Old Student Loan - Rehab to Add Back to Credit Report

[RadioRob]

I'm working with a friend to help him rebuild his credit.  I have the good will and validations under control.  One thing I discovered is that his tax refund is being held due to some old defaulted student loans.  These loans are old enough that they longer report on his credit report.  

Overall he has a pretty young AAOA (under 2 years) and his student loans are from the 90's, so obviously SIGNIFICANTLY older.  

I'm thinking about having him work to try a formal rehab.  Once he completes the rehab, I'm hoping it would report the positive trade line dated back to when the loan was first opened which would have a significant impact to his AAoA.  This would also remove the holds on his tax refunds as well.

Has anyone done this before after the trade line had already fallen off?  If so, what happened during the rehab process?  Did it re-add the trade line negatively until it was positive?  Are there any gotchas I should be considering before advising him?  

[Credit4Growth]

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@RadioRob wrote:

I'm working with a friend to help him rebuild his credit.  I have the good will and validations under control.  One thing I discovered is that his tax refund is being held due to some old defaulted student loans.  These loans are old enough that they longer report on his credit report.  (These last two statement applied to my situation as well)

Overall he has a pretty young AAOA (under 2 years) and his student loans are from the 90's (this is the situation I was in as well), so obviously SIGNIFICANTLY older. ... age is yet another number🤗

I'm thinking about having him work to try a formal rehab.  Once he completes the rehab, I'm hoping it would report the positive trade line dated back to when the loan was first opened which would have a significant impact to his AAoA.  This would also remove the holds on his tax refunds as well. (This was exactly my experiences with Fed loans.  I experienced about a 30-35 point FICO 8 increase in scores across all 3 CRA exactly this past FEB when the TLs repopulated onto the reports)

Has anyone done this before after the trade line had already fallen off?  ( I rehabbed after the defaulted TLs had already fallen off)   If so, what happened during the rehab process?  Did it re-add the trade line negatively until it was positive?  (No, only Positive TLs back dated to the original issue date - 23 years but with no payment history... could be due to the loans had already fallen off credit reports. )   Are there any gotchas I should be considering before advising him?  - Seek others advice/experience about any other gotchas, more specifically when the hold on Tax Refunds is released but the loan service provider will know best if & when your friend does decide to rehab

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I was informed from my service provider that Fed Loans can only be rehabbed 1 time.

I had intended to pay these loans down by half right before completing rehab to help manage the estimated monthly repayment amount and DTI of my credit profile - which will be important for the approval process when applying for credit in the future. 

Do to having a manageable repaymemt amount compared to income I did not pay the down nor consolidate the loans leaving me with not only 1 new 23 year old TL but 9 of them ranging from 23nto 21 years of age.

The best advice I can communicate here is to make sure you friend will understands the repayment options and estimated amounts they will need to address after rehab is done..

One unforseen or unnoticed  positive affect of having loans from the late 90's was that the original terms (% rate) on those student loans seem to much lower than of those issued/dispersed many years afterwards.   Even recently I have read of people refinacing/consolidating at a much higher rate that what I had during and after rehab, an average of 4.15%.

The SLs I am addresses did not qualify for the economic hardship/ 0% interest period (due to COVID-19) because they are not classified as Direct Loans or something to the effect.  However with the Fed cutting rates this year, as of July 1st my average interest rate dropped 2 percent as points down to 2.15%

Good luck!

Find out exactly what the rehab process will entail for your friend.  How many consecutive monthly payments?

Ask many more questions and chat with others that habe much more experience on the subject matter.  I can only share my experiences with you.

[Anonymous]

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@RadioRob wrote:

I'm working with a friend to help him rebuild his credit.  I have the good will and validations under control.  One thing I discovered is that his tax refund is being held due to some old defaulted student loans.  These loans are old enough that they longer report on his credit report.  

Overall he has a pretty young AAOA (under 2 years) and his student loans are from the 90's, so obviously SIGNIFICANTLY older.  

I'm thinking about having him work to try a formal rehab.  Once he completes the rehab, I'm hoping it would report the positive trade line dated back to when the loan was first opened which would have a significant impact to his AAoA.  This would also remove the holds on his tax refunds as well.

Has anyone done this before after the trade line had already fallen off?  If so, what happened during the rehab process?  Did it re-add the trade line negatively until it was positive?  Are there any gotchas I should be considering before advising him?  

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My SO is in the process of SL rehab with 2 servicers and I am in the process with 3 servicers (although one is being quite dificult, but that is a separate story and does not apply to 99% of individuals).

