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If you've defaulted on student loans, it means you're not paying back your debt as agreed, and your loan issuer is now looking for other ways to get its money.
Missed student loan payments and loans in default have a major negative effect on your credit. Consequences can also include losing access to further federal financial aid, having your wages garnished and tax refunds withheld, and being charged steep fees by collection companies.
Here's what happens if you default on student loans and how to get your credit back in shape afterward.
Consequences of Student Loan Default
The consequences of defaulting on your student loans can vary based on the type of loans you have. For starters, while federal student loans aren't considered to be in default until you've gone without payment for nine months, private loans can go into default in three months.
And while the federal government offers a rehabilitation program for defaulted loans, allowing you to avoid some of the consequences, that's not the case with private lenders.
Here's how student loan default can impact you:
- The entire balance, including interest and fees, will be due immediately.
- You'll be ineligible for deferment and forbearance plans.
- It'll go on your credit history and remain there for seven years.
- It can damage your credit score significantly.
- You may have to deal with an aggressive debt collector.
- The collection agency may add its own fees to your balance.
- The federal government may garnish your wages, your tax refund or your federal benefits.
- If you have federal loans, you'll lose eligibility for further federal financial aid.
- If your loans are federal, you may not be able to buy or sell certain assets, such as real estate.
- The collection agency may sue you for payment.
How Does Student Loan Default Affect Credit?
By the time you've defaulted, you already have multiple missed payments on your credit report, which can significantly lower your credit score. The default itself adds to the damage.
If you have federal loans in default, your credit report will include a derogatory mark noting that the loan holder has filed a claim with the government to collect on the debt.
And if you have private loans, a collection company may buy your defaulted debt, and that collection account will also show up in your credit history. Each of these marks will stay there for seven years.
How to Get Student Loans Out of Default
Your options for getting out of default, or even if you can get out of default, can vary depending on the type of loans you have.
Federal Student Loans
Federal student loans come with two structured ways to get out of default, both of which can help you rebuild credit:
- Student loan rehabilitation: When you rehabilitate a defaulted federal loan, you agree to make nine on-time payments within a 10-month period. You'll generally pay 15% of your monthly discretionary income during this time. If you have Perkins loans, your lender will determine the monthly payment.
- Student loan consolidation: You can also turn your defaulted student loan into a direct consolidation loan to get out of default. This process requires you to either make three full, on-time payments toward the defaulted loan before consolidating or to repay the new loan on an income-driven repayment plan.
While rehabilitation takes longer, it's preferable because your loan servicer will remove the default notation from your credit report, though your pre-default missed payments will remain. With consolidation, you'll get out of default faster, but the default record will stay on your credit history.
Private Student Loans
Private lenders generally don't offer defaulted-loan restoration options, but there are some potential options you can pursue:
- Ask your lender what you can do to bring your defaulted loans back into good standing.
- Refinance the debt with another lender, though you may need a cosigner due to the recent missed payments on your credit reports.
- Settle your debt for less than what you owe.
- Consult an attorney who specializes in student loan debt.
How to Rebuild Credit After Student Loan Default
Whether you have federal or private student loans, it's possible to rebuild credit on your own after default. Here are some steps you can take:
- Pay all bills on time. Because your payment history is the most influential factor in your FICO® Score☉ , the score used by 90% of top lenders, it's crucial that you pay on time on all your credit accounts going forward.
- Pay down credit card balances. If you have credit cards with balances, pay them off completely every month, if possible, and keep the balances you carry from month to month low, or at zero, going forward. Credit utilization, or the amount of available credit you're currently using, is the second most important factor in your credit score.
- Consider adding a new account. If you don't have any other loans or credit cards already, you may consider applying for a secured credit card or a credit-builder loan that's meant to improve your credit score. To get a secured card, you'll pay a cash deposit that becomes your credit limit; with a credit-builder loan, the loan amount is held in a separate account and disbursed to you upon your final payment. With either option, the positive payment history on the account is an important part of improving your credit score.
- Avoid unnecessary credit. While new credit accounts can help you rebuild your credit history, it's important to be mindful of when and how you borrow. It's typically best to avoid multiple credit applications in a short period of time, and you'll also want to avoid credit that's not necessary for improving your score.
- Review your credit report for errors. While your default is bringing down your credit score, there may be other information on your credit reports that's impacting your credit file. Review your credit report for errors or inaccuracies and dispute anything you find in those categories.
Monitor Your Credit to Track Your Progress
Throughout the default process and your financial recovery, it's important to monitor your credit regularly to understand how your actions impact your credit score to track your progress as you rebuild.
Experian's free credit monitoring service provides access to your FICO® Score and Experian credit report, along with real-time alerts when changes are made to your credit report. With this information, you'll be better equipped to get back on track after default.