Rehabilitating Your Defaulted Loan
Once you've defaulted on your student loans, any unpaid interest is computed and the entire balance of the loan becomes due and payable immediately. Once you reach this point, you have several options to avoid the negative consequences of default:
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You can pay off your entire student loan in one lump sum.
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You can establish monthly payment arrangements with your guaranty or collection agency (rehabilitation).
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You can consolidate your account into one new loan.
When you come to a repayment agreement with your lender, guaranty agency, or collection agency, a new loan is created that wipes out the old, defaulted loan.
Besides removing your loan default from reports to the credit-reporting bureaus, rehabilitating your loan helps you regain your student loan benefits if you still need them and restores your eligibility for student financial aid.
The Process of Rehabilitation
Rehabilitation is a federal repayment program offered to student-loan holders who have defaulted on their loans. To rehabilitate your loan, you have to make 12 on-time monthly payments in a row. Then the government agrees to once again insure your loan and your guaranty agency can sell it to a secondary market or lender, removing it from default status.
After making 12 on-time payments, apply for rehabilitation. Once your loan has been rehabilitated, you have up to nine more years to repay it. You can only rehabilitate a defaulted student loan once.
