On This Page: Consolidation to Get Out of Default Rehabilitation to Get Out of Default Rehabilitation Tips and FAQs

There are fewer, but still some, ways to set up a new repayment plan after you have defaulted on your loan. If you are able to get out of default through rehabilitating or consolidating your loans, you will once again be eligible for the more flexible pre-default repayment options as well as deferments.

The two main post-default repayment programs for government loan borrowers are consolidation and rehabilitation. Consolidation with the Direct Loan program is a particularly good option, especially for low-income borrowers, because it allows borrowers to repay through the income contingent repayment plan. You should also think about whether you have enough money to settle your student loan debt.

As you think about these programs, try to be realistic about whether you can afford to make even very small payments each month. If at all possible, you want to avoid rehabilitating or consolidating your defaulted loans and then defaulting again because you are unable to meet your new obligations. This is especially important if you choose to consolidate your defaulted loans. In most cases, you will not be able to consolidate again if you default on a consolidation loan.

CONSOLIDATION TO GET OUT OF DEFAULT

Click here to review the pros and cons of consolidation and to find out more about how it works. This section contains information about how to consolidate if you have already defaulted on your loans.

Consolidation works well for many borrowers with defaulted loans. After obtaining a consolidation loan, you get a fresh start, becoming eligible for new loans, grants, and even deferments. You will no longer be listed as currently in default on your credit records, and no longer subject to tax intercepts, garnishments, or other collection efforts.

The government loan consolidation programs are especially helpful because you can choose one of the income-dependent repayment plans.

WARNING: It is very dangerous to consolidate federal loans into a private consolidation loan. This is because you will lose your rights under the federal loan programs once you choose to consolidate with a private lender. These include deferment, forbearance, cancellation, and affordable repayment rights. Also, federal consolidation loans generally have lower interest rates.

Federal Consolidation Loans for Borrowers in Default

FFEL consolidation allows borrowers in default to either make three affordable monthly payments or agree to an Income Sensitive Repayment plan. Direct Consolidation allows defaulted borrowers to make three reasonable and affordable monthly payments or agree to pay under Income Contingent Repayment plan (ICRP).

If you have outstanding balances on Direct Loans, you are eligible for Direct Loan consolidation. You are also eligible if you have only FFEL loans as long as you meet one of the following two conditions: 1) You must be unable to obtain a FFEL Consolidation loan or 2) unable to obtain a FFEL Consolidation loan with acceptable income-sensitive repayment terms. To meet this second condition, you must also be eligible for the Income Contingent Repayment Plan (ICRP). You will have to fill out this form to apply for an ICRP. Despite what a FFEL lender might say, you do not have to actually apply for a FFEL consolidation loan before applying for a Direct Loan consolidation.

You will run into problems if you defaulted on a consolidation loan and now want to consolidate again. If you defaulted on a FFEL consolidation loan, you may consolidate with the Direct Loan program, but only if you are selecting an ICRP. If you defaulted on a Direct consolidation loan, you cannot consolidate again with either program unless you are adding new loans to the consolidation. But all is not lost. You can look into getting out of default by rehabilitating your loan. Once the rehabilitation process is over, you will be eligible once again to consolidate.

REHABILITATION TO GET OUT OF DEFAULT

You can renew eligibility for new loans and grants and eliminate the loan default by “rehabilitating” a defaulted loan. To qualify for FFEL or Direct Loan rehabilitation, you have to make nine monthly payments within 20 days of the due date during a period of 10 consecutive months. The Perkins program has separate rules.

The 9 out of 10 rule basically allows you to miss your payment one month, but still be eligible to rehabilitate.

If you are rehabilitating a FFEL loan, the guarantor must attempt to find a lender to purchase the loan after you have made the required payments. Once rehabilitation is complete, the loan is removed from default status and you are eligible for new loans and grants. The default should be removed from your credit record.

How to Rehabilitate Your Loans

You will need to request rehabilitation from your loan holder. You may be dealing with a collection agency. Regardless of who you are dealing with, you should insist on getting the agreement in writing. Be sure and read everything before signing.

The main item to negotiate is how much you will have to pay every month. Your loan holder may tell you that you have to pay an amount beyond what you can afford. This is wrong. The law says that you only have to pay what is reasonable and affordable for you. There is no minimum amount that the loan holder must charge.

Common Rehabilitation Problems The papers that the loan holder wants you to sign may say that the agreement is canceled if any payment is late. (see sample). This is wrong. You must make nine timely payments in a ten month period. You may be late one month and still qualify for rehabilitation. You may successfully make it through the rehabilitation process only to find that the loan holder has put you in a standard repayment plan with payments that you cannot afford. You should carefully track when the rehabilitation period is over. Once you have rehabilitated, your loan is out of default and you are eligible for any of the pre-default flexible repayment plans as well as consolidation. Arrange for an affordable repayment plan with your lender so that the transition out of rehabilitation is as smooth as possible.

REHABILITATION TIPS AND FAQs

Q: Can my loan holder charge collection costs after I rehabilitate my loans?

A: Yes, but no more than 18.5% of the unpaid principal and accrued interest at the time of the sale of the loan.

Q: Can my loan holder continue to collect even after I have signed a rehabilitation agreement?

A: Yes. To avoid this problem, you should insist that the loan holder agree in writing to stop all collection efforts other than routine billing while you are current on your rehabilitation payments.

Q: Do I have the right to rehabilitate defaulted private loans?

A: Only if your private lender has a rehabilitation program. Most do not.

Q: What if my lender won’t agree to a rehabilitation payment amount that I find reasonable and affordable?

A: The lender will probably say that minimum payments are required so that the lender can sell your loan at the end of the ten month rehabilitation period. Private collectors will almost always tell you this because they only get paid a commission if they set up rehabilitation plans where borrowers pay certain minimum amounts. Despite what they tell you, you have the right to pay only what is reasonable and affordable. Although this is difficult, the best way to deal with this problem if it arises is to tell the lender that you are aware of your right to a reasonable and affordable payment plan and to keep pushing until they give it to you. You should be prepared to provide detailed documentation of your income and expenses. If you still don’t get anywhere, you should try contacting the Department of Education ombudsman office or one of the guaranty agency ombudsman offices. If you still can’t get anywhere, you might consider contacting a lawyer.