Student Loan Rehabilitation: What It Is and When to Use It

Student loan rehabilitation is a one-shot opportunity for borrowers to get federal student loans out of default. Private student loans are not eligible for rehabilitation.

Rehabilitation takes longer than student loan consolidation, the other primary option for default recovery. But rehabilitation is generally the better choice because it:

• Removes the default from your credit report. This will improve your credit score, though the late payments leading to the default will remain.

• Eliminates additional collection costs. Rehabilitated federal direct loans are subject to collection costs, but those fees are not capitalized, or added to your loan balance.

You can only rehabilitate your loans once, so make sure you have a plan to continue making payments when you get out of default.

» MORE: Student loan default: What it is and how to recover

How to rehabilitate student loans

Follow these steps to rehabilitate student loans:

1. Contact your federal student loan holder. This could be a servicer, collection agency or different company, depending on your loans and how long they’ve been in default. Log in to your studentaid.gov account if you’re unsure whom to contact.

2. Agree to a payment amount. Rehabilitation payments must be “reasonable,” which usually means 15% of your discretionary income. But if you can’t afford that amount, you can request an alternative payment based on your overall finances. Alternative payments can be as small as $5 per month.

3. Sign a rehabilitation agreement. You must submit a written agreement to rehabilitate your defaulted loans. Don’t start making payments until you’ve officially started this process; they may not count toward rehabilitation.

4. Pay as required. Student loan rehabilitation requires you to make nine on-time payments — within 20 days of the due date — over a 10-month period. Payments must also be voluntary. For example, money seized from your tax refund wouldn’t count as a payment. Keep in mind that months spent in the current automatic forbearance for federal student loan borrowers count toward student loan rehabilitation.

Borrowers who successfully rehabilitated their loans

Source: Department of Education March 2022

Student loan rehabilitation calculator

What happens after student loan rehabilitation

After student loan rehabilitation, your loan is usually assigned or sold to a new servicer. All collection activities stop — though wage garnishment only ends after you make five rehab payments — and you’ll regain access to federal student aid and repayment options, such as deferment, forbearance and income-driven repayment.

» MORE: How to go back to school with defaulted student loans

Because you’re allowed to rehabilitate a student loan only once, have a strategy to afford your payments post-rehab. If you originally fell behind because payments were too expensive, selecting an income-driven repayment plan will likely be your best choice. Your new servicer will give you this option when you restart repayment.

If your plan doesn't work and your rehabilitated loan defaults again, your only option will be to consolidate it out of default — assuming it's your first time consolidating that loan. If it's not, your remaining choices are to add another loan to the consolidation or pay your full balance.