Defaulting on your student loans can hurt your credit score, making it difficult for you to get credit in the future. The good news is it is possible to repair credit after student loan default. It is a lengthy process that requires persistently following good financial practices, but it can be done. 

Before discussing how to repair credit after defaulting on student loans, it’s important to understand the consequences of default.   

How Student Loan Default Impacts Your Credit

Loan payment history is the single biggest factor that affects a person’s credit score. Consistent on-time payments can help improve your score slowly and steadily. On the other hand, every late payment will shave a few points off your score. Multiple late payments can damage your credit significantly. 

Federal student loans go into default if they remain unpaid for 270 days. Private student loans go into default if they are unpaid for 3 months or 90 days. If you have student loans that are in default status, your credit report and score will reflect a poor payment history. This can pull your score down by several points. To lenders and creditors, a low score is an indication that you’re not financially responsible. Most lenders and creditors will deny your loan or credit application right away. The few who do approve will charge you a higher interest rate to compensate for the higher risk of lending you money.  

If one or more of your student loans are in default, it’s important to take steps immediately to minimize the damage and repair credit. 

How To Repair Credit After Student Loan Default

1. Pay Off Your Loan And Get Out Of Default

Getting out of default should be your topmost priority. The default is what’s pulling your credit down. In order to restore your credit, you need to get out of default. 

The simplest way to do this is by paying off your loan in full. We understand this puts you in a catch-22 situation. Your loan is in default because you don’t have the funds to cover the repayment. However, you need funds to make the payments and get out of the default.   

If you don’t have any savings, try and get a low interest rate. Use the low-interest loan to pay off your student loans and get them out of default. Ask a family member to help you. They may loan you money at a lower rate of interest, which can help you regain your financial footing. Another option is to apply for a loan with a cosigner with good credit. Their high score will help you secure a loan with a low interest rate. 

2. Rehabilitate Your Student Loans

Rehabilitating your student loans can help you get out of default and restore your credit score. You’ll need to work with your loan servicer or collections agency to rehabilitate your student loans. 

Rehabilitation involves making a series of affordable monthly payments for about nine to twelve months. ‘Affordable’ payments could mean different things to different borrowers. Make sure you tell your loan servicer how much you can afford to pay every month. Once your loan servicer agrees, you must ensure that you make every payment in full and on time. Consistent punctual payments will eventually get the default status removed from your credit report and repair your credit score. 

3. Pay Off All Other Debts

If you have student loans that are in default, chances are high that you may be behind on other credit payments too. Or you may have high balances on your credit cards. This can increase your credit utilization, which accounts for 30% of your credit score. A high credit utilization ratio hurts your credit score. What’s more, credit cards have higher interest rates. When you’re trying to repair credit after a student loan default, you can’t afford to ignore debts with higher interest rates. It’s tough but paying off both is equally important. It’s the only way to stop your credit score from dropping any further. 

4. Consider Getting A Secured Credit Card

Secured credit cards work differently from traditional credit cards. To apply for a secured credit card, all you need is a savings account with a reasonable balance. The bank in which your account is held will issue you a secured credit card equal to the balance in your account. Your account balance acts as the secured card’s credit limit. When you exhaust the full amount from your account, you have to replenish the funds to reinstate your credit limit. 

The benefit of secured credit cards is that they are easier to obtain and they generally have lower interest rates. This is great for you as you can use it to pay off your higher-interest debts. 

More importantly, the lender will report every payment you make to the credit bureaus. Paying every month’s bill on time will boost your credit score by a few points. Doing this consistently will help you to repair credit after a student loan default. 

5. Apply For A Credit-Building Loan

A credit-building loan is specifically designed to help borrowers build or repair their credit. With this type of loan, you don’t receive a lump sum as you would with a traditional loan. Instead, the borrowed amount is held in an account that is inaccessible to anyone. You can only get the funds after you’ve paid off the full loan amount. 

The benefit of a credit-building loan is that they are easier to obtain even if you have bad credit. This is because there is a lower risk involved as the lender is the only one who can access the sealed funds. Another benefit of credit-building loans is they allow you to improve your credit score with consistent timely payments. 

6. Consolidate Your Federal Student Loans

Consolidation applies only to federal student loans. It involves combining multiple federal student loans into one consolidated loan. You’re eligible to apply for the federal Direct Consolidation loan after making three on-time payments. 

There are several benefits to consolidating federal student loans. It will immediately simplify your payments as you now have to deal with just one loan servicer, one interest rate, and one due date. Interest rates will remain low as it is a federal government program. Last but not least, if you’re in a qualifying profession, you’ll get access to the Public Service Loan Forgiveness Program. 

7. Enroll In An Income-Based Repayment Program

This also only applies to federal student loans. Income-based repayment programs are a federal government initiative that bases a borrower’s monthly payment amounts on their monthly income. This ensures that the monthly repayments are always affordable. Making timely payments will ensure your accounts remain current and do not go into default. Meanwhile, the lower payments will free up cash that you can use to get your student loans out of default and repair credit. 

Repairing credit after student loan default is neither quick nor easy. It requires you to take consistently responsible financial decisions over an extended period of time. And while you’re working towards repairing credit, make sure to continue paying all bills on time. This is the only way to keep improving your credit score in the long run. 

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