How to Repair 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.

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. Here’s a list of tips and strategies on how to repair credit after student loan default…

How student loan default can impact your credit

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.

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.

How to repair credit after student loan default

Get 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 off your loans. 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, then this might be a reasonable option. Another option is to apply for a loan to pay off your student debt with a cosigner in order to obtain better APR rates and terms.

    • 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.

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).

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%.

By following a budget, you can avoid late payments further denting your credit score. Keep in mind that skipping payments on your bills can stay on your credit report for seven years, so be sure to stay on top of payments dates and consider enrolling in autopay options.

Consider a secured credit card

If you’re working to repair credit after student loan default, chances are, your credit may have suffered as a result of defaulting. This may make it more difficult to get favorable APR rates and loan terms until you polish up your credit score.

If you have fair or bad credit, consider looking into secured credit cards. Unlike traditional credit cards, you’ll have to pay a deposit and 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.

Apply for a credit-building loan

Credit-building loans are a type of loan used to specifically help borrowers build their credit. Unlike a personal loan where you receive a lump sum and repay it back with interest over an established period of time, when you take out a credit-building loan, the amount you borrow is held in an account that you can’t access until you’ve paid off the loan.

These types of loans can be more easily accessed than traditionals loans if you have bad credit because the lender is taking on less of a risk by holding the money you borrowed. Over time, the lender will report to the three credit bureaus that you’ve been repaying your loan which can eventually lead to your credit score increasing.

Why you should continue these best practices

Unfortunately, working to repair credit after student loan default 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 may soon be well on your way to seeing improvements. Many people have done it before you, and although going into default is never a good thing, there are still options for having financial success in the future.

Kristina Byas and Amanda Push contributed to this report.

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