it in the comments section so I can get you a response.

Can I Rehabilitate a Defaulted Private Student Loan?

Maybe, but it depends. Private Lenders can do whatever they want with defaulted loans, and while some of them do offer rehabilitation programs, this is relatively rare.

If you default on private debt, it’s much harder to get your loan back into repayment. If this is the situation you’re facing, please visit my page on Getting Help with Private Student Loan Defaults.

Will My Loan Holder Continue Collecting From Me After I Agree to Rehabilitate my Defaulted Loan?

After you sign a rehabilitation agreement your loan holder can only collect from you if it’s required by law.

Make sure that you understand what you’re actually required to be paying them, and if there’s any doubt, consult with an attorney, the Department of Education, or some other group or individual who knows the rules.

Don’t let them push you around or bully you into making payments that you don’t actually owe!

My Lender Refuses to Agree to an Amount That’s Affordable For Me. What Should I Do?

Under the laws governing the federal loan rehabilitation process, you have a right to affordable monthly payments calculated according to the IBR 15% formula I mentioned above.

Make sure that the lender knows that you know this, because some of them will push people around and try to get away with charging extra amounts.

If the lender continues to give you trouble over this issue, try contacting the Student Loan Ombudsman Group at the Department of Education to ask for their assistance. This is a free service provided by the Federal Government who can advocate on your behalf.

Will There Be Collection Fees For My Loan Rehabilitation?

Yes. After you’ve completed the rehabilitation process, and the collection agency resells your loan to a traditional lender, they’ll be able to charge up to 16% of the principal balance of your loan, plus 16% of any accrued interest, which can end up being a substantial amount of money.

However, you should be aware that this is the absolute limit of what they’re allowed to charge, so if they try to come after you for 17%, 25%, or anything more than that, then they’ve violating Federal law.

Once more, I recommend making sure that you know all these laws, but also making that clear to your loan holder during the rehabilitation process, because you don’t want them trying to get away with anything, and adding more stress to an already difficult situation.

Do I Have to Use the IBR 15% Formula to Calculate My Loan Payment Amounts During Rehabilitation?

No, there is another option, but it’s significantly more complicated, and I’d only recommend doing this if you really have a good feel for how all this stuff works.

You could opt to have your payments set by using the Internal Revenue Services (IRS) expense standards to determine acceptable expenses, but you’ll also be forced to set limits to certain expenses, based on IRS rules.

Why would you want to do this? Because any expense that isn’t listed in the IRS expense form doesn’t have a set limit.

For example, medical expenses aren’t listed on the form and therefore don’t have a limit, so if you’re already paying massive medical bills, this can increase your expenses far beyond what the IBR 15% formula would use, and you may end up with a much cheaper monthly payments because of that consideration.

If I Use The IRS Expense Form, How Will My Payment be Figured?

The Department of Education will set your payments using a similar process as the traditional 15% IBR formula, but the difference is in the way that they calculate what your discretionary income actually is.

Under the standard 15% IBR formula, your discretionary income is whatever’s left over from earnings after payroll taxes and basic living expenses have been subtracted from your income.

Under the iRS Expense Form, your expenses can vary wildly (like I mentioned above in the medical bills example), so while you’ll still be paying 15% of discretionary income, if you can prove your expenses are much higher than the standard discretionary income calculation would produce, then you could end up with a much lower monthly payment.

Once again, this is a complicated process, and one that you shouldn’t enter into lightly. I would recommend having an attorney, financial planner, or even a CPA review your plan before you decide to move away from the standard 15% IBR formula, because in many cases, it won’t be in your best interest.

Where Can I Go For Other Questions?

If you have questions about other topics related to student loans, student loan debt, or student loan debt relief, please take a look around my site, as I’ve created guides like this one for all sorts of additional topics.

For Assistance with Federal Student Loans, check out my pages on Forgiveness For Federal Student Loans, Borrower’s Defense To Repayment Discharges, the Closed School Loan Forgiveness Program, Bankruptcy Forgiveness For Federal Student Loans, Federal Student Loan Consolidation, Federal Student Loan Delinquency & Default Help, and Federal Student Loan Repayment Plans.

For Assistance with Private Student Loans, see my pages on Private Student Loan Forgiveness, Consolidating Private Loans, Private Student Loan Bankruptcy Discharges and Private Student Loan Default Assistance.

Finally, make sure you also visit the official Department of Education website devoted to helping student loan borrowers get out of default, as this is one of the best resources on the web for assistance with this problem.

If you have any further questions about federal student loan rehabilitation please leave them in the comments section below and I’ll get you an answer as soon as possible.

Disclaimer:Information obtained from Forget Student Loan Debt is for educational purposes only. You should consult a licensed financial professional before making any financial decisions. This site receives some compensation through affiliate relationships. This site is not endorsed or affiliated with the U.S. Department of Education.


Tim's experience struggling with crushing student loan debt led him to create the website Forget Student Loan Debt in 2011, where he offers advice, tips and tricks for paying off student loans as quickly and affordably as possible.