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How to build back credit after defaulting on student loans

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    Education in the United States is expensive, and many students graduate carrying with them the weight of unpaid debt. In fact, according to the U.S. Department of Education, over 43 million Americans had federal student loans in 2022.

    While not all debt is bad, it is important to remember that paying back your loans can help keep you on a healthy financial path.

    In this article, you will learn:

    • What happens when you default on student loans
    • How defaulting on student loans can affect your credit score
    • Steps to take to rebuild your score after defaulting
    • How to get student loans out of default
    • Finding additional help

    What happens when you default on your student loans?

    According to the Consumer Financial Protection Bureau (CFPB), going into default on your federal student loan occurs when you have not made payments to your lender for about 270 days (9 months). When this happens, a few consequences may occur, including:

    • Wages may be collected from your paycheck without a court order
    • Losing your tax refund or Social Security check, funds that would instead be applied towards your owed debt
    • A drop in your credit score — this will have already happened if you’ve missed late payments, leading to default
    • Derogatory remarks on your credit report, which can stay for up to 7 years

    There are some ways to try and avoid these consequences, however. For example, you may have an arrangement like a deferment or forbearance, which may prevent you from going into default automatically.

    How defaulting on your student loans affects your credit score

    By the time you’ve defaulted on a student loan, your credit score may have already been damaged. This is due to the fact that payment history makes up a large portion of your score. If you miss a payment, your score can drop significantly, and going into default adds to the consequences.

    If you have a private student loan, it’s possible that your default leads to collections. Should your lender attempt to collect the debt from you, this could appear on your credit report as a derogatory remark, which will further negatively impact your score.

    Steps to take to rebuild your credit score after defaulting on your student loans

    Having debt such as student loans can be overwhelming and stressful, but you can overcome defaulting on your student loans. You don’t have to do it alone, either. With tools like Chase Credit Journey®, you can rebuild your credit score using the credit improvement feature. This feature generates a personalized action plan provided by Experian™ and gives you actionable steps you can take today to improve your credit score over time.

    Some steps you may take to help rebuild your credit score and credit history over time include:

    • Making consistent, on-time payments to replenish your payment history
    • Working with your lender to figure out an arrangement or plan to help you get out of student loan debt
    • Working with a financial advisor who can help you budget and plan to help pay back your debt
    • Cutting unnecessary expenditures or freezing subscriptions to help put that money towards paying off debts

    How to get student loans out of default

    Your approach to getting out of default may vary depending on if the student loan is a private or federal loan. Note: Even if you get out of default, it will remain as a derogatory remark on your credit report for up to 7 years from the date of the default.

    Federal student loans

    If you’re trying to get out of default on a federal student loan, you may be eligible for student loan rehabilitation. This is where you agree to pay back at least some of your loan on time for a certain duration. This agreement may help you eventually get out of default.

    You may also be able to do a direct consolidation loan. According to Federal Student Aid, this type of loan allows you to combine “one or more federal education loans into a new Direct Consolidation Loan for the purpose of lowering your monthly payment amount or gaining access to federal forgiveness programs.” This may be beneficial if you’re looking to adjust your monthly payments or receive financial assistance. Contact your financial aid office to learn more about what options you may have.

    Private student loans

    For private student loans, you may want to work with your lender to see if you can adjust the terms of your loan. You may be able to refinance your debt or have a co-signer assist you with taking on the responsibility of the payments. Be sure to contact your lender directly to find out how you can best go about alleviating your debt.

    How to find additional student loan help

    Going into default can be scary and discouraging, especially when you see how it can affect your credit score. Remember, you’re not alone, and there are resources out there to help you.

    In addition to using free online tools like Credit Journey®, you can:

    • Work with an attorney or financial advisor
    • Consult with your lender
    • Utilize resources provided by the federal government to help settle federal student loan debt

    Your debt and default won’t last forever. With careful, diligent steps, time and patience, you can be well on your way to rebuilding your credit and setting yourself up for a more positive financial future.

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