Your credit score may improve if you pay off student loans in default. But it likely won’t lead to a significant increase. Your score will experience the biggest jump after the late payment history falls off your report in seven years.
But what if my defaulted loans aren’t on my credit report? If your student loans fell off your credit report, paying the balance won’t affect your score. It won’t increase because the loans were no longer dragging your score down. And it won’t decrease because the loan servicer won’t add the loans back to your credit history. Read more about what happens if your student loans were removed from your credit report.
Still, besides raising your score, other benefits make it worthwhile to pay back your debt from college — especially defaulted federal student loans.
When you get federal student loan debt out of default, you’ll:
Qualify for income-driven repayment plans, deferments, forbearances, and loan forgiveness programs.
Protect your paycheck from wage garnishment, tax refund from seizure, and Social Security benefits from offset.
Remove your name from the CAIVRS report so you can borrow an FHA mortgage.
Regain eligibility to receive more financial aid.
The only benefit private lenders and collection agencies offer to student loan borrowers who pay defaulted loans is a settlement for less than the balance owed. The loan holder typically won’t agree to delete the negative information from the three major credit bureaus (Equifax, Experian, and TransUnion).
Learn More: How to Get Student Loans Off Your Credit Report