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    How Does Debt Rehabilitation Work?

    How Does Debt Rehabilitation Work

    If your student debt is in default, you don’t have to accept your fate and wait for the collector’s call. Through a process called debt rehabilitation, you can settle the amount you owe in a series of monthly installments that suit your budget. 

    In this article, we’ll take a closer look at the basics of this effective debt repayment method and give you the information you need to decide whether you’d like to apply. 

    How Is It Different To Debt Consolidation? 

    You may have been offered a consolidation loan in the past to help settle your debt - but is this the same as a rehabilitation plan? The short answer is no. 

    • When you consolidate a debt - or debts - you’re essentially applying for one big loan that will let you pay down all the smaller ones. This approach saves you time, helps you manage your repayments better, and ideally comes with a lower APR than your existing debt. 
    • Rehabilitating a debt doesn’t involve applying for a new loan. Instead, you’ll approach your creditor and take advantage of a one-time offer to resume payments. This time you’ll be offered a repayment plan that suits your budget.

    The Steps  

    If you’re keen to start over with your current lender and settle your debt, you may be wondering what’s involved. Here’s what you’ll need to do in order to get the rehabilitation process started. 

    Get In Touch With Your Loan Holder             

    Very few loan providers advertise their rehabilitation programs - probably because some borrowers may be tempted to default on their payments if they knew there was an alternative. 

    • You’ll need to approach your lender directly, explain that your loan is in default and ask them to explain their rehabilitation offering in detail.
    • It’s important to note the total amount you’ll be repaying, the monthly installment your lender offers you, and what APR you’re agreeing to. 
    • Your monthly installment shouldn’t exceed 15% of your discretionary income (the money that’s left over after you’ve paid taxes and covered your standard monthly costs). If you feel the amount is too high, you can always ask for a lower one. Note that the smaller your installment, the longer your loan will take to be repaid. 

    Agree To Rehabilitation Amount And Sign Agreement           

    Once you’re satisfied with the amount your lender has suggested and you’ve asked all the questions you think are relevant, you can ask them to send you a rehabilitation agreement to sign. 

    • You’ll want to double check the monthly installment, the period of the loan repayment (usually stated in months and years), and the interest rate. These should all match what you were quoted when you spoke with your provider. 
    • Once you’re satisfied with the agreement you’re entering into, you can sign the document and return it to your loan company. You’ll receive a copy for your reference. 

    With your agreement in place, you’re ready to repay your loan and settle it for good. All you’ll need to do is ensure that you make your payments each month. 

    Make Nine Payments           

    One of the most important things to know about restoring your loan to current status is the need to make nine monthly payments out of ten in a row. 

    • You’ll be required to make each monthly repayment within 20 days of the due date for at least nine months out of ten during your rehabilitation phase. If you skip more than one payment during this time, your loan will go back into default. 
    • If you’re in the armed forces and are deployed overseas, you may be able to freeze this repayment period temporarily - but most other borrowers will need to comply with it as a condition of rehabilitation. 

    What Happens After?   

    Once you’ve completed your ten-month probation period successfully, your loan provider may sell your debt to another company and you’ll be informed about the next steps you can take to pay down your debt. 

    • FEEL Loans are often not able to be sold - but this isn’t the case with Direct Loans. Your provider will inform you of the status of your debt. 
    • By law, your monthly repayment after rehabilitation shouldn’t increase for at least 90 days. 
    • As soon as you know who your loan has been sold to, you should contact your new creditor and ensure that the new monthly repayment is affordable - or else you risk missing payments and finding yourself in default again. 


    A student loan in default doesn’t need to become a cause of anxiety. Debt rehabilitation is a one-off opportunity to restore your loan, repay it, and move forward with your other financial goals. 

    Approaching your creditor to request this type of assistance - and ensuring that your repayments are affordable both during and after rehabilitation - will ultimately boost your chances of success.