How to Repair Your Credit After Student Loan Default

Written by Cat Alford

April 16, 2019April 12, 2021Credit & DebtCredit & Debt, Featured1022Cat Alford

Updated on April 16, 2019

Editorial Note: This content is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by the financial institution.

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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.

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.

Step 4: Rinse, Repeat, and 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.

Kristina Byas contributed to this report.

Interested in refinancing student loans?

Here are the top 9 lenders of 2021!

Lender	Variable APR	Eligible Degrees
	1.88% – 6.15%¹	Undergrad & Graduate	Visit Splash
	1.88% – 5.64%²	Undergrad & Graduate	Visit Earnest
	2.50% – 6.85%³	Undergrad & Graduate	Visit CommonBond
	1.89% – 5.90%⁴	Undergrad & Graduate	Visit Laurel Road
	1.99% – 6.59%⁵	Undergrad & Graduate	Visit SoFi
	1.88% – 5.64%⁶	Undergrad & Graduate	Visit NaviRefi
	1.90% – 5.25%⁷	Undergrad & Graduate	Visit Lendkey
	2.39% – 6.01%	Undergrad & Graduate	Visit Elfi
	2.13% – 5.25%⁸	Undergrad & Graduate	Visit PenFed
Check out the testimonials and our in-depth reviews! ¹ Important Disclosures for Splash Financial. Splash Financial Disclosures Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice. To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit. Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of June 1, 2021. ² Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest. Earnest Disclosures Interest Rate Disclosure Actual rate and available repayment terms will vary based on your income. Fixed rates range from 2.48% APR to 5.79% APR (excludes 0.25% Auto Pay discount). Variable rates range from 1.88% APR to 5.64% APR (excludes 0.25% Auto Pay discount). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 36% (the maximum allowable for these loans). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 2.04% and 5.8% to the one month LIBOR. Earnest rate ranges are current as of 6/8/2021, and are subject to change based on market conditions. Auto Pay Discount Disclosure You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay. Student Loan Refinancing Loan Cost Examples These examples provide estimates based on payments beginning immediately upon loan disbursement. Variable APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 5.89% APR would result in a total estimated payment amount of $17,042.39. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 6.04% APR would result in a total estimated payment amount of $17,249.77. Your actual repayment terms may vary.Terms and Conditions apply. Visit https://www.earnest. com/terms-of-service, e-mail us at [email protected], or call 888-601-2801 for more information on our student loan refinance product. Earnest Loans are made by Earnest Operations LLC or One American Bank, Member FDIC. Earnest Operations LLC, NMLS #1204917. 535 Mission St., Suite 1663, San Francisco, CA 94105. California Financing Law License 6054788. Visit earnest.com/licenses for a full list of licensed states. For California residents (Student Loan Refinance Only): Loans will be arranged or made pursuant to a California Financing Law License. One American Bank, 515 S. Minnesota Ave, Sioux Falls, SD 57104. Earnest loans are serviced by Earnest Operations LLC with support from Navient Solutions LLC (NMLS #212430). One American Bank and Earnest LLC and its subsidiaries are not sponsored by or agencies of the United States of America. © 2021 Earnest LLC. All rights reserved. ³ Important Disclosures for CommonBond. CommonBond Disclosures Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. ‍All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.15% effective Jan 1, 2021 and may increase after consummation. ⁴ Important Disclosures for Laurel Road. Laurel Road Disclosures All credit products are subject to credit approval. Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com. As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest. Checking your rate with Laurel Road only requires a soft credit pull, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score. Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan. After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship. During any period of forbearance interest will continue to accrue. At the end of the forbearance period, any unpaid accrued interest will be capitalized and be added to the remaining principle amount of the loan. Automatic Payment (“AutoPay”) Discount: if the borrower chooses to make monthly payments automatically from a bank account, the interest rate will decrease by 0.25% and will increase back if the borrower stops making (or we stop accepting) monthly payments automatically from the borrower’s bank account. The 0.25% AutoPay discount will not reduce the monthly payment; instead, the discount is applied to the principal to help pay the loan down faster. Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount. Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate. Interest Rate: A simple annual rate that is applied to an unpaid balance. Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%. KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. This information is current as of April 29, 2021. Information and rates are subject to change without notice. ⁵ Important Disclosures for SoFi. SoFi Disclosures Fixed rates from 2.49% APR to 6.94% APR (with autopay). Variable rates from 1.99% APR to 6.59% APR (with autopay). All variable rates are based on the 1-month LIBOR and may increase after consummation if LIBOR increases; see more at SoFi.com/legal/#1. If approved for a loan your rate will depend on a variety of factors such as your credit profile, your application and your selected loan terms. Your rate will be within the ranges of rates listed above. Lowest rates reserved for the most creditworthy borrowers. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license #6054612; NMLS #1121636 (www.nmlsconsumeraccess.org). Additional terms and conditions apply; see SoFi.com/eligibility for details. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. ⁶ Important Disclosures for Navient. Navient Disclosures 1. NaviRefi loans are made by Earnest Operations LLC, a member of the Navient family of companies, subject to individual approval and underwriting criteria. California residents only: Loans made or arranged pursuant to a California Finance Lenders Law license. Additional terms and conditions apply. – To qualify, you must be a U.S. citizen or non-citizen permanent resident of the United States, reside in a state we lend in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.navirefi.com/help-and-questions. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Loan terms are subject to eligibility. Approval and interest rate depend on the review of a complete application. Loan approval is subject to confirmation that your debt-to-income, free cash flow, credit history and application information meet the minimum requirements. You must have a minimum FICO score to be considered. – You can choose between fixed and variable rates. Fixed interest rates are 2.75% – 6.04% APR (2.50% – 5.79% APR with Auto Pay discount). Starting variable interest rates are 2.13% – 5.89% APR (1.88% – 5.64% APR with Auto Pay discount). Variable rates are based on an index, the 30-day Average Secured Overnight Financing Rate (SOFR) plus a margin. Variable rates are reset monthly based on the fluctuation of the index. We do not currently offer variable rate loans in AK, CO, CT, HI, IL, KY, MA, MN, MS, NH, OH, OK, SC, TN, TX, and VA. – You can take advantage of the 0.25% Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. NaviRefi rate ranges are current as of June 1, 2021 and are subject to change based on market conditions and borrower eligibility. – Loan cost examples: These examples provide estimates based on payments beginning immediately upon loan disbursement. Variable APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 5.89% APR would result in a total estimated payment amount of $17,042. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 6.04% APR would result in a total estimated payment amount of $17,250. Your actual repayment terms may vary. – The information provided on this page is updated as of 06/1/2021. Earnest Operations LLC reserves the right to modify or discontinue (in whole or in part) this loan program and its associated services and benefits at any time without notice. Check www.navirefi.com for the most up-to-date information. Terms and Conditions apply. Call 855-284-4893 for more information on our student loan refinance product. – Earnest Operations LLC – NMLS #1204917, CA CFL #6054788 – 535 Mission St., Suite 1663, San Francisco, CA 94105. Navient Solutions, LLC – NMLS #212430 – 123 Justison St., Wilmington, DE 19801. Visit https://navirefi.com/lending-licenses for a full list of licensed states. ⁷ Important Disclosures for LendKey. LendKey Disclosures Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution. Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810. As of 04/07/2021 student loan refinancing rates range from 1.90% APR – 5.25% Variable APR with AutoPay and 2.49% APR – 7.75% Fixed APR with AutoPay. ⁸ Important Disclosures for PenFed. PenFed Disclosures Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.89%-4.78% APR and Variable Rates range from 2.13%-5.25% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.