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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.
The specific effects and timing of default depend on whether your student loan is federal or private. But in almost all cases, your late payments, and the default itself, will stay on your credit report for seven years.
Here's what happens if you default on student loans, and how to get your credit back in shape afterward.
When Do Student Loans Default?
Most federal student loans, including direct loans and Federal Family Education Loans, enter default status after 270 days, or nine months, of nonpayment. These loans are considered delinquent, however, as soon as you fall behind. A record of your missed payments first appears on your credit report—and starts affecting your credit score—after 90 days.
Some loans enter default status even earlier. Federal Perkins loans can go into default after a single unpaid bill. Private student loans also can go into default as soon as you miss a payment. Check your loan agreement to see at what point after nonpayment your loans default.
How Does Student Loan Default Affect Credit?
Payment history is the most important factor in your credit scores, accounting for 35% of your FICO® Score☉ , the most commonly used scoring model. That means just one missed payment can negatively impact it, and nine months of skipped bills can lower your score significantly.
A payment is considered missed if it's more than 30 days overdue. It stays on your credit report, meaning it's visible to lenders, for seven years. The way student loan servicers collect loan bills can also magnify the effect of a missed payment. If you have multiple student loans managed by the same servicer, one monthly payment may cover several loans. So on your credit report, a single missed bill could put multiple loans into delinquency or default.
Additionally, when federal loans go into 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. A collection company may buy your defaulted private student loan debt, and that collection account will also show up in your credit history. Each of these marks will stay there for seven years.
If you pay all bills on time and avoid using a substantial amount of your available credit, the impact those negative marks have on your score will decrease over time.
How to Rebuild Credit After Student Loan Default
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. For Perkins loans, your loan holder will determine the monthly payment.
Once your loan has been rehabilitated, you'll regain benefits including access to federal student aid. Wage and tax return garnishment will end. Rehabilitation also offers the advantage of removing the default notation from your credit report. Your pre-default missed payments will remain, but the removal of the default record could benefit your credit.
- 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.
If you choose this route, the default record won't come off your credit report. But consolidation can be a faster process than rehabilitation, and your new consolidation loan will be listed as current on your credit report as you make on-time payments.
Private lenders generally don't offer defaulted-loan restoration options. But ask your lender what you can do to bring your defaulted loans back into good standing. Be sure to check into whether your private lender will remove any negative marks from your credit report as part of a loan rehabilitation program.
You can also work to rebuild credit on your own after default—whether you have federal or private loans—by making use of responsible credit habits:
- Pay all bills on time on all your credit accounts, including credit cards and other loans.
- 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 (after payment history).
- When you're ready, consider applying for a secured credit card that's meant to improve your credit score. To get a secured card, you'll pay a cash deposit that becomes your credit limit. You likely won't have access to a large credit line, but positive payment history on the account is an important part of improving your credit score.
Bouncing Back From Student Loan Default
While student loan default can be distressing—both financially and emotionally—there is a way forward. Take advantage of rehabilitation strategies offered by the government for federal student loans, and reach out to your lender if you have private loans.
As difficult as the process may seem, the sooner you address the default and commit to making on-time payments, the sooner your credit can recover. Also, if your loans are in danger of defaulting but haven't yet, take this opportunity to get ahead of the issue and talk to your lender as soon as you can.
Consider signing up for repayment plans that can lower your bill, or opt to postpone payments until you're back on steadier footing. Aim to avoid missed payments and a record of default so you can keep your credit, and your overall financial health, strong.