How to Repair Your Credit After Student Loan Default


When you go into student loan default, your credit takes a major hit. But if you’re reading this, you probably already know that.

If student loan default has happened to you, know that the world isn’t over. You can fix your credit and you will 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, paying off your debt, and eventually applying for credit as needed to improve your debt-to-credit ratio. I won’t lie: this can be a lengthy process. Once you get started, however, you’ll see that in just a few months, your score will start to go up.

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’s sent to collections, and you will be notified. When you are notified, usually by mail, you should call the phone number on the letter sent to you to learn about your options.

Typically, you have three options in this scenario::

1. Pay Your Loans Off

The one simple 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 will help you out by loaning you money at a lower interest rate, or if you qualify for a personal loan, this might be a reasonable option. (Keep in mind getting a loan if you’re already in default is unlikely).

2. Rehabilitate Your Loans

You might be able to work with your loan servicer or collections agency on a plan to make smaller 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 a certain period of time, as agreed upon with the collections agency, they will most likely be willing remove the default status from your credit report as well.

3. Consolidate Your Loans

If you have several student loans, you can choose to consolidate them into one, which will count as a payment and bring you out of default. You usually have to make three on-time payments, work out a payment plan with your servicer, or enroll in an income-driven repayment plan before you’re eligible to consolidate.

Step 2: Pay Off Other Debts

Your credit utilization makes up 30 percent of your credit score, so if you have other debts such as credit cards, 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 higher interest rate debt 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” — or available credit — as possible. Consider opening a new line of credit in addition to paying down your loans so you can increase your debt-to-credit ratio (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 percent.

If you are late on a payment, it will have a negative impact on your credit. Pay 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 an easy or quick process. You have to consistently repeat the steps above to make your score continue to rise. This means always paying your bills on time, maintaining low credit card balances, and periodically  opening new lines of credit (that you don’t max out) so that your debt- to- credit ratio and credit mix improve.

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.

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