How do I apply for student loan rehabilitation?
If your student loan is already in default, you may be thinking on how to quickly get it out of the default status so that you can continue with the repayment. There are actually ways you can achieve this. But in this article, we shall concentrate on two options; student loan rehabilitation and consolidation. But for the purpose of information, you can get out of default by paying off the outstanding student loan. This option may not fit into the situation of many people. The reason is that, if they have the money to pay in the first instance, the student loan should not have entered default. However, we should not rule it out that this option may work for few people. It is possible that that a person suddenly enjoys a windfall which he may like to apply towards the payments of his defaulted loan. The windfall can be in form of cash gifts or inheritance. Whatever the case, one can get his student loans out of default by deciding to pay off the loan. Of course, every lender will welcome this.
Student Loan Rehabilitation Vs Consolidation
The two popular options for getting federal student loans out of default are through student loan rehabilitation and student loan consolidation. Even though these two options will help you get out of default, they might have different effects. That is why we shall be considering the similarities and differences between the student loan rehabilitation and consolidation.
What is student loan rehabilitation?
Instead of giving a definition that may further confuse you, it is better to explain how student loan rehabilitation works. This will make it more practical and everybody can easily understand it. If you have a federal student loan and you want to rehabilitation the loan, you will need to contact your lender to determine the actual amount that you owe. You will let the lender know your intention to rehabilitate the defaulted student loan. This will require that you make payment for ten consecutive months without late payment or default to pay down the loan balance. After this, your loan will be out of default and you will then be eligible to the benefits you enjoyed before the loans went into default.
You may want to know how much you will be paying every month in order to get your student loan out of default. The monthly payment is usually calculated by using the income based repayment plan. At times, it is possible that the amount arrived at as your monthly payment using income based repayment program may not be affordable to you. If this is the case, you can actually negotiate for reduced monthly payment with your lender in order to agree on the amount you will be able to pay every month. In order to arrive at the monthly repayment amount for the student loan rehabilitation, certain factors will need to be considered. Such factors include your disposable income including other benefits such as social security benefits, welfare benefits and your family size. You should understand that the calculation will not be based on your entire income. Consideration will be given to how much you will need to spend on rent, food and other essential things. At the end, the payment amount that will be arrived at may be the same amount payable under IBR program. Nevertheless, you will not be enrolled into IBR program. Therefore, you should not expect to enjoy IBR program benefits such as loan forgiveness while your student loan still remains in default. The essence of the reduced monthly payment amount is to make the amount affordable to the borrower so that he won’t need to default the second time. If you are able to make your payment for consecutive ten months, thereafter, your student loan will be out of default. Student loan rehabilitation has its pros and cons. These shall be discussed below:
Pros of Student loan rehabilitation
Eligibility for student loan deferment and forbearance: After you have successfully taken your student loan out of default, you will be eligible for deferment and forbearance. Deferment and forbearance allows student to temporarily suspend the monthly payment on their student loan for certain period of time says six months. It is possible that you are suddenly out of job or you want to go back to school. With forbearance and deferment, you will be able to suspend or reduce your monthly payment to a manageable level. However, interest will accrue on the loan during this period. You can choose to pay the interest monthly or allow the interest to be capitalised into the loan balance. For some subsidized direct loans, government will help the students to pay the interest accrued on their loans during deferment or forbearance period.
Student Loan forgiveness: Once you are out of default, you will be eligible for student loan forgiveness. However, you need to meet the student loan forgiveness requirements.
Eligibility for federal student aids: You will be eligible to receive new student loans and other federal student aids.
Choice of repayment plan: Remember that when your loan is still in default, you cannot be enrolled into IBR program. But once you are out of default, you regain your privilege to be able to choose a repayment plan that is convenient for you.
No more default status: This is the main advantage that student loan rehabilitation has over student loan consolidation. That is why many borrowers will prefer rehabilitating their loans despite the fact that it is a longer route. Immediately you get your student loan out of default, the default status will be removed from your credit history.
It stops collection calls: Once you are able to agree with your lender that you will like to rehabilitate your defaulted student loans, you should expect an end to all the collection calls. This alone can make one to enjoy unusual peace.
Cons of Student Loan Rehabilitation
The process is long: Student loan rehabilitation requires ten months consecutive payments before you can get your loan out of default. This may not suit people that want to get their student loans out of default immediately.
Impact of late payment: If you plan to rehabilitate your defaulted student loan, you should have it at the back of your mind that you will not make late payment. That is the only way to get the loan out of default within the ten months timeframe. If you make any late payment in-between, you will need to start the cycle afresh. This will continue until you are able to make ten consecutive payments promptly for ten months.
Rehabilitation is only once: If you default in your payment the second time, you will not be able to rehabilitate the student loan the second time. Student loan rehabilitation is one time opportunity.
Payment burden: Student loan rehabilitation can lead to double monthly payments if your loan is already under wage garnishment. Any payment you make under wage garnishment will not be counted towards your student loan rehabilitation payment amount. However, after you have successfully made payments for good five months, you can have your wage garnishment suspended.
Student Loan Consolidation
The second option for you to get your student loan out of default is by consolidating the loans. Instead of waiting for ten months before you can get your loan out of default under student loan rehabilitation, student loan consolidation can help you achieve this within thirty to sixty days. This can be achieved by consolidating the defaulted student loans with other loans under Direct Consolidation Loan. How does student loan consolidation work? You simply take a new loan in order to pay off the existing loans.
Before your lender can allow you to consolidate your defaulted student loan, you must make three consecutive monthly payments on the defaulted loan. The payment amount has to be made voluntarily and on time. The monthly payment must also be the full monthly payment you are making before the loan went into default. Also, you must agree that you will repay the new consolidation loan under income based repayment plan.
Advantages of Student Loan Consolidation
Just like student loan rehabilitation, you will be eligible for the following:
- Student loan deferment
- Student loan forbearance
- Student loan forgiveness
- New federal student aids
- No more collection calls
However, the default status will not be removed from your credit history. This is the main disadvantage of student loan consolidation.