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Rehab vs. Consolidation

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New Contributor

Rehab vs. Consolidation

Good morning good people!

So, I'm trying to determine the best option to get my husband's loans out of default.  And when I say best, I mean the fastest.  I thought I had the rehab process started last year after  the US Department of Education and IRS hijacked our tax refund.  But I digress.

Can anyone give me any tips on either the rehab process versus consolidation.   Currently browing the studentaid website now.

Thanks in advance for your help.

Message 1 of 13
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Contributor

Re: Rehab vs. Consolidation

Consolidation is the fastest and in both cases the original history remains BUT rehab removes the default remarks. Consolidation does not.
Exp - 847 TU - 838 EQ - 846
Message 2 of 13
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New Contributor

Re: Rehab vs. Consolidation

Thanks @Mookey67! I spoke with a rep today about the rehab form, but if consolidation is the fastest then we're going with consolidation.
Message 3 of 13
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Valued Contributor

Re: Rehab vs. Consolidation

Was the intent to do the fastest way to avoid the refund offset?
I'm asking because therev are other side effects by consolidating. First, he'll give up the right to try to fix and issues with the loan(s). The consolidation will create a new loan. As such any payments towards any type of forgiveness will also reset. It will also be a new account on the credit report. The lates will have full effect until they age off. The interest rate will change, though this isn't generally bad.
But more importantly, when he doesn't make the required good faith payments he will have limited himself to only one plan of all the income-driven repayment plans, the Income-contingent repayment plans. This payment can end up being pretty close to the standard repayment plan. On the long run, it could mean a significant, immediate increase in minimum payments. It cant be undone.
Just letting you know because sometimes it's unaffordable and forces people into a second default.
Good luck with his loans. 🙂



Message 4 of 13
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Senior Contributor

Re: Rehab vs. Consolidation

I'd echo was @Sabii said.
Why do you need this done the fastest?  
It's definitely not the best for FICO reasons (particularly on older scores, like the more conservative mortgage ones).


EQ: 804 | EX: 789 | TU: 787 | Accounts: 2/6 4/12 10/24
Happy practitioner of AZE6or7or8
Message 5 of 13
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New Contributor

Re: Rehab vs. Consolidation

Hi @calyx and @ sabii. My husband would like to return to school to complete his degree in accounting, and the defaulted loan is hindering that. In addition needing to have the loans out of default to avoid a tax offset. Can you elaborate on the FICO and mortgage effect? Thanks.
Message 6 of 13
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Contributor

Re: Rehab vs. Consolidation

The only real difference with credit reporting is that any previous derogatory information reported prior to the default will remain. I wouldn’t hope for them to be removed even through a goodwill campaign because even after rehabilitation more than likely the derogatory information will not be removed. Just being honest. Whether he rehabs or consolidate. With rehabbing the default remarks only as stated previously will be removed. But not if he consolidates. He will still have repayment options, deferment and forbearance options if he consolidates. When does he plan on going to school? Is he needing to borrow more funds? I believe if he enters into a repayment agreement such as with rehab then that should stop the tax offset. You are able to google this information as well so that you are able to read the benefits and consequences of one versus the other. I’m not really sure the reason for the default but even tho they both offer repayment options, He’ll be able able to get lower payments on the repayment options if he does not consolidate. I’m not really a fan of going on the repayment options just because and stretching the loans out so long but they are there if needed. So I don’t really advise those unless you having problems with making payments. I do understand the immediate need to get out of default but I would also recommend he takes into account the future and look at them for the long haul. Just my 2 cents. Good luck!
Exp - 847 TU - 838 EQ - 846
Message 7 of 13
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Community Leader
Valued Contributor

Re: Rehab vs. Consolidation

How big are the loans?
- Paying them off in full vs possible forgiveness

When were they taken out & when did he default?
- difference in IDR plans
- how the lates will possibly appear

Are they direct loans?

Income information would be helpful if you don't mind. Or you could just use the repayment estimator to get a sense of potential repayment plans:
https://studentaid.gov/app/repaymentEstimator.action

There's also an article from Student Loan Hero comparing the two. It includes the difference in fees when you exit collections. I'm not sure how accurate or relevant it still is but it could still be a helpful read.
"Should I Rehabilitate or Consolidate My Defaulted Federal Loans?"
https://studentloanhero.com/featured/student-loan-rehabilitation-consolidation/



Message 8 of 13
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Re: Rehab vs. Consolidation

Sabii provided a great link😊. It explains the differences well and expands on what I was saying. He will just have to decide which one is best for your situation and what you want to accomplish now and in the future.
Exp - 847 TU - 838 EQ - 846
Message 9 of 13
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Senior Contributor

Re: Rehab vs. Consolidation


@mommydiva wrote:
Hi @calyx and @ sabii. My husband would like to return to school to complete his degree in accounting, and the defaulted loan is hindering that. In addition needing to have the loans out of default to avoid a tax offset. Can you elaborate on the FICO and mortgage effect? Thanks.

If you start rehabbing immediately, you might be able to avoid the tax offset.   Some companies require a certain number of payments, some are more lenient (mine would stop garnishment/not do the tax offset as soon as you made your first payment), so you can contact them about that.

For FICO scoring purposes - defaulting not only means that there is a collections account, but a string of severe derogatories (90/120/150 lates), that will stay on your credit report for 7 years from the date of first delinquency*.    
IF the default happened long enough ago (as in the DOFD is more than 7 years), the negative information would "fall off" of the credit report once the rehab or consolidation is successfully completed.

Rehab removes the default.   What that means is that the loans will keep their original open date (so he could have nice, long tradelines), which helps with FICO scoring - longer tradelines = longer/higher average age of accounts (and possibly a higher age of oldest account - since in many cases, student loans are people's oldest tradelines).


The mortgage scores are older algorithms, and they put a much heavier emphasis on the age of accoutns - older = better.
In addition, you get a penalty if your youngest account is less than a year.   
If you consolidate, it starts a brand new tradeline (whether the old one remains will be a product of that 7 year exclusionary period*), so you will drop your aging metrics (AOYA, AAoA).

The utilization on your student loan is not having a big impact on scoring, so the 100% utilization of a new consolidated loan isn't a problem, the newness is.

IF you are looking at buying a house in the next year (or refinancing), rehab would be the way to go, because it will significantly help your mortgage/FICO numbers over consolidation whereas consolidation would actually hurt your mortgage scores with the new loan, which is why I mentioned them.   I'm a "finances over FICO" gal, but in this case, they line up, and since mortgages are typically large and long term, those points truly matter.   But, if you're not going into refi or to purchase in the next year after consolidation, it might not matter as much.

* I keep putting the asterix in as a caveat:  According to the HEA, federal student loans are not subject to the 7 year exclusionary periods, however the reality is that they seem to behave that way with the bureaus - likely because the system is pretty well automated and they don't seem to differentiate federal student loans from other kinds of debt with their treatment.

Rehab is usually better overall, for a number of reasons.   I have a consolidated loan, and there are plenty of reasons to do that as well.  It's going to be a personal decision.   But, out of default is out of default, and either will ultimately get you there.

I wish you the best with whatever path your pursue.   They'll both work, and I'm glad your husband is getting his loans out of default.


EQ: 804 | EX: 789 | TU: 787 | Accounts: 2/6 4/12 10/24
Happy practitioner of AZE6or7or8
Message 10 of 13
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