Rehabilitation is a process that removes a Direct Loan from default after the borrower makes a series of agreed-upon on-time payments.
How it works
The borrower contacts the Default Resolution Group or the collection agency holding the loan and agrees to a payment amount. Payments are made for nine months. Once the ninth qualifying payment is received, the loan is sold or transferred back to a regular servicer and the default notation is deleted from the credit history. Aid eligibility is restored.
Example: a borrower in default agrees to $50 monthly payments. After nine on-time payments within the required window, the default is cleared. The borrower can then file a FAFSA and receive a new Pell Grant for an online program, and the prior default no longer appears on the credit report.
How it differs
Consolidation of a defaulted loan can restore aid eligibility more quickly but does not remove the default from the credit report unless additional conditions are met. Full repayment ends the default but requires paying the entire balance. Rehabilitation is the only standard method that both restores eligibility and deletes the default from the credit history after the required payments.
Common errors
Missing the 20-day window for even one payment and having to restart the count. Assuming rehabilitation can be used more than once on the same loan. Expecting collection costs to disappear entirely upon completion.
References
- 1. Federal Student Aid loan rehabilitationNine-payment process
- 2. 34 CFR 685.211 rehabilitationRegulatory requirements
Rehabilitation is a process that removes a Direct Loan from default after the borrower makes a series of agreed-upon on-time payments.