2 Ways To Rehabilitate Your Federal Student Loans

2 Ways To Rehabilitate Your Federal Student Loans

By |September 26th, 2013|

federal student loan rehabilitationIf your federal student loan is in default, there are ways to get things back on track.

A defaulted federal student loan can leave you open to collection activities, not to mention that it can seriously impact your credit score.

Luckily, the federal government gives you some very good options for rehabilitating your student loans and getting your life back on track.

Here are the two major ways of rehabilitating.

Federal Student Loan Rehabilitation

You can rehabilitate your federal student loans by making 9 consecutive monthly payments over a 10 month period of time.

Your payment amount will be what is considered, “reasonable and affordable,” but that figure is largely up to your negotiations with the collection agency handling your federal student loan account. We’ve been successful in getting some excellent deals for our clients, but I’ve heard about lots of people who go it alone and end up with payments that are too high.

Once you’ve finished making your monthly payments, your loan will be considered in good standing.

Direct Loan Consolidation

You may also decide to consolidate your federal student loans as a way to rehabilitate them. You can do so if you agree to repay the loans under either the Income Contingent or Income Based Repayment Plan, OR make satisfactory repayment arrangements with the current loan holder.

Which Is Better, Rehabilitation Or Consolidation?

Both rehabilitation and consolidation will yield the same end result – a loan in good standing.

That said, there are benefits and drawbacks to going either way.

Credit Report Issue: If you consolidate a defaulted federal student loan, your credit report will show that the loan was in default before being paid in full. If you rehabilitate, however, the negative notation will be removed once you make your final rehabilitation payment.

Timing: Rehabilitation requires that you make at least nine (9) full payments of an agreed amount within twenty (20) days of their monthly due dates over a ten (10) month period. Consolidation, on the other hand, takes about 30-60 days to complete.

Which is more important to you, the speed of the process or the hit on your credit report? Best to sit down and figure it out together.

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About the Author:

I've been a consumer protection lawyer since 1995, working to help people end their bill problems. I'm a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.