How do you rebuild credit after you have defaulted on your student loans?
Life happens. Perhaps you were diligent with paying off your student loans each month but somehow missed a few payments because you fell on hard times.
Should you be punished because of unexpected circumstances? Will you ever be able to recover from a bad credit score?
When you’re in a financial tight spot it can feel like you will never get out of the funk.
This couldn’t be further from the truth. Not only can you get yourself out of that seemingly impossible hole, you will live to tell others about it so they will be inspired by your story.
So are you ready to rebuild your credit after a student loan default?
Let’s explore five effective ways to rebuild credit after a student loan default.
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Five Effective Ways to Rebuild Credit After Student Loan Default
Rehabilitate Your Loans
Being in default on your student loans will show up on your credit report. Obviously, since this is a negative item, it will bring down your credit score significantly.
One way you can get the default removed from your credit report is to rehabilitate your loans. Actually, this is the best ways to rebuild credit after student loan default because of that simple fact!
When you rehabilitate your loans, you come to an agreement with the loan servicer to pay a low monthly amount for anywhere between 9 and 12 months. Once you have followed this plan and paid the monthly amount on time each month, the default will be dropped off your credit report.
This will help you regain some points on your credit score.
Consolidate Your Loans
The next thing you can do in your quest to rebuild your credit is to consolidate your loans.
If you have federal loans from different servicers, consolidating your loans will simplify your payments.
The Direct Consolidation Loan, for instance, will allow you to make just one monthly payment on your federal loans instead of multiple payments. This makes things easier and more likely that you will pay them off quicker.
Furthermore, the Direct Consolidation Loan gives you access to the Public Service Loan Forgiveness Program if you are in a qualifying profession.
Another benefit you will enjoy with this program is that because it is regulated by the government, the interest rate tends to be lower than when you consolidate private loans.
If you have any of the following loans, you can consolidate through the Direct Consolidation Loan program:
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans
- PLUS loans from the Federal Family Education Loan (FFEL) Program
- Supplemental Loans for Students
- Federal Perkins Loans
- Nursing Student Loans
- Nurse Faculty Loans
- Health Education Assistance Loans
- Health Professions Student Loans
- Loans for Disadvantaged Students
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans
- FFEL Consolidation Loans and Direct Consolidation Loans (only under certain conditions)
The Direct Consolidation Loan program is free to apply for. Don’t let anyone scam you into paying a fee to help you sign up for this program.
Have private loans? You can consolidate those too.
Several banks have loan consolidation programs. Your best bet is to talk to a banking advisor on how best you can do this.
The interest rates on private consolidation programs depend on your credit score. Since a default might have affected your credit score adversely, it is best if you first rehabilitate your loan before you apply for one of these programs.
Use Income-Based Repayment Programs
Paying off your student loans using an income-based repayment program can also help you rebuild your credit after a default.
These payments will be based off your current income. If you are able to make timely payments each month, your accounts will remain current and not go into default.
Use a Secured Credit Card
A secured credit card is usually easier to get than a regular credit card. This is because you make a deposit on the card that serves as your credit limit.
As long as you make timely monthly payments on your secured credit card, your credit score will continue to improve.
Once you have used a secured card for a year or two during your “rebuilding” phase, you can get rid of it and use a regular credit card.
Keep Your Debt Ratio Below 30%
As a good rule of thumb, keeping your debt below 30% of your overall available credit is helpful in building up your credit score.
Whether you are using a secured card or a regular credit card, this rule of thumb is a good one to always keep.
Continue Paying All Your Bills on Time
Your utility bills, cell phone bills, and rent and car payments can show up on your credit report if you don’t keep up with those payments.
Continue paying all your bills on time to keep negative items from appearing on your credit report. Plus, making on-time payments is one of the best ways to boost your credit score over the long run.
Rebuilding your credit after a student loan default will not happen overnight. It takes diligent work and patience.
So if you have found yourself in that tight spot of being in default on your student loans and as a result your credit has taken a hit, don’t lose hope. Do the work required and you will come out of it.
Remember, the quicker you are able to resolve your default using the five methods we have described above, the easier and quicker it will be to build that credit back up.
Question of the Day
Have you ever been in default with your student loans? How did you recover from that? Let us know in the comments below.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.