Should I rehabilitate before consolidating my defaulted loan?Rehabilitation or Consolidation? There are many benefits to rehabilitating a defaulted loan before consolidation. If you consolidate a defaulted loan without rehabilitating it, your credit record continues to show a default status on the loan. This is true even after the consolidation loan pays off the defaulted loan in full.
However, if you rehabilitate a defaulted loan before consolidating it, the loan holder will update your credit record to no longer reflect the default status of the rehabilitated loan(s).
Keep in mind that if you default on your loan, you are liable for any collection costs incurred to collect the loan. If you pay off the defaulted loan by taking out a Consolidation Loan, the amount you borrow must be enough to pay off your defaulted loan, including principal, interest, and collection costs. This means that the amount of the new loan may need to be up to 18.5% larger than the principal and interest outstanding on your defaulted loan. Both rehabilitation and consolidation will reinstate eligibility for additional Federal student aid under Title IV of the Higher Education Act (Pell Grants, FFEL and Direct Loans, etc.). |