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Student Loan Rehabilitation: Steps And Benefits – You are here: Home / US Student Loan Center / Student Loan Repayment Plans / Student Loan Default / How to Use Student Loan Rehabilitation to Clear Student Loan Default
With the increase in college tuition, it is no wonder that more and more students are defaulting on their loans…
Student Loan Rehabilitation: Steps And Benefits
Normally, your loan will be considered in default status after 270 days of not making any payments.
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For example, did you know that defaulting on your loan, even for a few months, can completely ruin your credit history?
This means you may find it difficult to get a mortgage in the future. In other cases, you may find that you do not qualify for a credit card. In extreme situations, you may even find that you are unable to get certain jobs or apply for a mortgage.
(NOTE: Defaulted loans can lead to lower credit scores, painful collections, and anxious thinking. Avoid default and learn how to turn “Default” status into “Current” status in less than 90 days by using our Roadmap to Getting Out of Student Loans o Absence. Click here to learn more and get the free map – before your next payment date!)
The number of people defaulting on their loans has risen sharply over the past two years. Along with the rising default rate, the average amount of debt a student graduates with has also risen.
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As the average amount of debt increases, it is likely that the default problem will get out of control. This means that more and more people will need to look at options such as rehabilitation.
Loan rehabilitation allows the student to make smaller payments on their loan for a set period of time. If they are able to pay these reduced payments, then their loan will be ‘rehabilitated’.
It’s worth noting that if you go down the consolidation route, then there will be no deletion of the default.
Don’t worry, we’re going to cover these in more detail, we just want to give you a brief overview:
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Let’s deal with the first point. There are many people out there who will graduate with a couple of loans under their belts. However, if you are struggling to repay them, you will only be able to rehabilitate one of the loans at a time.
If you have more debts than you can handle, and you don’t feel like rehabbing just one of them is going to help, then you might want to look into consolidation instead. That default won’t be removed from your account, but at least you’ll be able to make sure the problem doesn’t become too difficult to handle.
(NOTE: Are your student loans giving you default headaches? Avoid default and learn how to turn “Default” status into “Current” status in less than 90 days by using our Roadmap to Getting Student Loans Out Default. Click here to learn more and get the map for free – before your next payment date!)
If you are struggling to make payments on your account and you really don’t feel that rehab is going to help, then never go down that route because you will be required to make payments on time. This leads us to our next point.
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If you miss more than one payment, then the default will not be removed from your account.
They cannot be taken from wage garnishment. You need to pay them yourself. So make sure you know when the payment is due. It is also worth noting that you have to make monthly payments. Although the amount of money you need to pay will be significantly reduced, you will not be able to make one lump sum payment.
The amount of money you need to pay will depend on your discretionary income. Typically, your payments will be equal to 15% of your discretionary income.
The cost of rehabilitating your student loan will not exceed 16% of the unpaid principal and the amount of interest you have accrued. Of course, the amount of money you will need to pay back each month will be very dependent on your income and the amount of your loan that you will still need to pay back. It’s common for some people to pay as little as $5 a month, although you’ll probably pay a little more than this back.
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Before we dive into the benefits of rehabilitation, take a look at the chart below. It shows you a comparison of how much you can expect your mortgage payment to be in relation to your credit score.
Obviously, this is a ‘guide’ image. However, it goes to show you that even the smallest boost in your credit rating can significantly increase your mortgage payment. So, if you have a blip in your credit score, then this is a problem that will need to be rectified.
A big advantage of going through student loan rehabilitation is that you are going to be able to get rid of that default status.
It is essential that you remove the default status as it will affect your credit score for 7 years. That means you may find it almost impossible to get a mortgage during that time.
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It’s worth noting that if you fail to get a loan, then you won’t be able to apply for financial aid again. This is because you will now be considered ‘untrustworthy’. Obviously, this is not ideal if you are in the middle of studying. By defaulting on your loan, you may completely eliminate any chance of pursuing the career path you want.
However, when that deficiency is removed through the rehabilitation process, you will then be able to reapply for student aid in the future.
Finally, if you do not remove the default status, you will never be able to apply for a deferral or forbearance in the future. This means that there will be fewer options available to you should there be a time when you have trouble making payments on your loan.
Of course, this will make it even more difficult to keep control of your credit score. Many people who pay off their loan repeatedly may not even be able to rent a property because their score is so low. Obviously, this is not something you are going to want to happen!
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However, it is worth noting that this system will also have some disadvantages. You will need to consider those disadvantages before deciding whether this is the right choice for you.
Firstly, if you are unable to make those 9 payments each month, then your account will remain in default.
As we mentioned previously, the charges should not be too high. They will vary based on your discretionary income. However, the discretionary income is not going to take into account any expenses you may have leaving your account. This means you may not have the money needed to pay your loan repayments.
However, if you cannot make it work for you and you are not 100% certain that you will be able to pay your loan repayments each month, then you will want to postpone loan rehabilitation. This may not be the right option for you.
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Once those ten months are up, that’s it. You will never be able to rehabilitate it again.
Therefore, it is going to be in your best interest to make sure that you cannot afford to pay your loan repayments every month. In many cases, people will find that some smart budgeting is all they need to do in order to avoid defaulting on their loans.
This is not a way to give yourself some extra money for a period of time. It should be a method that you only use when you realize that you are unable to pay those loan repayments in any other way. If you don’t use it that way, then you’re going to be causing yourself problems in the future.
As you can see, student loan rehabilitation is going to be a great method of making sure you don’t have blemishes on your credit report. However, it’s not going to be a method for everyone out there.
What Should The U.s. Do About Rising Student Loan Debt?
It’s good to know that you have options like this available to you. It will really make things easier for you. The national unemployment rate peaked at 14.7 per cent in April 2020, but fell dramatically and has remained below 4 per cent since December 2021. Meanwhile, inflation increased from an average of 1.2 per cent in 2020 to 9.1 per cent in June 2022 – the biggest jump in 40 years.
Yet, following nine extensions, the student loan moratorium remains in place at an estimated direct cost of $5 billion per month. The Biden Administration
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