Tips for Repairing your Credit after Student Loan Default

Defaulting on student loans is not recommended and should be avoided at all costs. Talk to your lender long before your loans reach the default stage and try to negotiate forbearance or deferment rather than ignoring the problem and sliding into default. However many have not dealt with student loans in this recommended way and have ended up defaulting on their loans, with the subsequent result that their credit rating is ruined.

Not only are all late payments recorded on your credit report as a matter of course, but the default status will be registered too. A registered default is a serious matter which precludes the borrower from obtaining any future federal funding assistance and extends beyond further education loans to incorporate such programs as HUD’s assistance for home buyers.

Whilst all late payments will continue to show on your credit report for seven years it is possible to repair your credit after student loan default, by having the default status removed. The US Department of Education offers a one off rehabilitation program to those who have defaulted on federal student loans. Those who successfully complete the nine month rehabilitation program are entitled to have the default status of the loan removed under the Fair Credit Reporting Act. The rehabilitation program is the only way to have the default status erased from your credit report.

Those wishing to participate in the program should contact the Department of Education and apply. A monthly fixed payment can be negotiated and provided that nine consecutive monthly payments are then made on time the default status will be removed. Those who are in default may already be subject to employer garnishment of wages and may have the IRS intercepting tax refunds. This will continue whilst you are making payments under the rehabilitation program and any funds credited to the defaulted loans from this method will not count as payment under the rehabilitation program.

However if the program is completed then the IRS and employer garnishment will cease and the previously defaulted loan will be marked as “paid as agreed” by the Department of Education. Federal funding will once again be available. You will also regain your rights to apply for forbearance and deferment.

Those who complete the rehabilitation program and have the default status removed should expect to see around a one hundred point increase in their FICO score, but the payments recorded as being late will take time to filter down your credit report. If you use other methods to try and rebuild your credit then over time your credit score will improve.

One of the easiest ways to begin to repair your credit is to take a credit card and use it to re-establish your credit rating. It may be necessary to obtain a secured credit card at this stage, and use it sensibly by using it at least once a month and then repaying the full balance.

Once you are engaged in repairing your credit score be sure to keep up to date on all payments and avoid future default on your student loans at all costs. It is not possible to go through the rehabilitation program more than once so be certain to deal with the loans responsibly.