How to Repair Your Credit After Student Loan Default

If you default on student loans, credit repair is possible. The world isn’t over — you’ll still be able to borrow money again in the future, so long as you take the steps necessary to repair your credit.

These steps include getting out of default, paying your bills on time, working away at your debt and eventually applying for credit (as needed) to improve your debt-to-credit ratio. We won’t lie: This can be a lengthy process. But once you get started, you could see your score start to rise in just a matter of a few months.

Default on your student loan? Credit repair may be needed

Credit scores range from 300 to 850. This score is calculated by examining a person’s current debt, the type and number of accounts they have open, their credit history, credit utilization, and payment history.

As you know, student loan default can have a big impact on that credit score. If your payment is missed or late for a given period of time, or if you stop making payments completely, student loan default can be the result. Your credit score and report will reflect a poor payment history, and when it comes time to finance a car, apply for an apartment, or do anything else that will require a peek at your credit score, you’ll look risky to lenders and creditors.

How to recover from defaulted student loans

Step 1: Getting out of default

In order to repair your credit, you need to get out of student loan default first.

When you default on your loan, it can be sent to collections, at which point you will be notified, usually by mail. If you receive such a notice, the first step is to call the phone number on the letter sent to you to learn about your options.

Typically, you have three possibilities in this scenario:

  • Pay Your Loans Off: The simplest way to get out of student loan default is to pay off your loan in full. This is obviously easier said than done, as the average student loan balance is in the tens of thousands of dollars.

    However, if you have a family member who can help you out by loaning you money at a lower interest rate, let’s say, then this might be a reasonable option. A sudden windfall, like an inheritance, could also suddenly make this a viable option.

  • Rehabilitate Your Loans: You might be able to work with your loan servicer or collections agency on a plan to make a series of affordable monthly payments. When you call, explain that you want to get out of default and can only pay a certain amount each month.

    The benefit of loan rehabilitation is that, as long as you make your monthly payments on time for that given period of time, you will most likely be able to remove the default status from your credit report.

  • Consolidate Your Loans: If you have several federal student loans, you can choose to consolidate them into one, which will count as a payment and bring you out of default. In order to qualify for consolidation (and note, this is for federal rather than private student loans), you have two choices: You can make three on-time payments before applying for the federal Direct Consolidation loan, or you can apply for an income-driven repayment plan, which will set your monthly payments on the new loan at a portion of your disposable income to make repayment more affordable.
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Step 2: Pay off other debts

Your credit utilization makes up 30% of your credit score, so if you have other debts, like credit cards or a car loan, your next step should be to lower those balances once your student loans are under control.

If your credit card interest rates are well above your student loan interest rates, it would be wise to focus on paying those as quickly as possible, since mathematically speaking, paying off the debt with the higher interest rate first will save the most money over time.

Additionally, if your credit cards are maxed out, it will not reflect well on your credit score. You need to have as much “space” — that is, available credit — as possible. Consider opening a new line of credit in addition to paying down your loans so you can increase your credit utilization. (Just don’t rack up any new debt).

Step 3: Pay all your bills on time

If you struggle with your other bills, like your phone bill or your mortgage, it’s time to sit down and take a long hard look at your finances to ensure you always pay your bills on time. It’s more important than you might think: Your payment history is the most significant factor of your score, at 35%.

This is one of the many reasons people turn to secured credit cards to raise their credit score after student loan default. By paying a deposit, you’ll receive a credit card equal to the amount of the deposit (or maybe more, depending on the creditor). Every month that you pay your bill on time, the lender will report it to the credit bureaus. As a result, your payment history will improve and so will your credit score.

However, if you’re late on a payment, it will have a negative impact on your credit, so be sure to pay your bills on time, every time, and your credit score will improve as time passes.

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Step 4: Rinse, repeat & be patient

Unfortunately, building up your credit is not often an easy or quick process. You have to consistently pay your bills on time, maintain low credit card balances, and periodically open new lines of credit (that you don’t max out) to keep pushing your score higher.

If you do all of these things and are patient, you will be well on your way to repairing your credit after student loan default. Many people have done it before you, and although going into default is never a good thing, you definitely have options for having financial success in the future.