Student Loan Rehabilitation vs. Consolidation

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Updated on Monday, January 28, 2019


If you had a stack of cash laying around, you wouldn’t be in this predicament, now would you?

So, it’s probably safe to rule out the simplest way to get out of federal student loan default: paying off your debt completely, with one large lump sum. Instead, we’ll consider two other, perhaps more realistic, ways to remove the default status from your college debt: rehabilitation and consolidation.

Student loan rehabilitation and consolidation reach the same end but by different means, so let’s review them to see which one might be most advantageous for your situation.

Dealing with student loan default

A default occurs when you’ve let at least 270 days pass without making a payment on your federal student loan. At that point, the balance “accelerates,” meaning that it suddenly become due in one big chunk.

Avoiding a default, if at all possible, is the best option, since it will sidestep other serious consequences, including:

  • Your loan servicer could place your loan with a collections agency.
  • Your wages could be garnished, or you could be sued in court.
  • Your tax refund or Social Security benefits could be withheld.
  • You could lose your driver’s license or other state-issued, professional licenses.

Through loan rehabilitation or consolidation — or, yes, paying off the debt in full — you could remove the default and its consequences.

For instance, both rehabilitation and consolidation can allow you to regain previously forfeited benefits, such as:

  • Eligibility for deferment and forbearance
  • Ability to switch repayment plans
  • Access to loan forgiveness programs

Only through loan rehabilitation, however, would you be able to remove the record of default from your credit history. That’s where the differences between the repayment strategies start.

Student loan rehabilitation

For student loan default, rehabilitation is the hardest way to remove a default status because it’s the longest — but it’s also the most rewarding.

Through the government’s student loan rehabilitation program, you would be called to make nine loan payments within 10 months — that’s on top of, not in place of, wage garnishments or collections costs you might be forking over simultaneously. (Perkins Loan holders are given only nine months to play catch-up.)

Your servicer would set the monthly payment amount at no more than 15% of your discretionary income. If your income is on the low end of the of the spectrum, or if you can prove you have other exceptional but necessary expenses, your payment could be as low as $5.

Before we examine the pros and cons of this method, however, note that student loan rehabilitation programs are rarely offered by non-governmental lenders. With private lenders, you might be able to pause loan payments via forbearance, but you’ll first want to speak with your lender’s customer service to review all of your options.

Pros of student loan rehabilitation

Temporarily lowering your monthly payment is a positive here, but what happens after student loan rehabilitation?

Removing the default from your credit report is the primary benefit. Keep in mind, however, that any late or missed payments that occurred before the default will remain on your credit report for up to seven years.

Still, shedding the default from your report is a huge win. It would improve your credit score, making you a more viable candidate for student loan refinancing or a home mortgage, among other common forms of borrowing.

Cons of student loan rehabilitation

Aside from the cost and the 9 to 10 months it could take to achieve, loan rehabilitation comes with another unwelcome catch: It’s a one-time deal. You can only rehabilitate a defaulted debt once.

If you default a second time — and unfortunately, many borrowers become stuck in a default cycle — you would need to resort to loan consolidation.

Before embarking of rehabilitation, confirm you can afford the regular monthly repayment that starts after your 9- to 10-month rehab. If the amount seems like too great of a burden, you might be wise to switch repayment plans.

Student loan consolidation

A faster way to get your loans out of default is to consolidate them into one new loan that pays off your original debt. It takes less than 30 minutes to apply for a Direct Consolidation Loan, and there are no application fees.

To qualify, you must agree to repay the consolidated loan on an income-driven repayment (IDR) plan — or make three full monthly payments before consolidating.

An IDR plan would tie your future monthly payments to a percentage of your discretionary income.

The three-payment approach, albeit more expensive upfront, would allow you to keep your current repayment plan. That might be a good idea if, for example, you’ve already made headway toward Public Service Loan Forgiveness (PSLF) and don’t want to reset the clock, which would happen if you switched your payment plan.

Pros of student loan consolidation

Consolidating is an attractive option for many borrowers, not just those facing a default. Among the possible benefits of this approach are:

  • Simplifying your repayment to a single monthly payment
  • Choosing your new federal loan servicer
  • Lowering your monthly payment by extending your repayment term
  • Gaining eligibility for IDR plans

Additionally, if you default on your new Direct Consolidation Loan, you could re-consolidate it if you have another loan to pair with it. Otherwise, you’d have to resort to loan rehabilitation if payment in full isn’t possible.

Cons of student loan consolidation

Disadvantages of irreversible loan consolidation include:

  • Lengthening your repayment term, which allows interest to accrue, making your loan costlier
  • Yielding benefits specific to your original loans, as they might not carry over to a Direct Consolidation Loan
  • Losing credit for past, qualifying payments toward PSLF

There are also cons of consolidation that are specific to exiting a default. Most importantly, the default itself, as well as any late payments, will remain on your credit report for up to seven years. That’s the most significant difference from what happens after student loan rehabilitation.

Also, you wouldn’t be eligible to consolidate your defaulted debt until any wage garnishment or court order has been lifted — another stark difference with loan rehabilitation.

Student loan rehabilitation vs. consolidation: Which is right for you?

Having your federal student loans in default is a dire situation, but it can be solved. Short of a financial windfall that wipes away your debt, you can utilize either loan rehabilitation or consolidation to set things right.

Choosing between rehabilitation and consolidation is the first task. To make the best decision for your repayment, ask yourself what matters most.

If you have ambitious personal finance goals, such as buying a home in the near future, trudging through the longer route of loan rehabilitation might be worth the reward of cleaning up your credit report. Just be prepared for the long slough, plus the resumption of your larger, post-rehab monthly payment.

On the other hand, if permanently lowering your payments and simplifying your monthly obligation is a priority, a Direct Consolidation Loan could be the better choice. Your default would stick to your credit report much longer, but you’d have a more gradual path to ending your debt. Keep in mind, however, that you’d have to get out of collections before you can tap this option.

If you’re still not sure about the best course of action, it never hurts to ask for guidance. The Federal Student Aid office’s Student Loan Support Center can be reached at 1-800-557-7394. You could also review our guide to getting out of default for more detail on the strategies available to you.