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FAQ: What happens to a defaulted student loan once it has been rehabilitated?

June 29, 2011

As a direct loan servicer, Nelnet’s Partner Solutions team receives questions from the school financial aid and borrower community on a regular basis. In an effort to share the information and educate our school partners, Partner Solutions will begin posting to its blog some of the more relevant and well-timed questions that we receive.

 Q: What happens to defaulted FFELP and Federally-owned (PUT and Direct Loans) once they have been rehabilitated?

 A: When a defaulted FFELP loan is rehabilitated, it is purchased by a lender after the rehab payments are made to complete the rehab process. The loan does not have to be purchased by the original lender, but will be repurchased by an eligible lender as arranged by the guarantor. Conversely, when a PUT or Direct Loan is rehabilitated, it is sent by Debt Collection Services to a Federal Loan Servicer.

Once a loan is rehabilitated, the holder must immediately establish a repayment period with the borrower that meets the requirements applicable to other loans of the same type as the rehabilitated loan, and must allow the borrower to choose any repayment schedule that is available for that loan type, including the income-based repayment (IBR) plan. A repayment schedule must be sent to the borrower no more than 60 days, and the first payment due date must be no more than 75 days after the holder considers the repurchase to be complete.

Guaranty Agencies must provide notice of rehab to the prior loan holder. The prior holder then must request within 30 days that any consumer reporting agency to which the default claim payment was reported remove the default from the borrower’s credit history. For PUT and Direct Loans, ED instructs any consumer reporting agency to which the default was reported to remove the default from the borrower’s credit history.

Alan Ishida - Regional Director, Nelnet Partner Solutions (CO, HI, Guam, IA, WI, WV)

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