How does loan rehabilitation for defaulted student loans work?

Loan rehabilitation is a formal federal process for borrowers who have defaulted on eligible federal student loans. It’s designed to help people regain good standing, stop aggressive collection actions (including most wage garnishments and offset of tax refunds), and regain access to federal repayment plans and benefits. The program requires a short series of on-time, voluntary payments and then removes the default notation from your credit report, though the debt itself stays in place.

In my work advising borrowers for more than 15 years, I’ve seen rehabilitation successfully end cycles of collection, restore access to options such as income-driven repayment (IDR), and make borrowers once again eligible for federal student aid. Below is a practical, step-by-step guide to how rehabilitation works, who’s eligible, and what to expect.

Who is eligible?

  • Most owners of defaulted federal student loans can pursue rehabilitation, including many Direct Loans and FFEL (Federal Family Education Loan) program loans that are in default. The loan must be eligible for rehabilitation — private loans are not eligible for federal loan rehabilitation.
  • If your loan is in collections under a third-party collection agency, the agency or your loan holder can give you the terms to rehabilitate the loan.
  • Rehabilitation is generally not a pathway for loans discharged in bankruptcy; bankruptcy survivors may face additional rules.

For the latest eligibility details, see Federal Student Aid’s official guidance (studentaid.gov). (See: Loan Rehabilitation — https://studentaid.gov)

The core requirement: nine payments in ten months

To rehabilitate a defaulted federal loan you must agree to a reasonable and affordable repayment amount and make nine on-time, voluntary payments during a ten-month period. “Voluntary” means you make the payments yourself (or by an arrangement that isn’t court-ordered) according to the agreed schedule.

  • The payment amount is set by the loan holder or collection agency and is intended to be affordable based on your documented income. In practice, payment amounts can be very low for borrowers with limited income.
  • If a scheduled payment is missed, the rehabilitation timeline typically resets and you’ll have to start again.

Authoritative source: Federal Student Aid, Loan Rehabilitation (https://studentaid.gov).

What happens when rehabilitation is complete?

  • The loan is no longer in default and the default notation is removed from your credit reports — this often produces a meaningful improvement in your credit score. However, individual late payments and other derogatory marks that predate rehabilitation may still remain on your credit reports until their normal reporting time expires (usually seven years from the date of delinquency). See CFPB guidance for details (https://www.consumerfinance.gov).
  • Collection activity related to the default generally stops. That includes wage garnishment and administrative offsets of federal benefits such as tax refunds and Social Security benefits once the loan is rehabilitated and the garnishment is lifted by the Department of Education.
  • You regain access to federal repayment plans (including income-driven plans), deferment and forbearance options, and federal loan forgiveness programs where you qualify.

Payment amount: how it’s calculated

There isn’t a single nationwide formula published by the Department of Education that applies to every borrower for rehabilitation payments. Instead:

  • Your loan holder/collection agency proposes a “reasonable and affordable” payment based on your income and other factors.
  • For borrowers with very low income, payments can be minimal; for others the payment may approximate an affordable percentage of discretionary income.

Because amounts vary, ask the collection agency for a written calculation of how your payment was determined. If the payment is unaffordable, you can negotiate or ask for documentation to support the calculation.

Practical steps to begin rehabilitation

  1. Confirm which entity owns or services your loan. If you’re in collections, find the collection agency’s contact information on your credit report or from Federal Student Aid.
  2. Contact the loan holder or collection agency and request rehabilitation terms. Tell them you want to rehabilitate the loan and ask for the written agreement with the payment amount and schedule.
  3. Verify the payment amount and provide income documentation if requested.
  4. Make payments on time for nine payments within ten consecutive months. Use a reliable payment method and keep proof of each payment (bank records, confirmation numbers).
  5. After you complete the ninth payment, request written confirmation that the loan has been rehabilitated and that default status was removed from credit reporting.

