Background

Loan rehabilitation is a Department of Education program designed to help borrowers bring defaulted federal student loans back into good standing without paying the full balance in a lump sum. The process grew from policy changes in the Higher Education Act and is administered through loan servicers and collection agencies. (See U.S. Department of Education and Federal Student Aid for program details: https://studentaid.gov.)

How it works — the basics

  • Typical requirement: agree to a reasonable repayment amount and make nine voluntary, on‑time payments within ten consecutive months (requirements can vary by loan type and servicer). When completed, the loan is no longer in default and collection actions—such as wage garnishment and tax refund offsets—must stop. (Source: U.S. Department of Education — studentaid.gov.)
  • What “on‑time” means: payments must be made according to the rehabilitation agreement and received by the collection agency or servicer by the due date.
  • After rehabilitation: the loan is assigned to a loan holder or servicer for normal repayment, and the default designation is removed from federal systems and should be updated on credit reports.

Who is eligible

  • Borrowers with federal student loans in default (Direct Loans, FFEL Program loans, and many Perkins loans) are typically eligible. Specific eligibility and timelines can vary by loan program and collection status. Confirm with your loan servicer or the collection agency. (See CFPB guidance: https://www.consumerfinance.gov.)

Key effects on loan status and borrower rights

  • Default status removed: Completing rehabilitation changes the loan’s status from “default” to “rehabilitated” in federal records.
  • Collection actions stop: Garnishments, tax refund offsets, and other collection activities tied to default must cease once the loan is rehabilitated.
  • Federal aid eligibility restored: Borrowers regain eligibility for federal student aid and many repayment plans after rehabilitation (verify with studentaid.gov).
  • Credit reporting nuances: The default notation is removed, but the record of late payments leading to default may remain on your credit reports for up to seven years under the credit bureaus’ rules. Rehabilitation improves your standing but does not erase the underlying history of delinquencies.
  • Effects on forgiveness programs: Payments made under a rehabilitation agreement generally do NOT count toward Public Service Loan Forgiveness (PSLF) or toward the qualifying-payment count for most income‑driven repayment (IDR) forgiveness programs. After rehabilitation, however, you can enroll in qualifying plans and start accruing qualifying payments again.

Steps to rehabilitate a defaulted federal loan

  1. Contact the collection agency or loan servicer handling your defaulted loan to request rehabilitation. Ask for the proposed rehabilitation repayment schedule in writing.
  2. Review and agree to a ‘‘reasonable and affordable’’ monthly payment the agency proposes; repayment amounts are based on your income and expenses.
  3. Make the required consecutive on‑time payments (typically nine in ten months). Keep proof of each payment (bank records, receipts, payment confirmations).
  4. After the final payment, get written confirmation that the loan is rehabilitated and that the default has been removed from federal records and will be updated with the credit bureaus.

Professional tips from practice

  • Get the agreement in writing and keep copies of all payment records—this protects you if reporting errors appear later.
  • Enroll in automatic payments only after confirming the payment amount and schedule; some borrowers prefer manual payments during rehabilitation to ensure exact timing.
  • Verify NSLDS and credit reports after rehabilitation; if reporting isn’t corrected, dispute errors with the credit bureaus and follow up with the servicer.

Common mistakes and misconceptions

  • Myth: Rehabilitation erases all negative credit history. Reality: Rehabilitation removes default status but doesn’t necessarily delete all prior delinquencies from credit reports.
  • Myth: Rehabilitation counts payments toward PSLF. Reality: Rehabilitation payments generally do not count toward PSLF or toward forgiveness under most IDR plans.
  • Missing a rehabilitation payment can void the agreement and restart the process—communicate immediately with your servicer if you miss a payment.

When to consider alternatives

FAQ (short)

  • What happens if I miss a payment during rehabilitation? Missing a required payment can end the rehabilitation agreement and may return the loan to default; contact your servicer immediately.
  • Will my credit score improve immediately after rehabilitation? Scores may improve over time as the loan is reported as rehabilitated, but past delinquencies can still affect your score.

Authoritative sources (current as of 2025)

Internal reading

Professional disclaimer

This article is educational and general in nature. It does not replace personalized legal, tax, or financial advice. Contact your loan servicer or a qualified financial counselor for guidance tailored to your situation.