Will Student Loan Rehab Fix Your Credit?

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When Lionel Alexander rehabilitated his federal student loan he thought his credit would get back on track. After all, that’s one of the promises of federal student loan rehabilitation: that the default will be removed from the borrower’s credit reports.

Student loan rehabilitation is a process that allows borrowers who have defaulted on federal loans to make reasonable and affordable payments to get them out of default. It usually requires the borrower to make nine consecutive payments on time.

What he didn’t know is that there is a hidden trap when it comes to student loan rehabilitation and credit reports. While the notation about the default will be removed from the borrower’s credit reports upon completion of the program, late payments leading up to that point may remain for seven years and continue to severely hurt the borrower’s credit.

Alexander feels misled. He acknowledges that he was told that the default would be removed if he rehabilitated his loan. “And that’s pretty specific in hindsight”, he says. “But when you first get that agreement, all it says to the layperson is that you are going to be fine afterward.”

“We agree that loan holders and collectors tend to oversell the benefits of rehabilitation,” says Deanne Loonin, staff attorney with the National Consumer Law Center. The organization recommends “full credit repair relief “ in a policy brief published by its Student Loan Borrower Assistance project.

No News Isn’t Good News

Alexander defaulted on two student loans in early 2011. Shortly after he defaulted, though, he was able to come up with a plan to pay them back. One loan, with Sallie Mae, had been turned over to the Louisiana Office of Student Financial Assistance. The other loan was through the University of New Orleans.

Lionel Alexander

Lionel Alexander

He made the required payments on both loans for nine months and at the beginning of 2012 received letters saying that his loans had been successfully rehabilitated. “I just assumed everything was fine,” he says.

It wasn’t until the summer 2012 that he signed up for a credit monitoring service and was shocked to discover a lot of negative information still on his reports. In fact the Sallie Mae loan was now reported three times: first under the original loan with Sallie Mae, then with the servicer that handled his loan while in default, and finally with the new servicer he was paying post-rehabilitation.

More disturbingly, Sallie Mae was still reporting the default, which should have been removed by then.

He wrote a letter to Sallie Mae but they refused to correct it. Recently, he says he “decided to take up the fight again.” He sent another letter, and followed up with a phone call that lasted two hours. He knew his rights, and insisted they at least remove the default notation. “Over the phone they still refused to amend any part of the reporting of the loan,” he explained in an email, “but then a week later, I checked my daily Experian credit report and saw that they’d amended the loan’s status to “Unknown” and removed the default and the government claim remarks, instead remarking now that the loan had been ‘transferred to another office.’”

Fortunately, his other lender was more accommodating. Upon his request, all negative information related to the University of New Orleans loan was removed.

But the Sallie Mae loan still shows 90- and 120-day late payments which are dragging down his credit scores. Even though the default was removed, Alexander says those late payments mean “my credit score didn’t really rise, so it really didn’t benefit my credit.”

He is now in the process of getting ready to launch a food truck next year. He has saved a considerable amount of money but will still need a loan and he’s concerned his credit will be a deal-breaker.

Student Loan Borrowers Beware

There can be very good reasons to rehabilitate a federal loan and get it out of default. For example, the borrower may be able to get into a more affordable repayment program once that process is completed. And it can restore their eligibility for federal student aid.

However, if borrowers are hoping their credit scores will improve, they may be in for a rude awakening.

Student loan borrowers can find out how their loans are affecting their credit scores by getting a free credit score at It will include analysis of the factors affecting the score.

More on Student Loans:

Main image: iStock; Inset image courtesy Lionel Alexander

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  • Gerri Detweiler

    I’m glad you are getting good results. I’ve heard other complaints from other consumers who is not seen that benefit, and so it seems to be somewhat hit or miss. Please do keep us posted on your progress. Thanks!


    they were garnishing my paychecks so I didn’t really have a choice other than to get into a rehab program but I’m hoping it does help my credit score. I’ve never lived off credit really so my scoreis basically low for that reason. they say bad credit it better than no credit :/ I would like to finance an automobile someday though. right not my credit is in the low 500’s. I’ve made the rehab payments to stop the garnishments, now I have 3 more months to complete the program. wish me luck. hopefully I don’t have to go thru what Alexander went through.

  • G-Falk

    Personal anecdotes can’t possibly prove Alexander’s story as exception or rule; only actual data could do that. We should be clear about that. As for my own personal anecdote, I was misled similarly by Pennsylvania Higher Ed. Assistance Agency, or “PHEAA,” regarding my so-called rehabilitation. I’ve paid on time now for 11 months; they promised me rehabilitation after 9. However, to date, they have not lifted a finger to change the account status with respect to my credit reporting. They are liars, plain and simple; and in my book, being a liar is far less ethical than being a deadbeat on one’s student loan.

  • bm4n

    I graduated in 2010, moved to bigger city to find a well paying job and had no such luck. I defaulted on my student loans soon after. I wasn’t able to make any payments and now I have a decent income, I’ve consolidated all my loans last year, but the negative marks, countless missed payments from the original loans still show on my credit report and are reflected in my score. How do I get the missed payments off? or is that possible? It is the only on my credit report and its killing my score.

    • Credit Experts

      You may not be able to get the missed payments off. At this point, your best bets are time (which diminishes the impact of negative information) and positive credit history. You get positive credit history by paying on time and keeping debt levels low. If you are not eligible for a traditional credit card, consider getting a secured card, and keeping your balance below 30% (below 10% is even better). Do use the card, but use it lightly and pay it on time. Here are more resources that may help:
      How Secured Cards Help Build Credit
      How to Build Credit the Smart Way

  • Kathy

    I did this and my credit raised by over 70 points

  • Gerri Detweiler

    Were you behind on payments when you went into forbearance?

    • Dee

      When they put you in forbearance they are supposed to include what you have not paid.

  • Kina Gloria

    I am having the same issue. I thought that my loans would be removed after completing the program to get out of default, but it still shows the debts and all the late payments are there. They told me this would happen today, August 6th. My only hope is maybe it was delayed. I guess I will have to write like this person did. I am so upset.

    • Gerri Detweiler

      It’s very confusing isn’t it? Make sure you let the Consumer Financial Protection Bureau know about your experience.

  • Gerri Detweiler

    Thanks for sharing your story. I’d suggest you also file a complaint with the CFPB and the Department of Education’s Ombudsman’s Office.

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