How to Rebuild Credit after Student Loan Default

If you have student loan debt and are in default, or think you are, there is a way out. The first step is to understand what default is and find out if your agreement has officially been declared, by the lender, to be in that category. Simply create an account at and find out how they list your account. If you can't or don't want to use the StudentAid website, try pulling your credit report. Any lapsed loans will be clearly visible. The most important thing to know from the start is how a financial contract gets into a negative status and what the consequences are.

What are the Consequences?

In most cases, your account will go into default if you miss nine monthly payments on a federal obligation or three payments on a private one. Lenders have plenty of remedies if you miss a lot of payments, including wage garnishment, attachment of assets, forcing you into bankruptcy and keeping you from getting any more money for school. The government can withhold your tax refunds and your credit score will take a big hit.

Recover and Rebuild Credit

There are four ways you can recover and rebuild credit. Of course, the recovering part must be the first step. Only after you have resolved your financial situation will you be able to work on improving your credit scores. Here are the four basic approaches for doing so:

  • Pay it all: This option is the fastest but also not practical for most people who owe a lot.
  • Make a settlement agreement: You can agree to pay a lower amount in settlement but not all lenders will do this. Even when they do, settlements are often a bad deal and include higher interest and longer payment terms.
  • Rehabilitate the debt: You can restart the agreement by making nine payments of 15 percent of your discretionary income. After that, you go back onto the regular payment schedule.
  • Consolidate the debt: This is the best way for many who owe large amounts. Make three full payments and then get onto an income-based repayment plan.

Fixing Your Credit

Once you have opted for one of the four recovery options, it's time to begin the credit repair process. Most credit counselors recommend that you begin by opening a secured credit card account, for which you'll have to put at least $200 cash down. These kinds of cards act more like debit cards because you can't really charge more than your security deposit amount. But after a few months, they are quite good at giving your credit score a boost. Within a year, you can see significant results just from a single secured credit card account.

If you can qualify for a retail credit card, such an account can also work to improve your scores. Be careful, because when you do apply, your score will take a small hit due to the hard-pull of the inquiry. However, inquiries have minimum impact on long-term credit scores, so the trade-off is usually worth it.

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