Student Loan Rehabilitation vs. Consolidation: Which Option Is Better?

More than 5 million federal student loan borrowers are in default as of April 2025, with millions more delinquent on their loans, according to the U.S. Department of Education.

It can be difficult to get back on track with your loan payments once you've fallen behind, but it's not impossible. Strategies like loan rehabilitation and consolidation can help you restructure your loans to make repayment more manageable. They can also help improve your credit by getting your loan out of default.

If you're behind on payments, this guide will help you understand student loan rehabilitation vs. consolidation to determine which process is right for you.

Current student loan refinance rates

What is student loan rehabilitation?

Student loan rehabilitation is a one-time program offered by the Department of Education to help federal student loan borrowers get out of default.

To rehabilitate your federal loan, you agree to make nine reasonable and affordable monthly payments over a 10-month period. Your loan servicer decides what counts as a reasonable and affordable payment, which is typically 10% or 15% of your discretionary income.

Once you complete rehabilitation, your loan is no longer in default. This strategy can significantly improve your credit score, since it removes the default status from your credit report.

Afterward, you'll select a new repayment plan, ideally one that lowers your monthly payments.

“Borrowers who rehabilitate their loans should choose an income-driven repayment plan, which pegs the loan payments to the borrower's income, as opposed to the amount they owe,” advises Mark Kantrowitz, student loan expert and author of “How To Appeal for More College Financial Aid.” “Borrowers who don't are at much higher risk of redefault than borrowers who do,” he adds.

What is student loan consolidation?

Student loan consolidation gives federal borrowers another way to get out of default — often faster than rehabilitation. With this option, you combine one or more loans into a Direct Consolidation Loan. Instead of taking up to 10 months like rehabilitation, consolidation can bring your loans back into good standing within a few weeks.

To qualify for loan consolidation, you'll have to either make three consecutive, on-time payments on your loan or agree to make payments on your new Direct Consolidation Loan under an income-driven repayment plan.

However, it's important to note that to qualify for a Direct Consolidation Loan, you must have at least one federal loan that isn't in default. If you only have defaulted loans, you'll have to choose an alternative method.

Although consolidation is usually the faster path, it doesn't erase the record of your default.

“By consolidating loans, borrowers are 'paying off' the defaulted loan with a brand new loan,” says Jack Wang, a college financial aid specialist and wealth adviser at Innovative Advisory Group. “However, the default status on the paid-off loan would remain on the borrower's credit report.”

Rehabilitation vs. consolidation

Below are some key differences between student loan rehabilitation and consolidation to help you quickly decide which option may be right for you.

When you should choose rehabilitation

Student loan rehabilitation may be the right option if your ultimate goal is credit repair. While it takes longer than consolidation to get your loan out of default, the default record is removed from your credit report once you've completed rehabilitation. As a result, you're likely to see your credit score bounce back faster than you would with consolidation.

You might also consider rehabilitation if you don't qualify for loan consolidation. For example, if you've already consolidated your loans or don't have any loans that aren't in default, then consolidation isn't an option for you.

Finally, rehabilitation may be the right choice if you want to retain your original loan terms and you just need some support to get back on track. When you're done with your nine rehabilitation payments, your existing loan will simply go back into normal repayment.

Rehabilitation pros and cons

When you should choose consolidation

Consider loan consolidation if your goal is to get your loan out of default and end collections as quickly as possible. While rehabilitation takes at least nine months to complete, you could have your loans consolidated in as little as six weeks.

While the record of your default will remain on your credit report, your loans won't be actively in default any longer. And if you were struggling to make your loan payments before the default, consolidation can help make payments more affordable, as it requires you to move to an income-driven repayment plan.

Loan consolidation may also be your only option if you've already gone through rehabilitation and are now back in default. You can only rehabilitate each loan once (twice, starting in 2027).

Finally, you may opt for loan consolidation for your defaulted loans if you want to simplify loan repayment. If you have multiple student loans, keeping track of each individual payment can be confusing. Consolidation simplifies repayment by combining all of your loans into one larger loan with a single (often lower) monthly payment.

Consolidation pros and cons

What happens after a student loan default is resolved?

Once your student loan default is resolved, you can go back to making your normal monthly payments, whether that be on your original loan after rehabilitation or on your new loan and repayment plan after consolidation.

Whether the history of loan default remains on your credit report depends on whether you chose to rehabilitate or consolidate your loans. But either way, your credit score may be lower due to your past missed payments. By spending some time on credit repair, you can get your score back up to (or even higher than) it was before.

Focus on making on-time payments every month. You can also improve your credit score by paying off revolving debt to lower your credit utilization. Be patient, keep a close eye on your credit report, and use all of your credit lines responsibly, and you'll slowly see your score bounce back.

Finally, consider what steps you can take to avoid missed payments or default on your loans in the future. Work out a monthly budget that prioritizes loan payment and other essential expenses.

“It is also a good idea to sign up for autopay,” recommends Kantrowitz. “Not only do you get a slight interest rate reduction, saving money, but you are also much less likely to be late with a payment.”