What is Loan Rehabilitation?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 13 February 2020
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Loan rehabilitation is the process of recovering a loan that has gone into default and making the loan active once again. In most cases, the process for any type of rehabilitation of the loan will involve establishing new guidelines for repayment, refinancing the current balance owed, and possibly requiring the addition of a cosigner to the loan agreement. Loan rehabilitation is most often associated with student loans, although the process can be employed with just about any type of loan.

Student loan rehabilitation usually occurs when former students have failed to make timely payments on their student loans. As a result, the loans are declared to be in default by the lender. In order to prevent further legal action, the former student and the lender may choose to work through a program to restructure the loan. Many countries operate student loans rehabilitation programs that specify how the loan can be brought up to date, what is involved in restructuring the schedule of payments, and defining the commitments that the lender and the debtor agree to accept as part of the terms of the rehabilitation.


One common provision in many student loan rehabilitation strategies is that the payments no longer go directly to the original lender. Instead, the debtor forwards payments to a government agency. The payments are in turn sent to the current lender, which may be another government agency or a private lender who contracts with the government to fund the resuscitated student loans.

Loan rehabilitation may also occur with other types of lending situations. Businesses that have allowed a loan to go into default may be able to use various financial networks to pull the loan out of default and arrange new payment options that are within the means of the business to honor. Some financial institutions will also work with individuals to route a defaulted mortgage through some sort of home loan rehabilitation program, preventing the need for foreclosure. There are federal loan rehabilitation programs that may assist people in dire need, such as citizens who have lost jobs or are unable to meet their obligations due to an extended illness that made it impossible to work.

In general, a loan rehabilitation program of any type will seek to protect the interests of both the lender and the debtor by providing a fresh start for both parties. The debtor has the opportunity to put past financial issues behind him or her, and make a fresh start. The lender avoids the expense and time associated with pursuing recompense through legal channels, a process that often adds more financial burden to the lender.

Generally, a debtor has one opportunity to pull a loan out of default and make this renewed effort to settle the debt. Should the debtor fail to abide by the terms of the loan rehabilitation, the loan will return to default status and the lender is free to pursue any legal means of collecting the outstanding balance, plus applicable interest and penalties.



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