FAQ: What Happens to a Defaulted Student Loan Once it has Been Rehabilitated?

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 enjoys sharing 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: Once a borrower completes the rehabilitation process for a FFELP loan, a lender will purchase the loan. This purchaser does not have to be the original lender; the purchaser will be arranged by the guarantor. Conversely, when a PUT or Direct Loan is rehabilitated, Debt Collection Services will send it 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.
• Allow the borrower to choose a repayment plan available for that loan type, including the income-driven repayment plans.
• Send a repayment schedule to the borrower no more than 60 days after the repurchase is complete. The first payment due date must be after no more than 75 days.

Guaranty Agencies must provide notice of rehab to the prior loan holder. Within 30 days of notice, the prior holder must request that consumer reporting agencies remove the default from the borrower’s credit history. For PUT and Direct Loans, the Department of Education instructs consumer reporting agencies to remove the default from the borrower’s credit history. Please note that all reported delinquencies leading up to the default will remain on the borrower’s credit report, only the Defaulted status will be removed.

This content was originally posted on June 29, 2011. It has been updated to reflect current information.