Student loan rehabilitation can improve your credit

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If you're in default on your federal student loans, there's a rehabilitation program that can take that default off your credit report.

I found this out from the nice fellow who installed our security system and is using this rehabilitation program to do just what it's designed to do.

This is a one-time opportunity to get back on track.

To use it, you need to know what kind of student loans you have. Only federal student loans are eligible, a list that includes Stafford loans, Perkins loans, Parent Loans for Undergraduate Students (PLUS), PLUS loans for graduate and professional students (Grad PLUS), federal consolidation loans, federal SLS loans, Health Professions Student Loans (HPSL) and Nursing Student Loans (NSL).

Your loans must be in default to qualify, but you can't have a legal judgment against you as a result of that default. Your lender may still be willing to rehabilitate your loan, but the rehabilitation won't be under this program.

Your original loan papers will tell you what kind of loan you took out. You can also look up the details at

You need to get in touch with your lender and arrange a rehabilitation agreement, which will stipulate your monthly payment amounts and their due dates for the next nine months. The payments have to be reasonable and affordable, which for many people means 1% of the loan balance.

Demonstrate financial hardship, and you might be able to negotiate a smaller payment — remembering, of course, that paying off the loan is your ultimate goal, and bigger payments help you do that faster.

Then you make those payments as agreed, within 20 days of their due dates. You can't pay in advance or make extra payments to speed the process along.

You only get one chance to rehabilitate a loan. If you let the loan default again, this program won't come to your rescue.

What's in Your Score?

Factor Percentage
Payment history 35%
Credit utilization 30%
Length of credit history 15%
New credit opened 10%
Types of credit used 10%

Once you've successfully completed your nine months of loan rehabilitation, your loan loses its default status. Instead, your credit will show that your loan repayment is in good standing.

That can repair a lot of the damage the default did to your credit.

Unfortunately, your credit report will still note any late or nonexistent payments that occurred before you rehabilitated the loan.

But your credit score should increase, and you'll also regain your eligibility for deferments, forbearance and additional financial aid.

Collections and legal actions stop, wage garnishment either stops or never starts, and the IRS keeps its fingers off your tax refunds, provided it has no other reason to take them.

Your loans reset to their original terms, interest rates and repayment schedule, with a schedule adjustment for the nine months of repayment. Your regular monthly repayment rate might be more than it was during the nine months of rehabilitation, and your lender may add collection costs to your loan principal.

If that program doesn't work for you for some reason, you have other options.

One of them is obvious: Repay the loan in full.

Meghan Loftus

Success Story: Paying down a student loan. Meghan Loftus paid down her student loans more than five years early by living on a budget. Follow her three tips:

  • Live frugally.
  • Build bigger payments into your budget.
  • Don't neglect savings.

Student loans are notoriously sticky — even bankruptcy doesn't usually remove the obligation to repay them — so consider putting an inheritance, tax refund, bonus or other found money toward paying off a student loan.

You might also qualify for a deferment (the government pays the accruing interest) or forbearance (the accruing interest gets added to the loan principal) if you're in school, unemployed, underemployed, in the Peace Corps or in the U.S. military.

If you're in a public service job, you may be able to have some of your loan forgiven, but only after you've made 10 years of on-time payments.

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