Around 8 percent of student loan debt, on average, is in default at any given time. With the end of the three-and-a-half year pandemic-related payment pause and the Department of Education’s “on-ramp” to repayment ending September 30, 2024, that number is sure to grow. Fortunately, borrowers with defaulted loans have options in dealing with this situation.

Understanding Default

Defaulting on your student loan is something more than just missing a couple payments. Once a payment is missed, that loan is deemed “delinquent”. If the servicer doesn’t receive payment within 90 days, the delinquency is reported to the credit bureaus, impacting the borrower’s credit score. After 270 days (nine months) without payment, then a loan officially goes into “default” status. And the consequences of defaulting on a loan can be disastrous.
 

What happens when a loan enters into default?

• Loan is assigned to a collection agency, which means an abundance of phone calls and letters to borrowers.
• Credit scores are significantly impacted, affecting your ability to get an auto loan, mortgage, credit card, or even rent. If you are able to get er interest rates if you do manage to get a loan.
• The entire outstanding loan balance becomes due immediately. This balance continues to collect interest and late fees, which can add years to your repayment schedule.
• Eligibility for loan benefits, e.g., additional student aid, deferment, payment forbearance, loan forgiveness, and even tax benefits, is lost, making it even more difficult to catch up on payments than before!
• Wage garnishment and/or tax offset
• Legal action: Lenders may sue borrowers to collect garnished wages. You may then also be charged for any court or lawsuit-related costs.

What is Loan Rehabilitation?

Loan rehabilitation is a one-time opportunity to get your loan out of default status by making nine payments in a ten-month period (which means you can miss one payment over the course of ten months). Best of all, these will be reasonable payments based on your current financial situation. Your loan servicer will calculate a monthly payment amount equal to 15% of your discretionary income (the same formula that would be used to calculate an income-based repayment plan.) If that’s still too high, with appropriate documentation of your income and expenses, you can ask them to recalculate a lower amount, which could be as low as $5! Make this new, lower payment for nine out of ten months, and your loan will come out of delinquent status.

At that point, if you’ve been facing wage garnishment and tax offsets, those will stop. Your default will even be removed from your credit history! (Any late payments you made will remain in your credit report, but the more serious notation of “default” will be removed.) To keep you in good standing, you’ll once again be eligible for loan modification and payment plans, along with any forbearance, deferment, or forgiveness options that were lost because of default.

Once your loan is rehabilitated, you’ll be working with a new loan servicer, so you’ll want to be sure to discuss all of your available options with that new servicer to be sure you stay on top of your new payment plan because you will not get this opportunity again. Loan rehabilitation is a one-time option, and you will not be permitted to enter into a loan rehabilitation agreement again.

There are a few exceptions to this: If you rehabilitated a loan before August 14, 2008, though, you will have the chance for loan rehabilitation just one more time. If you get out of default through Fresh Start, it will not count as your one opportunity. (More on that below.)

If loan rehabilitation sounds like the path you need to get your student loan out of default and stop collections activity, wage garnishment, and all the other negative effects of default, contact us now!

We’ll guide you in contacting your loan servicer or collection agency to get the loan rehabilitation process started. You’ll enter into a written agreement to make nine affordable payments over the course of ten months. You’ll make each of those nine payments within 20 days of the due date. Your default status will be removed, and you’ll be eligible to negotiate a new payment plan. You’ll even be eligible again for further loans and federal student aid!