Student loan consolidation vs. rehabilitation
Student loans that fall into collections or default could have a negative effect on your credit report and history. Two ways you could help recover your student loans are through consolidation and rehabilitation. Understanding how each option works could help you choose the right one for your situation.
You must get your student loans out of default to regain federal benefits or apply for a refinance.
What is student loan consolidation?
Student loan consolidation typically lets borrowers combine multiple student loans into one loan and monthly payment. Consolidating student loans could help borrowers simplify monthly payments and alter repayment length.
If your student loans go into default, you can use consolidation to help get them out of default. For this option, your current loan that is in default will be paid off, and a new Direct Consolidation Loan pays off your defaulted loans. You will generally need to apply for an income-driven repayment plan as part of the process. Eligibility rules vary, so check StudentAid.gov.
What is student loan rehabilitation?
If your student loans end up in default, student loan rehabilitation allows you to move your loans out of default. With student loan rehabilitation, borrowers will be required to pay at least nine of 10 consecutive monthly payments and restore eligibility for federal aid or benefits on any federal student loans. Completing rehabilitation can end collection activity, including wage garnishment, on your defaulted loans.
Student loan rehabilitation does not forgive the remaining loan balance; it just removes your loans from default.
Key differences: Student loan consolidation vs. rehabilitation
Here are some of the main differences between consolidating student loans and rehabilitation.
Timeframe to complete resolution
Student loan rehabilitation will need to be completed in 10 months but can be completed in as little as nine months.
If you choose student consolidation, you can choose a timeframe that best suits your needs. Extending your payment timeline through consolidation can reduce the overall principal paid each month, while reducing your payment timeline could increase your payments but allow you to pay off your loans quicker. Borrowers with student loans in default can use consolidation to get their loans out of default in a few weeks.
Effect on credit report
Student loan rehabilitation will remove your student loans from default and drop the default status from your credit report. This could help improve your credit score over time.
Student loan consolidation does not automatically remove a default from your credit report. It can take up to seven years for a default status to drop from your credit report without using another method.
Cost, fees and monthly payment requirements
Your monthly rehabilitation payment is typically based on a percentage of your discretionary income, usually 10% or 15% depending on when your loans were made. If that amount isn't affordable, you can ask your loan holder to recalculate it based on your income and expenses. Payments can be as low as $5 per month. Your monthly payments for student loan consolidation will depend on the exact plan that works for your situation. Collection costs may apply depending on your loan type and loan holder. Ask your loan holder what costs apply to your loans before you choose.
Restoration of federal financial aid and Pell Grant eligibility
The restoration of any federal financial aid or Pell Grant eligibility is not available until your loans are out of default. This is the same for both rehabilitation or consolidation of student loans.
Options when choosing the right path for your financial situation
Having trouble deciding which option is the best for your student loans and financial situation? Let’s look at a few of your options.
When rehabilitation is the best option
If your goal is to fix your credit, student loan rehabilitation might be a better option for you. While rehabilitation can take longer than student loan consolidation, the completion of rehabilitation will remove a default mark from your credit report, allowing your credit score to bounce back quicker.
When consolidation makes the most sense
If you are looking to get your student loans out of collections or default in the shortest timeframe, student loan consolidation may make the most sense. While rehabilitation can take nine months, consolidation could be completed in as little as six weeks.
Altering your student loan payments for your financial situation
If you are looking to alter your student loan payments to better match your financial situation, you can consider a student loan refinance. Refinancing your student loans can lower your interest rate, shorten your loan term, extend your loan term or change your loan from a variable rate to a fixed rate. Student loan refinancing is not available while your loans are in default.
If this sounds like the right option for you, begin your student loan refinance today.
Yes, you can consolidate a student loan after you have completed student loan rehabilitation. Consolidating a student loan after rehabilitation could help reduce and simplify your monthly payments.
Student loan rehabilitation does not remove any late-payment marks that were reported on your credit score before rehabilitation has begun. However, student loan rehabilitation will remove the default status from your credit report.
Garnishment generally stops once you have made the required number of qualifying rehabilitation payments. Your loan holder can tell you when this applies to your loans. Consolidating your defaulted loans pays them off with a new loan, which can end collection activity on the old loans. If the new loan later goes into default.
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