Home> Credit Library

FAQ ABOUT STUDENT LOANS, DEFAULT AND YOUR CREDIT

Loan Rehabilitation
If you start a rehabilitation of a student loan by making 12 consecutive timely payments, you may be able to have it rehabilitated and the previous delinquency expunged. This is an excellent way to get out of delinquent student loans and repair your credit. Rehab is completely legal and allowable under the Higher Education Act. So, before you continue letting your student loans remain delinquent or go to a collection agency, consider the following.

As stated by the Education Center Site:
You may be interested in participating in the loan rehabilitation program. After you have made 12 consecutive monthly payments that are both reasonable and affordable, we will agree to reinsure the loan. You will then be eligible to have the loan purchased by a lending institution. Once a loan is rehabilitated, it will be taken out of default, the credit bureau reports made by the servicing agency will be deleted, you will be able to repay the loan over a 9 year period, and you will again be eligible for additional Title IV student financial aid funds.

If you rehabilitated your loans and the prior delinquency has not been removed read this section:

The Higher Education Act of 1965 and the 1998 amendments clearly states the required statutes of this Act. If the Dept. of Education or the lender involved do not expunge the prior delinquent history after you have successfully rehabilitated the loan then they have violated the HEA and the FCRA and can be sued.  It will probably take one student who is sick and tired of being told that the Dept. of Ed. cannot enforce it and finding a feisty attorney who will file a suit, possibly a large class action. It is absolutely stated in the Act that the previous delinquency will be removed IF REHABILITATION IS ACCEPTED. Not doing so violates the Act and your constitutional rights!  There is no wording in the Act of "maybe" or "qualify for possible deletion." It is clear and concise and must be followed. Below is a portion of the importance to this statute. I also recommend those affected print that portion out and send a demand letter to both the previous lender who refuses to remove it and the Dept. of Education along with a copy to:

Gail McLarnon, Program Specialist
Program Development Division, Office of Student Financial Assistance
400 Maryland Avenue, SW, ROB-3, Room 3045
Washington, D.C. 20202-5449.

Section 674.39 Loan Rehabilitation
We believe it is helpful to review the aspects of loan rehabilitation that relate to borrower benefits and institutional responsibilities that are required by law, and therefore cannot be changed. Under the 1998 Amendments, a defaulted loan is considered rehabilitated if the borrower of a loan made under this part who has defaulted on the loan makes the required 12 payments. Accordingly, loan rehabilitation is available to all defaulted borrowers with a loan.  If a borrower requests loan rehabilitation, the institution or its servicer must allow the borrower to rehabilitate his or her loan. This also applies to defaulted loans that an institution has placed with a collection agency. However, the borrower may only rehabilitate a defaulted loan once.

Because the statute specifically refers to a stream of 12 payments as determined by the institution, the institution must work with the borrower to determine a payment amount that is appropriate. The statute does not require a signed rehabilitation agreement. In accordance with the 1998 Amendments, once the loan is rehabilitated (after the 12th payment has been made), the institution or its servicer must request that any credit bureau to which the defaulted loan was reported remove the default from the borrower's credit history.  The borrower is brought current and is no longer considered to be delinquent or in default. Removing the default is consistent with the requirements of the Fair Credit Reporting Act (FCRA), which requires that an institution correct and update the information it furnishes to a credit reporting agency. 

In this case, the institution would be updating the borrower's credit history to reflect the rehabilitation of the loan. The FCRA also requires credit reporting agencies to have reasonable procedures in place to accept updated or corrected information. Once the loan is rehabilitated, the borrower is subject to the terms, conditions, benefits and privileges of the borrower's original promissory note. This includes eligibility for deferments, forbearance, cancellations, and flexible repayment options.  The borrower is also subject to the same responsibilities under the note, which include, but are not limited to, making regular payments and informing the school or servicer of an address change or the need for flexible repayment arrangements. We sum up this status by saying the borrower is returned to regular repayment status in Sec. 674.39(b)(1) of the regulations. Finally, in accordance with the 1998 Amendments, a borrower who has rehabilitated his or her loan re-establishes eligibility for Title IV student financial assistance, as long as the borrower is otherwise eligible.

By virtue of section 484A(a) of the Higher Education Act, statute of limitations of no kind now limits Ed's or the guaranty agency's ability to file suit, enforce judgments, initiate offsets, or other actions, to collect a defaulted student loan. Regardless of the age of the debt, statutes of limitation are no longer valid defenses against repayment of a student loan.

What about disputing them through the CRA
Disputing student loans through the credit bureaus is usually a long shot, even if it gets accidentally deleted, it won't cure you of the debt, they will most likely validate the dispute later and  re-insert it and still be looking for you. However if they are reporting duplicates, inaccuracies or old transferred loans, dispute those. Additionally, keep all documentation regarding rehabilitation so you can have copies for the credit bureaus. Some education centers will even withhold your degree if you don't pay and some web sites (government sites) are now posting the "Most Wanted" debtors on their site for people who have defaulted., Seems like third party disclosure which could get an institution into big trouble, but remember we are dealing with the government..

Previous - Next - or- All about student loans-Default, Collections, Lawsuits and Repayment