Defaulting on student loans affects your credit score by adding late payments and a default status to your credit history for every loan you’ve defaulted on.
Payment history is the most significant factor affecting your credit score, so missing just one payment on your student loans can sting. If you miss enough payments, your loans will default, causing your FICO score to plummet by 50 to 90 points, according to a report from the Urban Institute.
Here’s what you need to know about how student loan default affects your credit score and what you can do to recover.
***The U.S. Department of Education announced the coronavirus-related forbearance and interest rate freeze would be extended until August 31, 2022. The department added that it would grant more than 7 million borrowers in default a “fresh start” and automatically return their accounts to good standing before the freeze ends. There’s no word yet on when this change will happen.
When is a student loan default reported to the credit bureaus?
Late payments for federal student loans are reported to the credit reporting bureaus after you miss three consecutive monthly payments. Your student loan servicer will keep reporting the delinquent payments for six more months, nine in total, until your loans default.
Once that happens, your servicer will report the default status to the bureaus. The defaulted student loan will stay on your credit report for seven years.
The servicer will also move the defaulted loans to the company that handles collections for the Education Department, Default Resolution Group, and report that your student loan account has been closed due to transfer. The DRG will take over credit reporting duties until you get out of default. Read more about how to get out of student loan default.
Private student loan lenders and servicers report delinquent payments to the three major credit reporting agencies — Equifax, Experian, and TransUnion — after a single payment is missed. Many private lenders will report that the loans defaulted or were charged off after 180 days or six months of missed payments.
Regardless of what type of loan you default on, federal or private, the default status will stay on your credit report for seven years or until you return the student loans to good standing.
Learn More: How to Remove Student Loans From Credit Report
How to repair credit after student loan default
Follow these two steps to rebuild your credit after defaulting on student loans.
Step 1: Fix your defaulted student loans
The Education Department gives student loan borrowers three options to fix defaulted loans:
- Settlement - lets you pay less than you owe to the loan holder in a lump sum or over a few months. You’ll save the most money settling private loans.
- Loan consolidation - pays off the defaulted student loans with a new Direct Consolidation Loan. The new loan restores eligibility for income-driven repayment plans, loan forgiveness programs, and deferments.
- Loan rehabilitation - returns the loans to good standing after you make nine on-time payments. The payment amount will be 15% of your discretionary income or an amount you can afford.
Anecdotal results from my clients suggest that the best option to get good credit fast is the option that gets you out of default the fastest, which is settlement or consolidation.
Completing the loan rehabilitation program removes the default status from your report, but it takes nine months to complete. And that means nine more months of delinquent student loan payments will be added to your report.
Private student loan creditors generally don’t have programs to restore defaulted loans. Your only options may be to pay the balance in full, refinance defaulted student loans with a new lender, or negotiate a student loan payoff.
You can ask the loan holder or collection agency if it will remove the negative marks from your report in exchange for paying off the loan balance — “pay for delete”. But companies typically won’t agree to remove legitimate derogatory information.
If the defaulted student loans aren’t showing on your credit report, both consolidation and rehabilitation will add the loans back to the report. But settling student debt shouldn’t cause the loans to be reported again.
Learn More: How to Get Student Loans Out of Default
Step 2: Work on your other debts
There are things you can do to help rebuild your credit while you’re working on getting out of default. Some good practices include:
- Paying your other bills, credit cards, mortgage, etc., on time. Payment history has the most influence on your FICO score.
- Keeping your credit card balances low or paying them off completely every month is possible. Credit utilization, or how much credit you are using, is the second most important factor in your credit score.
- Adding to your credit mix. The right combination of credit can raise your score. It shows lenders that you can responsibly pay back other types of debts, including secured credit cards, auto loans, personal loans, etc.
In default on student loan debt? Let’s talk.
Defaulting on student loans hurts your credit and can also lead to your wages being garnished, tax refunds being seized, and Social Security benefits being withheld.
If the process of getting out of default sounds overwhelming, I’m here to help. I’ve helped people like you evaluate their repayment options to quickly get federal and private loans out of default.
Schedule a free 10-minute call with me today. We’ll work together to develop a plan that fits your current financial situation and sets you up to meet your future goals.
We’ll help you escape the consequences of default and get back on track no matter what type of education loan you borrowed.