Defaulted private student loans and most defaulted federal student loans stay on your credit report for seven years from the date of the late payment. Federal Perkins student loans are a little different though. If you default on a Federal Perkins Loan, the blemish will stay on your credit report until you’ve repaid the loan in full.
How is Your Credit score impacted?
Given the many factors that go into your credit score, it’s impossible to say just how many points you will lose from defaulting on a student loan. Your payment history makes up 35% of your credit score, which is the largest share assigned to any category. In most cases, the result will be a significant and sizeable drop in credit score, something that will take years to repair.
The default will appear on your credit score for seven years. A negative credit score will affect your ability to do the following:
- Rent an apartment or buy a house
- Buy or lease a car
- Get a cell phone plan
- Sign up for utilities (gas, electric, water)
Even some employers will look at potential employees’ credit histories, so your ability to get a job can be impacted by defaulting on a student loan.
The smartest thing you can do is avoid defaulting on your student loans. Here are some tips.
Avoiding Default on Federal Student Loans
There are three primary options available to you if you find that you are struggling to make your monthly loan payments:
Apply for an Income-Driven Repayment Plan: If you’re approved for an income-driven repayment plan, your monthly payment will be reduced to what you can afford to pay, which is usually 10% of your monthly income.
Forbearance or Deferment: If you’re unable to meet your monthly loan payments due to circumstances beyond your control, or you have decided to return to school, you may be eligible for a temporary suspension of your student loan.
Loan Forgiveness: If you work in public service, or if you’ve been a qualified teacher at a low-income school for at least five years, you may be eligible for loan forgiveness. You can learn more about loan forgiveness here.
Avoiding Default on Private Student Loans
There are two primary options available to help borrowers avoid defaulting on private student loans:
Repayment Assistance: Depending on the circumstance, lenders may be willing to temporarily reduce your monthly payments or even suspend your repayment obligations. Contact your lender to find a mutually beneficial solution to temporary difficulties.
Refinance your loan: When you refinance a loan, you’re taking out a new loan to cover the cost of your existing loan. Newer loans sometimes offer better terms than pre-existing loans, so refinancing could be a good option if you’re struggling to meet your monthly payments.
How do I repair my credit score?
Rebuilding your credit score after defaulting on a student loan is a slow process, but it is possible. Take these steps to begin repairing and then start rebuilding your credit score:
- Get your student loan out of default
- Check your credit report for errors
- Start some positive credit history. Look into a secured credit card.
- Set up payment reminders to pay your bills on time
- Pay off any debts
Defaulting on a student loan is something to take seriously, but you can rebuild your credit score by developing good habits. Pay attention to what you owe, and make sure to pay all your bills on time.