The average student loan borrower who graduated in 2015 will have to pay back $35,000 according to an analysis of government data by Mark Kantrowitz, publisher at Edvisors, a group of websites about planning and paying for college.
It is likely that some of these students will end up defaulting as millions of Americans are struggling to repay their student loans. A whopping 17 percent of borrowers are behind in their payments or in default on the nation’s $1.2 trillion in college loans.
Defaulted student loans can ruin credit scores, making it difficult to get decent employment, housing, auto loans and even bank accounts.
Student loan rehabilitation is an option for some borrowers and it can recover your credit score in as little as 9 months.
What is Student Loan Rehabilitation?
Once a federal student loan goes unpaid for 270 days, the loan goes into default. Defaulted federal student loans are not eligible for deferment or forbearance. The loan is sent to a collection agency which can trigger a bank levy, wage garnishment or judicial procedures. But the lasting negative effects of defaulted loans comes to your credit history. Your credit scores will take a severe hit.
Loan rehabilitation can restore your good credit
It can take as little as 9 months to complete loan rehabilitation. But once you’ve completed rehabilitation you regain access to programs like student loan deferment and income based repayment (IBR). But more importantly, the default status is removed from your credit history (though delinquencies predating the default will remain) — that’s huge boost for your credit scores.
- To rehabilitate a Direct loan or FFEL Program loan, you must make nine of 10 payments deemed “reasonable and affordable” by you, the Department of Education and the debt collector. The 9 out of 10 rule basically allows you to miss your payment one month, but still be eligible to rehabilitate.
- For a Perkins loan, you need to make nine consecutive payments.
How Loan Rehabilitation Works
- You will need to request rehabilitation from your loan holder that means if you are dealing with a collection agency, you must set up rehabilitation through them. For Perkins loan you may need to contact your school.
- Within 15 business days of the determination of the loan rehabilitation payment amount, the loan holder must give you a written rehabilitation agreement which includes the reasonable and affordable payment amount and an explanation of any terms and conditions. This is an absolute must! You have not entered into a Rehabilitation plan if you do not have a WRITTEN AGREEMENT.
- To accept the agreement, you must sign and return the agreement or accept the agreement electronically. Be sure and read everything before signing.
- Debt collectors can wrongly claim that you must pay higher amounts you may not find reasonable or affordable. Keep in mind you are only required to pay a reasonable and affordable amount. Do not allow a student loan debt collector to set-up an unaffordable amount. New regulations effective July 1, 2014 create a system to help ensure that borrowers are paying only what is “reasonable and affordable” for them.
- Your loan is rehabilitated only after you have voluntarily made the agreed-upon payments on time and the loan has been purchased by a lender. Outstanding collection costsmay be added to the principal
- After rehabilitation, your monthly payment may be more than the amount you paid while you were rehabilitating your loan. Collection costs may be added to your principal balance, increasing the total amount you owe.
- The default status is removed from your credit history (though delinquencies predating the default will remain).
Some student loan debt collectors will play dumb when it comes to loan rehabilitation. Insist that you are offered loan rehabilitation; and, without any requirement of a down payments. If you encounter problems with the debt collector contact the Department of Education Ombudsman. Student loan debt collectors are under contract with the DOE and rarely want to the Ombudsman to intervene.