How Rehabilitation Works
Rehabilitation requires making 9 voluntary, on-time, reasonable and affordable payments within 10 consecutive months. The payment amount is typically calculated at 15% of your discretionary income (income minus 150% of the poverty level). If your income is very low, the minimum payment can be as low as $5/month.
You negotiate the payment amount with the collection agency holding your loan. They must offer a payment based on the income formula above. If the calculated amount is unaffordable, you can request a lower amount based on documented financial circumstances. The key is that payments must be voluntary (not garnished) and made within 20 days of the due date.
Benefits of Rehabilitation
1. Default removed from credit report -- this is the unique advantage of rehabilitation. No other resolution method removes the default notation. 2. Garnishment stops -- once rehabilitation is complete, active wage garnishment and tax refund offset stop. 3. Eligibility restored -- you regain access to deferment, forbearance, IDR plans, and additional federal student aid. 4. Loan transferred to regular servicer -- out of collections and back to a standard servicer.
Important limitation: you can only rehabilitate each loan once. If you default again after rehabilitation, you cannot use rehabilitation a second time for the same loan. Consolidation would be your only option for a second default.
After Rehabilitation
Once rehabilitation is complete (usually takes about 10 months), immediately enroll in an income-driven repayment plan to prevent future default. Set up autopay. If you qualify for PSLF, start the employment certification process. Your rehabilitated months DO count toward IDR forgiveness but do NOT count toward PSLF.
Monitor your credit reports to verify the default has been removed. This typically happens within 1-2 months of rehabilitation completion. If it's not removed, contact your new loan servicer to request an update to the credit bureaus.
Frequently Asked Questions
Can I rehabilitate while being garnished?
Yes. Garnishment payments don't count as voluntary payments for rehabilitation, but you can make separate voluntary payments alongside the garnishment. Once rehabilitation is complete, the garnishment stops.
What if I can't afford the calculated payment?
If the standard 15% of discretionary income calculation produces an unaffordable payment, you can request a lower amount based on your specific circumstances. The absolute minimum is $5/month. Provide financial documentation to support your hardship claim.
Does rehabilitation affect my loan balance?
Rehabilitation itself doesn't reduce your balance. Collection fees (up to 16% of the balance) may be added before rehabilitation, though 2023 regulations limited collection fee additions. Your balance may be higher after rehabilitation than when you entered default.
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