How rehabilitation differs from consolidation

Rehabilitation and Direct Consolidation Loans both can return a loan to good standing, but they work differently:

  • Rehabilitation removes default after you make the required payments and may be faster to exit default if you can make the agreed payments. After rehabilitation you can consolidate if you choose, but consolidation alone can also be used to get out of default by consolidating with a Direct Consolidation Loan — however, the rules and the timeline differ.
  • Consolidation requires at least three consecutive months of payments under an income-driven repayment plan or may be arranged through the Department of Education; it can sometimes be used to end default without the nine-payment rehab route. For comparison and decision help, see our guide: Federal Consolidation vs Loan Rehabilitation: Paths to Fix Default (https://finhelp.io/glossary/federal-consolidation-vs-loan-rehabilitation-paths-to-fix-default/).

(Internal resource: read our detailed guide on consolidation vs rehabilitation for a side-by-side analysis — Federal Consolidation vs Loan Rehabilitation: Paths to Fix Default.)

Credit reporting: what to expect

  • When rehabilitation is complete, the default notation should be removed from your credit reports. That often produces a significant credit-score improvement.
  • However, previous late payments that caused the default are not magically erased; they generally remain on credit reports until their normal reporting period ends (typically seven years from the date of the missed payments). This nuance explains why credit scores don’t always recover immediately to pre-default levels.

For more on how rehabilitation affects eligibility and credit, see our article Student Loan Rehabilitation: Steps to Restore Good Standing (https://finhelp.io/glossary/student-loan-rehabilitation-steps-to-restore-good-standing/).

Common mistakes and how to avoid them

  • Missing a scheduled rehabilitation payment: a missed payment usually restarts the nine-payment requirement. Avoid this by setting automatic transfers or calendar reminders and keeping backup funds available.
  • Consolidating before completing rehabilitation: consolidating while still in default without understanding the consequences can affect your ability to regain benefits and may require different steps.
  • Not getting written confirmation: always request written proof that the loan was rehabilitated and that the default status was removed from credit reporting.

Real-world examples and outcomes

In practice, I’ve guided clients whose rehab payments were set very low based on income (for some, under $50/month). After completing rehabilitation, clients typically see a jump in credit score and an end to federal collection actions. One client with a previously garnished wage saw garnishment lifted and regained eligibility for IDR and eventual public service loan forgiveness after meeting employment requirements and making subsequent qualifying payments.

Should you rehabilitate or consolidate?

The answer depends on your circumstances. Rehabilitation is usually faster if you can make the nine payments and want the strong benefit of removing default notation. Consolidation can be useful if you cannot reliably make those nine payments but can meet consolidation requirements. Because each borrower’s situation is different, evaluate both options, gather written offers from servicers/collection agencies, and consider talking with a counselor or financial advisor.

You can read more on comparing these pathways in our glossary: Student Loan Rehabilitation vs Consolidation: Which Fixes Default? (https://finhelp.io/glossary/student-loan-rehabilitation-vs-consolidation-which-fixes-default/).

Professional tips

  • Get everything in writing. Keep copies of agreements and payment confirmations.
  • Use electronic payments that generate a receipt; avoid cash unless you obtain a written receipt.
  • Track the ten-month rehabilitation window and set reminders.
  • After rehabilitation, review your credit reports to confirm the default notation has been removed and dispute any errors with the credit bureaus if necessary.

Frequently asked questions

Q: Will rehabilitation erase my loan balance?
A: No. Rehabilitation removes the default status and stops many collection actions, but the principal and interest remain and will still need to be repaid under normal terms.

Q: Can I rehabilitate more than once?
A: Yes, a borrower can rehabilitate loans multiple times in some situations, but repeated defaults and rehabilitations can complicate access to benefits. Aim to maintain payments after rehabilitation to avoid repeat default.

Q: Will payments made during rehabilitation count toward Public Service Loan Forgiveness (PSLF)?
A: Typically, payments made while you are in default do not count toward PSLF. After rehabilitation, you may be able to make qualifying payments that count—especially if you then enroll in an income-driven repayment plan. Check PSLF guidance and keep documentation.

Sources and further reading

Disclaimer

This article is educational and does not constitute legal or financial advice. Loan rules change and individual cases differ. For personalized guidance, contact your loan servicer, a certified student loan counselor, or a licensed financial professional.