Rebuilding Credit After a Student Loan Default

Posted on October 21, 2019 at 10:50pm by
Kansas City Student Loan Attorneys

Student loan defaults affect millions of borrowers. Many more borrowers may default in the near future if recent research turns out to be correct. Like with many forms of debt, your credit scores will take a hit after a student loan default. Credit scores affect your ability to qualify for loans, jobs and housing. As a result, it is important to have information that can help you rebuild your finances after defaulting on student loans

Step 1: Get Out of Default

Getting out of default will not be an option for everyone. Private lenders may not offer terms that allow borrowers to rehabilitate defaulted loans. Fortunately, federal borrowers are far, far more likely to have this option available. There are several ways to get your federal student loans out of default.

The first way is to take advantage of the Department of Education’s loan rehabilitation program. You cannot enroll in this program twice.

Your second option is to consolidate your loans into a Direct Consolidation Loan. However, this option may not be available to all borrowers. You should check with your servicer, the Department of Education, or a student loan attorney to determine whether this option is available for your situation.

The final option is to simply pay off all of your loans to exit default. Obviously, this is not going to be possible for most people due to the accumulation of interest, fees and large balances. 

Step 2: Enroll in an Income-Driven Plan

Chances are, you were having trouble with payments if you entered default. Many borrowers are unaware that income-driven plans exist for federal loans in good standing. These options limit your monthly payments to a percentage of your discretionary income. How much you pay each month depends on your income and the income-driven program you choose.

Income-driven plans even limit monthly payments to $0 a month if you do not currently have a source of income. This means that you can avoid a second default by staying enrolled during a period of unemployment.

However, you must recertify your income-driven plan each year. You will need to send the Department of Education your tax information to recertify. Fortunately, this is very easy and can be done online through a website operated by the Department of Education. You can also recertify after a job loss or demotion. 

Step 3: Show Financial Stability

Once your student loan situation stabilizes, it should be much easier to get your finances back in order. You should have more money available to rebuild your credit if you are paying less on student loans each month.

Stability is key while rebuilding your credit. Keep a steady source of income and be sure to pay all of your debt obligations in a timely manner. Pay your electricity bill, rent, car insurance, student loans, credit card bill, car payment and other debt obligations on time. This will demonstrate to future lenders that you are financially stable.

You should also be sure not to overextend your debts. Ideally, you want to keep your debt ratio below 30 percent. Maxing out your lines of credit or taking on unnecessary debt obligations will only cause more harm to your finances.

If your credit history is thin, meaning you defaulted on student loans without other forms of debt, then a secured credit card might be a good option. With a secured card, you make a deposit on a line of credit. 

You should be very cautious while researching which card to obtain. Are the interest rates adjustable or too high? These are factors to consider.

Step 4: Keep an Eye On Your Credit

All effective strategies have one aspect in common – you must monitor its progress. Is your current strategy working to improve your finances? You can find out by pulling a free credit report from the three credit bureaus, Equifax, TransUnion and Experian.

Prior blogs discussed how to obtain your free annual credit report from each bureau. The process does require you to obtain prior financial documents, so be prepared to have this information ready before beginning the process.

About Our Kansas City Student Loan Attorneys

The Kansas City student loan attorneys at The Sader Law Firm have experience helping borrowers who are struggling with higher education debt.

For a consultation with us, you can call (816) 281-6349 or use the contact form on our website. Follow us on Facebook for future updates on our blog and firm.