Student Loan Rehabilitation: How To Get Out of Default

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Student loan rehabilitation is one way to get your federal student loans out of default status. If you’re currently trying to get student loan relief but aren’t eligible for any programs because you’re in default, student loan rehabilitation may be exactly what you need for your fresh start. To get your student loans rehabilitated and out of default, you need to contact your loan servicer, create a payment plan, complete the required paperwork, and make a certain number of monthly payments.

Written by the Upsolve Team. Legally reviewed by Attorney Andrea Wimmer
Updated July 28, 2023

When Does a Student Loan Go Into Default?

If you miss one student loan payment, your loan won’t usually fall into default status right away. First, your loan will be considered past-due — also called delinquent. If you make up the missed payment or arrange something with your lender, you can get out of delinquency. If you continue to miss payments for multiple months, you risk going into default.

The timeline for this varies based on the type of loan you have:

• For many private student loans, your loan goes to default status when your payment is 90 days delinquent. At that point, your loan servicer will report your default to the major credit reporting bureaus, which can cause your credit score to fall.
• If you have a federal Direct Loan, Direct Consolidation Loan, or Federal Family Education Loan (FFEL), you get 270 days before your loan falls into default after missing payments.
• If you have a federal Perkins Loan, your loan holder may deem your loan “in default” after just one missed payment.
  • For a Perkins Loan, a missed payment is a payment made after the due date — even by just one day.

  To learn more about the difference between delinquency and default and how they work with different types of loans, read our article: Student Loan Default: What Is It? What Can I Do About It?

  How Do You Rehabilitate Student Loans?

  To rehabilitate your federal student loans, you need to gather some information about your income, figure out who your current loan holder is, call them, sign papers, and make on-time payments.

  Here’s an in-depth step-by-step guide to rehabilitating your defaulted student loans.

  Step 1: Gather Information: Figure Out Who Your Loan Holder Is & Find Your Recent Tax Return

  To start the rehabilitation process, you first need to identify the company holding your loan. It’s not uncommon for the Federal Student Aid office to transfer a federal loan from one company to another. Also, your loan holder may or may not also be the loan servicer.

  What’s the difference?

  • A loan holder owns your loan (and may or may not do the work of managing or “servicing” it).
  • A loan servicer manages the paperwork related to your loan and is often the point of contact for student loan borrowers.

  If your loan holder and servicer aren’t the same company, the Federal Aid office recommends contacting the loan holder for student loan rehabilitation. The easiest way to figure out your loan holder is by logging in to your account on StudentAid.gov to see the details on your loan. You can also call the Federal Student Aid Information Center (FSAIC) at 1-800-433-3243.

  Before you call your loan holder to discuss rehabilitation, you’ll want to find your most recent tax return or pay stubs. The lender will ask about your income and family size to calculate your new payment under the rehabilitation repayment plan.

  Step 2: Tell Your Loan Holder You Want a Rehabilitation Plan and Discuss Payments

  When you talk to the loan holder (lender), tell them you’re interested in loan rehabilitation. They will ask you for information about your household size and income to determine your discretionary income. To determine your rehabilitation monthly payment amount, they look at your adjusted gross income (AGI). This amount should be on your latest tax return.

  How Your Repayment Amount Is Calculated

  To figure out your rehabilitation payment, the lender will consider your income and family size and compare it to the poverty guidelines for your state. There’s a complicated formula to figure out your monthly payment. You don’t need to understand it to apply for rehabilitation, but if you’re curious, here’s how it’s calculated:

  If you have a Federal Family Education Loan (FFEL) or a federal Direct Loan, the lender will:

  • Calculate 150% of the federal poverty guideline for your household size
  • Subtract your adjusted gross income (AGI) from that number
  • Multiply that by 15%
  • Finally, divide that number by 12 to determine a monthly payment amount

  If the amount is less than $5.00, you’ll only have to pay $5.00 per month. This calculation is regulated under a federal law called the Loan Rehabilitation Agreement. If you think the amount is too high, you can ask for a lower rehabilitation payment. The goal is to get a monthly payment you know you can make so you can finish the rehabilitation program and get out of default.

  Remember: If your wages are being garnished or if the IRS keeps your tax refund for overdue student loan payments, these payments are not considered loan rehabilitation payments! Once you make five out of the 10 required payments, you should be able to stop the wage garnishment. Tell your loan holder if your wages are being garnished.

  Step 3: Sign Your Payment Agreement and Mail the Documents

  The loan holder will take information over the phone, but you’ll have to mail in proof of your income. If you want to request a lower payment, you’ll have to complete a Loan Rehabilitation: Income and Expense Information form and fill out more information about your expenses. You’ll have to agree to a monthly payment plan and confirm the agreement in writing.

  Within 15 days, the loan agency will send you a written rehabilitation agreement with a confirmation of your rehabilitation agreement. The agreement will contain a deadline to object to or confirm the rehabilitation agreement. It’s important to respond to confirm or reject! If you miss the deadline, the rehabilitation agreement won’t go forward.

  Step 4: Make Your Rehabilitation Student Loan Payments

  If you have a federal Direct Loan or FFEL, you have to make nine out of 10 student loan payments to get your student loan rehabilitated. These must be made within 20 days of the due date. (A Perkins Loan requires nine consecutive months of payments to be made within 20 days of the due dates.)

  If your wages are being garnished because of student loan default, you should be able to stop the wage garnishment after you make five out of 10 payments.

  If you have a change in your financial circumstances, you can request a change in your monthly payment amount, but you’ll have to submit documents for proof. (Request a change before the payment due date!)