Federal regulations define default as “the failure of a borrower to make an installment payment when due or to comply with other terms of the promissory note or written repayment agreement.” Unfortunately, those who default on federal student loans eventually find that their credit profile has also been adversely affected due to the required reporting of late payments to a borrower's credit profile.
The causes of default vary. In some circumstances, student loan borrowers having trouble making payments are simply too embarrassed to call their lender and ask for help to find out their options. Occasionally, borrowers do realize they are missing payments but also assume everything will be fine as long as they bring their loan current upon becoming financially stable. Others are not aware of the provisions in their promissory note which states you must contact the lender every time there is a change of address in order to ensure that the lender knows where the borrower wants to be billed for their loans. Not receiving a bill in the mail does not justify a borrower missing a scheduled loan payment.
The good news is that damage done to your credit profile for late payments on certain types of federal loans can be remedied. All it takes is communication with your lender on those loans and a commitment to make all future payments on time.
What is rehabilitation?
Rehabilitation is a process by which a borrower may bring a Federal Title IV Student Loan, such as a Perkins or a Direct Loan, out of default by complying with specified federal repayment requirements. A loan is rehabilitated if the borrower requests rehabilitation and then makes an on-time, monthly payment as determined by the lending institution each month for nine consecutive months.
Within thirty days of receiving the borrower’s ninth and final on-time consecutive monthly payment, the institution will:
- Return the borrower to regular repayment status
- Treat the first payment made under the nine consecutive payments as the first payment under the ten-year repayment maximum
- Instruct any credit bureau to which the default was reported to remove the default from the borrower’s credit history and update the credit report
In accordance with federal regulations, a borrower is allowed to rehabilitate a qualified defaulted loan one time only. Once rehabilitated, that loan will no longer be eligible for any future rehabilitation if the borrower happens to default on it again.
How do I rehabilitate my student loan?
Here are basic steps a borrower should take to rehabilitate a qualified student loan that has gone into default:
STEP 1: Contact your lender and request loan rehabilitation
STEP 2: Read the rehabilitation payment agreement your lender sends you carefully for terms and conditions, then sign and return it by the requested deadline
STEP 3: Proceed to make all of the agreed upon payments in a timely manner during the nine-month loan rehabilitation agreement period
STEP 4: If it is required of you by the lender, sign and return the new promissory note your lender requests of you
Following the rehabilitation of your loan, send all future payments on time. You will not be allowed to rehabilitate the same loan twice.
Is loan rehabilitation possible if I have been placed with a collection agency?
Yes! Simply contact the agency handling your qualified account and tell them that you would like to rehabilitate the loan. If you don't know the name and contact information for the collection agency your loan has been placed with, contact your lender and they will provide you with this information.
As previously stated, rehabilitation is dependent on the borrower making nine consecutive monthly on-time payments. Be aware that even if your account is with a collection agency, federal regulations state the amount of the monthly payment is at the discretion of the lender and the collection agency must obtain the lender's approval for entering into a loan rehabilitation agreement with you.
Can I rehabilitate a loan once a court judgment has been rendered?
No. Federal regulations exclude rehabilitation on a loan for which a judgment has been rendered.
(UCLA attempts to provide up-to-date information in our Bruin Dollars and $ense How To Series. Please be aware that the content of this document is based upon information that was correct at the time of publication. All information pertaining to and gathered from both UCLA and other sources is subject to change without notice.)