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 8 lenders of 2019!| Lender | Variable APR | Eligible Degrees | |
|---|---|---|---|
| Check out the testimonials and our in-depth reviews! 1 Important Disclosures for Earnest. Earnest DisclosuresTo qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application. Earnest fixed rate loan rates range from 3.20% APR (with Auto Pay) to 6.99% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 6.89% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate 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 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of December 13, 2019, and are subject to change based on market conditions and borrower eligibility. Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance. The information provided on this page is updated as of 12/13/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at hello@earnest.com, or call 888-601-2801 for more information on our student loan refinance product. © 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America. 2 Important Disclosures for SoFi. SoFi Disclosures
3 Important Disclosures for Figure. Figure DisclosuresFigure’s Student Refinance Loan is a private loan. If you refinance federal loans, you forfeit certain flexible repayment options associated with those loans. If you expect to incur financial hardship that would impact your ability to repay, you should consider federal consolidation alternatives. 4 Important Disclosures for Laurel Road. Laurel Road DisclosuresLaurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. Mortgage lending is not offered in Puerto Rico. All loans are provided by KeyBank National Association. ANNUAL PERCENTAGE RATE (“APR”) FEE INFORMATION There are no origination fees or prepayment penalties associated with the loan. Lender may assess a late fee if any part of a payment is not received within 15 days of the payment due date. Any late fee assessed shall not exceed 5% of the late payment or $28, whichever is less. A borrower may be charged $20 for any payment (including a check or an electronic payment) that is returned unpaid due to non-sufficient funds (NSF) or a closed account. LOAN AMOUNT For bachelor’s degrees and higher, up to 100% of outstanding private and federal student loans (minimum $5,000) are eligible for refinancing. If you are refinancing greater than $300,000 in student loan debt, Lender may refinance the loans into 2 or more new loans. ELIGIBILITY & ELIGIBLE LOANS Borrower, and Co-signer if applicable, must be a U.S. Citizen or Permanent Resident with a valid I-551 card (which must show a minimum of 10 years between “Resident Since” date and “Card Expires” date or has no expiration date); state that they are of at least borrowing age in the state of residence at the time of application; and meet Lender underwriting criteria (including, for example, employment, debt-to-income, disposable income, and credit history requirements). Graduates may refinance any unsubsidized or subsidized Federal or private student loan that was used exclusively for qualified higher education expenses (as defined in 26 USC Section 221) at an accredited U.S. undergraduate or graduate school. Any federal loans refinanced with Lender are private loans and do not have the same repayment options that federal loan program offers such as Income Based Repayment or Income Contingent Repayment. All loans must be in grace or repayment status and cannot be in default. Borrower must have graduated or be enrolled in good standing in the final term preceding graduation from an accredited Title IV U.S. school and must be employed, or have an eligible offer of employment. Parents looking to refinance loans taken out on behalf of a child should refer to https://www.laurelroad.com/refinance-student-loans/refinance-parent-plus-loans/ for applicable terms and conditions. For Associates Degrees: Only associates degrees earned in one of the following are eligible for refinancing: Cardiovascular Technologist (CVT); Dental Hygiene; Diagnostic Medical Sonography; EMT/Paramedics; Nuclear Technician; Nursing; Occupational Therapy Assistant; Pharmacy Technician; Physical Therapy Assistant; Radiation Therapy; Radiologic/MRI Technologist; Respiratory Therapy; or Surgical Technologist. To refinance an Associates degree, a borrower must also either be currently enrolled and in the final term of an associate degree program at a Title IV eligible school with an offer of employment in the same field in which they will receive an eligible associate degree OR have graduated from a school that is Title IV eligible with an eligible associate and have been employed, for a minimum of 12 months, in the same field of study of the associate degree earned. INTEREST RATES The interest rate you are offered will depend on your credit profile, income, and total debt payments as well as your choice of fixed or variable and choice of term. For applicants who are currently medical or dental residents, your rate offer may also vary depending on whether you have secured employment for after residency. DISBURSEMENT OPTIONS The repayment of any refinanced student loan will commence (1) immediately after disbursement by us, or (2) after any grace or in-school deferment period, existing prior to refinancing and/or consolidation with us, has expired. POSTPONING OR REDUCING PAYMENTS 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. We may agree under certain circumstances to allow a borrower to make $100/month payments for a period of time immediately after loan disbursement if the borrower is employed full-time as an intern, resident, or similar postgraduate trainee at the time of loan disbursement. These payments may not be enough to cover all of the interest that accrues on the loan. Unpaid accrued interest will be added to your loan and monthly payments of principal and interest will begin when the post-graduate training program ends. We may agree under certain circumstances to allow postponement (deferral) of monthly payments of principal and interest for a period of time immediately following loan disbursement (not to exceed 6 months after the borrower’s graduation with an eligible degree), if the borrower is an eligible student in the borrower’s final term at the time of loan disbursement or graduated less than 6 months before loan disbursement, and has accepted an offer of (or has already begun) full-time employment. If Lender agrees (in its sole discretion) to postpone or reduce any monthly payment(s) for a period of time, interest on the loan will continue to accrue for each day principal is owed. Although the borrower might not be required to make payments during such a period, the borrower may continue to make payments during such a period. Making payments, or paying some of the interest, will reduce the total amount that will be required to be paid over the life of the loan. Interest not paid during any period when Lender has agreed to postpone or reduce any monthly payment will be added to the principal balance through capitalization (compounding) at the end of such a period, one month before the borrower is required to resume making regular monthly payments. KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. This information is current as of November 8, 2019 and is subject to change. 5 Important Disclosures for Splash Financial. Splash Financial DisclosuresTerms 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. 6 Important Disclosures for CommonBond. CommonBond DisclosuresOffered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). 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 1.76% effective November 10, 2019. 7 Important Disclosures for LendKey. LendKey DisclosuresRefinancing 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 12/07/2019 student loan refinancing rates range from 1.90% to 8.59% Variable APR with AutoPay and 3.49% to 7.75% Fixed APR with AutoPay. 8 Important Disclosures for College Ave. College Ave DisclosuresCollege Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply. 1College Ave Refi Education loans are not currently available to residents of Maine. 2All rates shown include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation. 3$5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. 4This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary. Information advertised valid as of 12/1/2019. Variable interest rates may increase after consummation. |
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 | 1.99% – 6.89%1 | Undergrad & Graduate | |
 | 2.31% – 7.36%2 | Undergrad & Graduate | |
 | 1.99% – 6.75%3 | Undergrad & Graduate | |
 | 1.99% – 6.65%4 | Undergrad & Graduate | |
 | 2.43% – 7.60%5 | Undergrad & Graduate | |
 | 1.85% – 6.13%6 | Undergrad & Graduate | |
 | 1.90% – 8.59%7 | Undergrad & Graduate | |
 | 2.74% – 6.25%8 | Undergrad & Graduate | |
