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FAQ: What are the requirements to rehabilitate a defaulted loan, and what are the advantages to the borrower for doing so?

September 8, 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 is posting to the blog the frequently asked questions that we receive.

 Q:  What are the requirements to rehabilitate a defaulted loan, and what are the advantages to the borrower for doing so?

 A:  To rehabilitate a Direct, a FFELP or Perkins loan, a borrower must make at least nine (9) voluntary full payments of a reasonable and affordable amount within twenty (20) days of their monthly due date over a consecutive ten (10) month period to the Department servicer or guaranty agency.  Payments secured from the borrower on an involuntary basis, such as through wage garnishment or litigation, cannot be counted toward their nine (9) payments.  How the loan is handled once the borrower has made the required payments varies by which program the borrower was a loan recipient of:

  • Direct loan recipient:   Once the borrower has made the required payments, their loan(s) will be returned to one of the designated Direct Loan servicers.
  • FFEL loan recipient:  Once the borrower has made the required payments, their loan(s) may be purchased by an eligible lending institution.
  • Perkins loan recipient: Once the borrower has made the required payments, their loan(s) will continue to be serviced by the institution until the balance owed is paid in full.

The following are borrower advantages for rehabilitating a defaulted loan:

  • Their loan(s) will no longer be considered to be in a default status.
  • The default status reported by their loan holder to the national credit bureaus will be deleted.
  • The borrower will be eligible for the same benefits that were available on the loans before the loans defaulted. This may include remaining deferment eligibility, forbearance options, and Title IV eligibility.
  • Wage garnishment ends and the Internal Revenue Service no longer withholds the borrowers income tax refund.

Have more questions?  Please let us know.  We will get them answered for you.

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

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