Our SLs have or will be dropping off our CRs before they are completed in rehab. They will be placed back on once completed and with their new servicer (or the same, depends on who it is with). Our SLs are older, but not as old as your friend's.

SLs can only be rehabbed once with 2 exceptions:

If they had been previously rehabbed 8/2008 or earlier, you can rehab a second time

If you started a rehab and did not complete it, you can rehab "again" because you technically did not complete the rehab and were never reinstated with the same or new servicer, meaning they never actually defaulted a second time. It is the same default. I had this happen and the CA explained to me that rehab was absolutely still an option, but it had to be restarted, I could not simply pick up where I left off, understandably.

The nice thing in this situation is that your friend (and me and my SO) will not have the old, original SLs weighing us down with the lates possibly still being reported on our CRs. Even with the CAs (likely long gone from your friend's CRs, too) removed, for some, those original TLs with pesky lates remain. So it is great that your friend will start getting their tax refunds and have nice and neat SLs on their CRs!

As cautioned above, the interest and balances might be a bit shocking, depending on how much they owe. I had 70k-isk from 2000-2010 SLs balloon into 135k. My SO had 30k-ish balloon into 72k. That hurts! Depending on which CA your friend's SLs are held with and who they originated from (private or directly throughUS Dept of ED) the balances may be reduced some or a lot. We have many through private servicers and the max collection fees they can charge are 16% of the balance (part of fed-backed SL rehab agreement - to borrower's benefit, thankfully). 1 servicer is going to require the whole 16%. Another servicer will cut those in half down to 8%.

Fed loans are 0% collection fees. So that will be a goodblittle chunk removed from the balances, but most of our SLs are through private servicers, so it still hurts! Not to mention the interest that has been accumulating for the past 1-2 decades.

So make sure your friend is ready and willing to make those monthly payments. Stay on top of where the loans end up after rehab. They go straight into standard repayment, so if that monthly payment does not work, have your friend look into IBR straight away to perhaps get a more manageable monthly payment, as to not end up defaulting a second (or third) time. This is very important because if they cannot maintain the monthly payments, those old TLs will not help onve late/missed payments start reporting. Just a word of caution, not to be harsh at all.

Also be aware if selecting an IBR that if those fed laons are through a private servicer, some of the more enticing IBR plans may require consolidating those SLs with the US Dept of ED. That again would mean creating a new TL. You would still have the age of the old ones on the CRs for the next decade, but the new consolidated SL would be fresh and lower the AAoA some. I have had my oldest SLs (positive ones) just drop off recently and I took quite a blow to my scores. I have my next 4 oldest SLs dropping off my CRs on 10/1/20, which I am bracing myself for because the remaining TLs are much newer. I will gain the age back once my rehabbed SLs hit, so it is only temporary, thankfully. So just another word of caution if considering the consolodation for better IBR programs. While you may have those TLs for 10 years, they will drop off in 10 years, and then the age will be lost forever. I know 10 years is a long time, but the disparity between my oldest TLs and what is left is large and only saving grace is the rehabbed SLs will be placed back on, otherwise those 10 years went by quickly!

Still, I would rather finally be done with them because fed loans never go away. They will haunt you til the end of time, IMO/IME.

I would absolutely say it is worth rehabbing no matter how small the amount due to the fact that the collection fees will likely be reduced, even if just a little, and because of the nice lengthy and positive credit history that will placed back onto the CRs and the ability to obtain tax refunds again.

Avoid the route of consolidation or payoff  when speaking to the CA because then your friend will likely owe the entire amount of collections costs. Consolidation also creates a new TL, instead of giving you a backdated one.

Good luck!

[calyx]

Rehabbing old student loans will bring them back onto his report as *old* positive tradelines, which is excellent.
Federal student loans never go away, so it's the only way to get really get the garnishment remove (barring some pretty unusual circumstances that he probably wouldn't qualify for anyway).

@Anonymous's comment about older loans is correct.  I had FFELs (loans from the early 90s that were serviced by private lenders, before everything went to Direct Loans).   IF his loans are FFELs, but he qualifies and would like to take part in REPAYE/PSLF or one of the different forgiveness programs, they will have to be consolidated.  The best thing for his report in that case would be to rehab, wait a couple of positively reporting cycles and  *then* consolidate, because the "new"-old tradelines could hang around for up to 10 years, helping keep his file aged while his file "naturally" ages.

But honestly, if he doesn't, then yeah, rehab, and reap the rewards of old (good) tradelines.