You should sign the student loan rehabilitation agreement letter — if you want to get out of default. The loan rehabilitation program requires you make 9 monthly payments and turn in all necessary documents. The necessary documents often include the income and expense form, proof of income, and the signed loan rehabilitation agreement letter.
What the Loan Rehabilitation Agreement Letter Says
For starters, the header typically will list your name, address, phone number, and account number with the Department of Education.
After that, there’s a preamble of sorts that gives a general overview of the agreement.
It will typically state that you’re agreeing to rehabilitate your defaulted federal student loans (Federal Family Education Loans, Perkins, or Direct Loans).
The preamble will go on to identify where you should return it to and your monthly payment amount.
Rehabilitation Payment Amount
Remember, your rehabilitation payment was calculated using either your family size and adjusted gross income from your tax return or your financial circumstances (i.e., your discretionary income after calculating your monthly income, expenses, county of residence, and family size).
Once you get past the preliminary information, you move on to the actual terms of the agreement.
Here’s my interpretation.
Don’t simply rely on my interpretation. While I’m good at my job as a student loan lawyer, run the letter by a lawyer if you have questions.
The Terms of the Loan Rehabilitation Agreement Letter
Before getting to the terms, you’ll be reminded again of the core of your agreement:
You’re agreeing to get the default status removed from your federal loan by making 9 monthly loan payments of a certain dollar amount starting on a date you decided and continuing each month thereafter.
From there, the letter goes on to provide the following terms:
- You must make your payment within 20 days of the due date. The payment can be made up to 20 days earlier or later. Making the payment 20 days earlier can stop a wage garnishment quicker.
- With FFEL and Direct Loans, you have 10 months to make your 9 monthly payments.
- With Perkins loans, you have 9 months to make your 9 monthly payments.If you fail to make your on time payments, you’ll have to restart the entire 9 or 10 month period of payments over.
- You can change your monthly payment if you can no longer afford it but you first need to get the agreement of the Department of Education or the collection agency it hired.
- If you ask to change the payment amount, you’ll need to provide updated paperwork of your financial circumstances.
- Even after you make your required payments, you’ll still need to keep making payments until your loan is sent to your new loan servicer. Typically, it takes a month or two for this to happen. In some cases, I’ve seen the servicer place your loan into a deferment/forbearance while they get your federal loans onboarded.
- The interest that accrues while you’re in the rehabilitation program will be capitalized. Depending on your interest rate and your monthly payment, this can lead to your loan balance growing rapidly.
- Here’s the big one. The Department of Education will agree to waive the collection costs on your account after you complete the rehabilitation program. This is a one time benefit. So if you default a second time, the Department will add new collection fees and will reinstate the fees it waived. If that happens, your student loan debt can balloon.
- After your loans are transferred to your new loan servicer, your credit report will be updated to have the student loan default status removed. The late payments, however, will remain in your credit history. Because of that, don’t expect your credit score to take too much of a jump.
- Speak with your new loan servicer about getting an affordable payment under one an income-based repayment plan.
- Rehabilitation is a one-time thing. If you default a second time, your only way out of default may be to apply for student loan consolidation.
- If you’re being garnished, the garnishment won’t stop until after you’ve made your 5 monthly payment. After that, you still need to make your remaining payments. If not, the wage garnishment can start back.
What the letter doesn’t say is that after your 6 monthly payment, you can regain eligibility for federal student aid.
Just because you’ve signed the rehabilitation agreement doesn’t mean your tax refund is safe from offset. Before you file your income tax return, be sure you’ve been removed from the Treasury Offset Program List. Here’s what to do.
That means you can take out new loans and get other financial aid to go back to school even before you get your loans out of default.
In this post, I reviewed the loan rehabilitation agreement letter.
In my opinion, it’s a no-brainer that you sign it if you want to get your federal student loans out of default.
The truth is that there’s no room for negotiation on your part. It’s effectively a take it or leave it contract.
So should you sign it?
Unless you’re willing to stay in a default status forever or can afford a federal student loan settlement, signing the letter is likely going to be your best move.