Do Not “Rehabilitate” Your Defaulted Student Loans. It’s a Trap!
80% of Rehabilitated Loans Default Again.
As the first student loan activist in the country, I’ve seen all manner of tricks and traps foisted on the public by the student loan industry. There arenone so harmful and costly than student loan rehabilitation.
This is where a federal student loan falls into default, and the borrower makes payments, typically for ten months, and at the end of this term, the borrower signs for a new, much larger loan balance in good standing.
With collections activities resuming today, we are seeing a virtual army of “student loan lawyers”, “Debt Coaches”, and all manner of influencers, NGO’s, and even astroturf organizations (who claim to be student loan activists) pushing defaulted borrowers to do this.
This is terrible advice. You should run away- fast- from anyone counseling you to do this.
The fact of the matter is that these “rehabilitated” loans default again around 80% of the time. The CFPB found a re-default rate of ~75%, but Moody’s guidance going back decades indicate a re-default rate that is 4 times higher than normal loans, which could easily exceed 80%.
The reason the student loan industry pushes borrowers to do these loan rehabilitations so hard: There is a 16% commission that comes with them, payable by the Department of Education. Imagine defaulting on a loan at $50,000, rehabilitating, and being stuck with a new loan balance of $100,000 (a fairly typical increase with collection costs, interest, etc). Someone is paid $16,000 by the U.S. Government in commission on this much larger loan balance. This is hugely lucrative for the student loan industry- far more profitable than for servicing a loan that remains in good stead.
This is both a massive fleecing of the taxpayer, and financially ruinous for the borrower, who were unable to handle their much smaller loans in the first place, and who will almost certainly re-default. The only winner on these transactions is the student loan industry.
We are now in a mass default on student loans. This has been the fantasy of the student debt collection industry and their astroturf partners on social media for decades. Their dream has now come true.
If you’re a defaulted borrowers, they’re coming for you. Please be smarter than that.
What is MOST nefarious: Legislation introduced by Rep. Virginia Foxx (R-NC) in the “Big, Beautiful Bill” - legislation that is very likely to pass in the coming months- would increase the number of allowable loan rehabilitations from 1 to 2. This will make the rehabilitation process order-of-magnitude more harmful to borrowers who’ve already rehabilitated their loans once, re-defaults.
Imagine a borrower who defaulted on a $50,000 loan, rehabilitated their loans into a $100,000 new loan, then defaulted again (as most do). The industry can now coerce this borrower into rehabilitating again, and sign for a new, much larger loan- probably around $200,000. This will generate another much larger, $32,000 commission for the industry (in addition to the first, $16,000 the industry received on the first rehabilitation), and the borrowers will have a far, far greater likelihood of defaulting again than before.
This shameful, taxpayer giveaway to the student loan industry is the most dangerous and damaging legislation I have seen in the 20 years I have been looking closely at the federal student loan program.
While there really is no good advice to give defaulted borrowers, who have no good options because the most fundamental consumer protections (like bankruptcy rights, statutes of limitations, and others) have been stripped uniquely from federal student loans, they clearly should not rehabilitate their defaulted loans.
The federal student loan program is now in catastrophic failure where two-thirds of borrowers aren’t paying, and Tens of millions either are- or will soon be- in default. At the same time, nearly all the consumer protections that exist for all other loans have been stripped from student loans.
Frankly, Congress and the President should end and replace this nationally threatening loan scam.
The ONLY good advice for defaulted student loan borrowers: fight for the return of bankruptcy protections to this unconstitutionally predatory, hyper-inflationary debt. Only with this constitutionally enshrined right returned will borrowers have any leverage.
When bankruptcy rights are returned, the entire lending system will be forced to behave in good faith- as the Founders intended. Until that happens, we will see this failed, predatory behemoth ruin the lives of 85% of all student loan borrowers who- even before the pandemic- were never going to be able to repay their loans, according to the Trump appointee who ran the lending program during Trump’s first term.
