What Happens to Your Credit When You Default on Student Loans?
Struggling to pay off your student loan is a stressful situation. And if you default on your student loan, the situation is only made worse. One of the major impacts of defaulting is the hit your credit will take. So what does happen to your credit when you default on student loans, and what can you do about it?
The Impact on Your Credit
Defaulting on your student loan means your credit will drop. One of the major factors in your credit score is payment history. Defaulting means you’ve missed payments for an extended period of time. Therefore, your credit has already taken a hit as a result. Then, once you default, your loans will likely be sent to debt collectors. Any debt that’s sent to collections will be reported to the three credit bureaus. Because this shows up on your credit report, this will cause your score to drop even more. This can seriously hinder your ability to qualify for a mortgage, auto loan or other forms of financing.
How to Get Out of Student Loan Default
When it comes to getting out of federal student loan default, you have three options. You can pay the balance in full, consolidate your loans, or enter a student loan rehabilitation program through the Department of Education. With a rehabilitation plan, the default can be removed from your credit report as long as you adhere to the program requirements. This can help improve your credit, though the missed payments will remain on your credit report. With the other two options, the default will remain on your record until your student loan balance is paid in full.
How to Improve Your Credit
If you do default on student loans, you’ll be looking to improve your credit score. Aside from participating in the rehabilitation program, there are steps you can take to help boost your score. Payment history is the most important factor of your credit score. So be sure to get back to making payments on time with whatever option you’ve chosen to get out of default. Additionally, ensure that you’re making on-time payments on your other debts as well. Credit utilization is also a major factor in your credit score, so working to lower your overall debt can help too. You may also want to seek the help of a professional, such as a debt attorney, to help you manage your debt and get back on track.
How to Avoid Student Loan Default
The best way to prevent the impact on your credit from student loan default is not to default in the first place. Of course, that can be easier said than done. If you’re struggling to repay your student loans, consider your options. At any time during the course of your federal student loan, you can change your repayment plan. An income-based repayment plan will calculate your monthly payments based on a percentage of your income. This is meant to make paying off your student loans more affordable. If you’re still struggling even after a change of plan, consider reworking your budget. Often, struggling to pay off debt results from a lack of cash flow. Look to see if you can free up some funds in your budget or if you can find other opportunities to increase your income.
Defaulting on student loans can have severe consequences on many aspects of your life. Your credit, in particular, will be majorly affected by a default. This can hinder your progress towards other financial goals and generally set you back. Improving your credit after defaulting on your student loans is not impossible, but the best course of action is to avoid default altogether.
If you’re struggling with your student loan debt, contact Leslie H. Tayne, Esq. and the student loan debt professionals at Tayne Law Group.