How to Rehabilitate a Defaulted Federal Student Loan and Get Out of Default

What loan rehabilitation does when your federal loan is in default

Federal student loan rehabilitation is a formal way to get an eligible federal student loan out of default. You enter into an agreement with the loan holder and complete a required series of voluntary payments. After successful rehabilitation, the default status is removed, collection activity tied to the default stops, and federal student aid eligibility can be restored.

Federal Student Aid also states that after the ninth rehabilitation payment, the Department of Education requests that consumer reporting agencies remove the record of the default. Earlier late-payment history reported before the loan entered default can remain on the credit report.

Find the loan holder before requesting rehabilitation

Start by signing in to your StudentAid.gov account and reviewing the loan and servicer information. For most borrowers whose defaulted loans are held by the Department of Education, the responsible servicer is the Default Resolution Group. A borrower with a commercially held FFEL Program loan may instead have a guaranty agency listed as the loan holder.

Send your rehabilitation request to the actual loan holder. FFEL borrowers assigned to a guaranty agency should not send their rehabilitation documentation to DRG unless DRG is shown as the responsible holder.

Documents needed to request a rehabilitation agreement

Federal Student Aid instructs borrowers to provide the loan holder with one of the following forms of income documentation:

• Your latest tax transcript, which does not require a signature; or
• Both pages of your most recent IRS Form 1040 federal tax return, signed by hand. A typed or electronic signature is not accepted for this purpose.

If you live with your spouse but file taxes separately, Federal Student Aid instructs you to include your spouse's tax return as well. The loan holder can request additional documentation if the information provided is insufficient to establish the rehabilitation payment.

How your rehabilitation payment is calculated

Under the standard rehabilitation calculation, the monthly amount equals 15% of annual discretionary income divided by 12. The actual amount is established by the loan holder and stated in the Rehabilitation Agreement Letter.

If you cannot afford the standard payment

You can request an alternative payment by completing the Loan Rehabilitation: Income and Expense Information form. The loan holder reviews your household income, necessary monthly expenses, family size, and any supporting documentation it requests to determine an alternative reasonable and affordable payment.

Federal Student Aid states that, after the relevant information is submitted, an alternative payment offer is generally sent by postal mail within 10 business days. You must accept an approved payment amount before rehabilitation can proceed.

You must complete nine qualifying rehabilitation payments

The payment schedule depends on the federal loan program:

• Direct Loans: nine on-time voluntary payments within a period of 10 consecutive months.
• FFEL Program loans: nine on-time voluntary payments within a period of 10 consecutive months.
• Federal Perkins Loans: nine consecutive monthly payments.

For Direct and FFEL loans, the 10-month structure means one payment may be missed during that period without automatically preventing completion, provided the borrower still makes the required nine qualifying payments under the agreement.

Rehabilitation enrollment is not fully online

The rehabilitation request itself is not a fully online process. Federal Student Aid currently instructs borrowers working with DRG to submit the required income documentation by fax or postal mail. The completed rehabilitation agreement is also sent by postal mail rather than being made available as a complete online agreement.

After a DRG rehabilitation agreement is established, MyEdDebt.ed.gov can be used to review the agreement summary, payment due information, and payment history. Available payment methods include an online debit or prepaid-card option, as well as payment by mail or phone.

Collections may continue during the early part of rehabilitation

Starting rehabilitation does not necessarily stop involuntary collections immediately. Federal Student Aid states that wage garnishment and Treasury offset may continue until the loan is no longer in default or until the borrower has made at least five rehabilitation payments.

Keep voluntary rehabilitation payments separate from involuntary collections and verify the payments credited toward your agreement in your payment history.

What happens after you successfully complete rehabilitation

After successful completion, the defaulted loan is transferred to a new loan servicer and the default status is removed. For Department of Education-held loans, the MyEdDebt account will show the new servicer and a transferred date. Federal Student Aid states that borrowers should also receive an email within 30 days confirming the new servicer.

You regain eligibility for federal student aid after the loan leaves default. Your school may ask for evidence that the default has been resolved; borrowers handled by DRG can request a confirmation letter when needed.

Once the transfer is complete, review the repayment options offered by the new servicer and select a sustainable plan before another payment becomes overdue.

Rehabilitation versus consolidation for getting out of default

Rehabilitation is not the only possible way to resolve a default. Federal Student Aid identifies Direct Consolidation as another option that can generally be completed faster, but the consequences are different. Rehabilitation can result in removal of the default record from the borrower's credit history, while consolidation does not erase the prior default record.

If speed is more important than the credit-report benefit of rehabilitation, compare this process with consolidating federal student loans into a Direct Consolidation Loan before choosing an option.

Common mistakes to avoid during rehabilitation

• Sending documentation to DRG when a guaranty agency is actually the FFEL loan holder.
• Sending an unsigned Form 1040 or using a typed or electronic signature when a hand signature is required.
• Assuming that creating a MyEdDebt account alone enrolls you in rehabilitation.
• Failing to sign and return the Rehabilitation Agreement Letter.
• Missing enough payments that you cannot complete nine qualifying payments within the required period.
• Ignoring a rehabilitation payment that is unaffordable instead of requesting the income-and-expense review.
• Assuming wage garnishment or Treasury offset must stop as soon as the rehabilitation agreement begins.