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.