Call it America’s student loan crisis. With more than $1.5 trillion in student loans , the country is awash with debt. As the crisis balloons—the average debt among students graduating with bachelor’s degrees in the 2016 school year is $28,400—and more than 40% of borrowers are expected to default on their loans by 2023 .
One proportional response is student loan rehabilitation programs. Loan rehabilitation is a one-time opportunity to clear the default on a federal student loan. It also allows you to regain eligibility for federal student aid after your loans have gone into default.
Even the entertainment industry is catching on. In 2018, a game show launched where the objective wasn’t money, a cool car, or even a vacation. On “Paid Off ”, contestants compete for money to pay down their student loans. So it seems some borrowers are turning to game shows as a loan rehabilitation alternative.
In 2017 alone, the Treasury Offset program seized $2.8 billion from student borrowers in default. These funds were taken from borrowers’ assets like Social Security payments or federal earned-income tax credit.
For the millions in default , is a student loan rehabilitation program a good option? Or will the system just make things worse?
With student loan rehabilitation, you can work with lenders to create a new payment plan that is theoretically more reasonable and affordable. This can be advantageous if you follow deadlines moving forward, but the flip side of student loan rehabilitation programs is that they don’t always work the way they are intended to.
How the Student Loan Rehabilitation Program Can Help
One in 10 students have defaulted on their student loans less than three years after beginning to pay down their debt. For those in default, a student loan rehabilitation program can be beneficial. Since student loan debts can’t be discharged, the consequences of default can be steep. Here are some of worst potential consequences:
• You can lose eligibility for deferment or forbearance.
• Your entire loan becomes due in full without any repayment plan options.
• Your credit score can suffer.
• New collection costs will likely cause your loan balance to increase.
• If you want to return to school, you may become ineligible for federal aid in the future.
• You can be sued.
A student loan rehabilitation program offers lenders in default a chance to clear the nonpayment from their record. This one-time opportunity also allows them to regain eligibility for future federal aid. This means that if you want to get your master’s or your PhD, you will once again be eligible to receive loans from the federal government. However, if you default on the loan again and don’t make payments in time, you will not be eligible for any federal student aid in the future.
Each federal loan has slightly different rehabilitation terms. In general, it takes you three on-time, full payments to be able to qualify for student aid again. In some cases, once you’ve made nine payments, your loans can be rehabilitated, and the default can be removed from your credit history.
Consolidating Your Loans While in Default
Even while in default, you can choose to consolidate your loans, making it easier to keep up with one monthly payment instead of multiple. This means using a Direct Consolidation Loan with a new interest rate—generally the weighted average of your initial interest rates. An important note: Consolidating only applies to your federal loans—you can’t roll your private loans into a Direct Consolidation Loan.
Refinancing Your Student Loans
If your student loans have been rehabilitated, and you’re now in good standing on your loans, you may want to consider refinancing. Refinancing lets you to take out a brand-new loan with a new interest rate and new loan terms. If you qualify, refinancing could make you eligible for a lower interest rate or lower monthly payments.
If you’re worried about your loans potentially going into default, look into whether refinancing can lower your payments. Check how much you currently owe and what your interest rates are on your private and federal loans. Then, you can take a look at a student loan calculator to see what your new payment plan might be—you may have more options than you think.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.