Loan rehabilitation programs were designed to give borrowers a chance to get loans that are owned by the Department of Education out of default status. This includes Direct Loans or FFEL Program loans.
Loan rehabilitation requires a newly agreed-upon small monthly payment, based on your income—some are as little as $5 a month. Once you have made the payments on time for a nine-month period and your loan is sold to a new lender, your loan will be deemed fully rehabilitated.
Note, though, that a fee for collection costs will be tacked on to your loan, but it can't exceed 16 percent of the principal balance and accrued interest at the time of the sale to the new lender.
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The benefits of rehabilitation include not only bringing your loan out of default and repairing the damage on your credit report, but after five months on the program, you can stop any garnishments being taken out of your paycheck or tax refund. After the program is complete, your student loan will also be eligible for forbearance and deferment.
Last but not least, the program will restore your eligibility for federal grants or for additional federal student loans if you wish to go to grad school.