Quick answer

Forbearance temporarily eases or pauses payments but usually increases the loan balance because interest keeps accruing. Rehabilitation is a structured path out of federal loan default: make a series of affordable, on‑time payments and the loan’s default status is removed and the account is returned to regular repayment. Use forbearance when you need short-term breathing room; use rehabilitation when your loans are already in default and you want to restore eligibility for federal benefits and credit access.

Why this choice matters

Your selection affects three things that matter most to household finances:

  • How much you ultimately owe (interest accrual).
  • Your credit report and ability to borrow.
  • Access to federal benefits (income-driven plans, loan forgiveness, deferment, federal student aid).

Making the wrong choice can increase long‑term costs or make recovery slower. In my practice helping borrowers for over 15 years, I’ve seen forbearance solve immediate cash-flow crunches but leave people with larger balances months later; I’ve also seen rehabilitation restore credit access quickly for borrowers who could manage the required payments.

How forbearance works (federal and private loans)

  • What it is: A temporary reduction or pause in monthly payments granted by a loan servicer when you report financial hardship or meet qualifying conditions. (U.S. Dept. of Education: Forbearance guidance: https://studentaid.gov/sa/repay-loans/forgiveness-cancellation/forbearance)
  • Typical mechanics: Servicers may approve short‑term discretionary forbearance (commonly in 6–12 month increments) or mandatory forbearance for certain qualifying circumstances. Interest generally continues to accrue on unsubsidized federal loans and most private loans during forbearance.
  • Private loans: Lenders set their own rules. Some offer hardship forbearance but often with different timing, documentation, and interest rules.
  • Pros: Immediate relief, avoids late fees and potential default, maintains account status (if in good standing) without entering collections.
  • Cons: Interest accrues, raising your principal; prolonged forbearance can make payments unaffordable later and reduce future options such as qualifying for certain income-driven plans.

Related reading: FinHelp’s primer on what forbearance means: “What is a Forbearance?” and deeper guidance in “Student Loan Forbearance” and “What Is a Forbearance Conversion and How It Works”.

How loan rehabilitation works (federal loans only)

  • What it is: A federal program for borrowers whose Direct Loans or Federal Family Education Loan (FFEL) Program loans are in default. Rehabilitation requires making a series of affordable, voluntary, on‑time payments to regain good standing. (U.S. Dept. of Education: Rehabilitation program: https://studentaid.gov/sa/repay-loans/manage-loans/rehabilitation)
  • Typical mechanics: You and your loan holder agree on a reasonable and affordable monthly payment amount based on your income. You must make nine on‑time, voluntary payments within 20 days of the due date over a period of 10 consecutive months (policies are current as of 2025). After successful rehabilitation, the loan is no longer in default and the account is returned to regular repayment; the default status is removed from the loan and the loan servicer notifies credit bureaus that the loan is current.
  • Pros: Restores eligibility for federal repayment plans, deferment, forbearance, and federal student aid. The loan moves out of default (improving access to credit and federal benefits). You may also regain eligibility to have wages garnished stopped and to consolidate loans in some cases.
  • Cons: You must be able to make the agreed payments; late or missed rehab payments can re‑default the loan. Rehabilitation doesn’t erase late payments that occurred before default (those history items may still show on credit reports).

Important note: Rehabilitation applies only to federal student loans; private lenders do not offer federal rehabilitation. For private loans you should negotiate directly with the lender or consider refinancing (see Consumer Financial Protection Bureau guidance).

Side-by-side comparison (quick reference)

  • Eligibility: Forbearance — borrowers who need temporary relief (federal and private). Rehabilitation — borrowers in federal loan default only.
  • Effect on balance: Forbearance — interest usually accrues and is capitalized if unpaid; Rehabilitation — payments reduce balance and stop collection activity; however, arrears may still exist.
  • Credit report: Forbearance — account stays active but interest/late history depends on prior status; Rehabilitation — default status is removed from the loan and the loan is reported as current, improving prospects for credit (but earlier late payments may remain recorded).
  • Length: Forbearance — varies (often 6–12 month increments); Rehabilitation — nine payments across up to 10 months.

When to choose forbearance

Choose forbearance if:

  • You need short-term cash flow relief (job loss, temporary medical issue, short-term emergency).
  • You expect income to resume quickly and can resume full payments soon.
  • Your loans are not in default and you want to avoid immediate delinquency.

Considerations:

  • If you have subsidized federal loans, interest during forbearance will typically accrue on unsubsidized portions; check whether your student loan type is subsidized.
  • If you’re on an income-driven repayment plan, forbearance can affect accrual of interest differently—talk to your servicer about whether suspending payments could cause you to lose progress toward forgiveness.

When to choose rehabilitation

Choose rehabilitation if:

  • Your federal loan is already in default and you want to regain eligibility for federal protections and repayment options.
  • You can commit to making reasonable, on‑time payments for the rehab period.
  • You want to stop collection actions like wage garnishment and tax refund offsets that often accompany default.

Notes from practice: Borrowers who can find even a modest, stable monthly amount often regain far more benefit through rehab than from staying in collections or repeatedly extending short forbearances. Rehabilitation also prevents future barriers to student aid and federal programs.

Step-by-step: How to apply

For forbearance (federal loans):

  1. Contact your loan servicer and explain your hardship.
  2. Request the specific type of forbearance (discretionary or mandatory) and ask for the duration and interest treatment in writing.
  3. Keep records: save the request, approval letter, dates, and new payment schedule.

For rehabilitation (federal loans in default):

  1. Contact the loan holder or collection agency and say you want to rehabilitate the loan.
  2. Provide income documentation to negotiate an affordable monthly payment.
  3. Make nine on‑time payments as agreed; keep bank statements or receipts.
  4. After the ninth payment, get written confirmation that the loan is rehabilitated and that your account will be reported as current to credit bureaus.

If your loans are private: call the lender. Options may include hardship forbearance, modified payments, settlement, or refinancing. The Consumer Financial Protection Bureau has resources on private student loan options.

Common mistakes and traps

  • Assuming forbearance erases interest: it does not—interest often capitalizes and increases principal.
  • Underestimating the rehabilitation commitment: missing rehab payments can lead to re‑default.
  • Not documenting agreements: always get written confirmation of any forbearance or rehab agreement.
  • Ignoring alternatives: income‑driven repayment plans, consolidation (after rehab), or negotiating with private lenders may be better than indefinite forbearance.

Checklist to decide

  • Are your loans in default? If yes, prioritize rehabilitation (federal loans).
  • Do you need only temporary relief and expect to resume payments soon? Consider forbearance.
  • Can you afford affordable monthly payments and want to restore credit and federal benefits? Rehabilitation is usually better for long-term recovery.

Where to get help

Bottom line

Forbearance is a useful short-term tool when cash flow is constrained, but it usually increases total loan costs because interest keeps accruing. Rehabilitation is the preferred route for federal loans already in default when a borrower can make a short series of affordable payments: it removes the default status, restores access to federal benefits, and helps rebuild credit standing. Speak with your servicer, document every agreement, and consider long-term costs before choosing.

Professional disclaimer: This article is educational and does not replace personalized financial, legal, or tax advice. For decisions affecting your specific loans, consult your loan servicer or a licensed financial counselor.

Sources and further reading