For most federal student loans, you will default if you have not made a payment in more than 270 days. Defaulting on a student loan can have a number of negative consequences, including reduced credit scores, assessment of collection costs, loan acceleration, wage garnishment, and seizure of your tax refunds. If you have already defaulted on your loans, don’t despair; you have options to get them out of default, including repaying the loans in full, consolidating the defaulted loans, and loan rehabilitation.
To rehabilitate a federal loan, you typically must make nine consecutive timely payments that are considered to be reasonable and affordable. Effective July 1, 2014, payments calculated under the income based repayment plan formula (subject to a minimum monthly payment of $5) are considered to reasonable and affordable for this purpose.
Your loan is rehabilitated only after you have voluntarily made the agreed-upon payments on time and the loan has been purchased by a lender. Outstanding collection costs may be added to the principal balance.
Note: Payments that have already been collected from you—for example, through the Administrative Wage Garnishment (AWG) process or through legal action taken against you to collect your defaulted loan—do not count toward your rehabilitation payments. (Through AWG, payments will be deducted from your wages until your defaulted loan is removed from default status.)
Once your loan is rehabilitated, you may regain eligibility for benefits that were available on your loan before you defaulted. Those benefits may include deferment, forbearance, a choice of repayment plans, loan forgiveness, and eligibility for additional federal student aid.
Other benefits of loan rehabilitation include the removal of
- the default status on your defaulted loan,
- the default status reported to the national credit bureaus,
- wage garnishment, and
- any withholding of your income tax refund made by the Internal Revenue Service (IRS).
After rehabilitation, your monthly payment may be more than the amount you paid while you were rehabilitating your loan. Collection costs may be added to your principal balance, increasing the total amount you owe. Delinquencies (late payments) reported before the loan defaulted will not be removed from your credit report.