You may think you’re in the clear because your student loans are out of default, but you can’t be certain until you check your credit report. The formulas used to determine credit scores are highly guarded by the credit bureaus; moreover, each person deals with her finances differently, so you can’t pinpoint how much your score will improve once you get out of default. However, the way you handle your default could determine how notations are reported and what lenders see as they examine your credit history.
The Credit Score
Your student loans are just one of many elements involved in the calculation of your credit score. Other factors may include payment history, the types of accounts you have and how long they’ve been open, and any liens, collections or bankruptcies. While you may have defaulted and eventually pulled yourself out of default, your credit score is a composite of your cumulative activity, and any improvement in one area must be seen in light of how you manage money in other areas of your life.
Though it may not be a realistic route for many defaulted student loan borrowers, repaying the loan could be one way to get the defaulted loan out of your hair and the negative marks off your credit report. If you’re able to make a large, one-time payment, ask the debt collector, whether the original lender or a subsequent collection agency, to remove the default from your credit report in exchange for the large payment, advises Jeremy Simon of consumer credit card website CreditCards.com. However, there are no guarantees that it will agree or that removal will necessarily boost your credit score.
If you choose to get out of default through the student loan consolidation option, you agree to repay a consolidation loan via the Direct Loan Program of the U.S. Department of Education or make three consecutive loan payments through your current loan holder and then consolidate through Direct Loans. While this method will get you out of default status relatively quickly — three months or less — the notation of default stays on your record. Whether your credit score improves or not, lenders will continue to see this mark and potentially deny you loans because they see you as high risk.
Getting out of default status through loan rehabilitation has the effect of wiping off the defaulted loan from your record, unlike other methods of dealing with default. Previous delinquencies remain on the record, but the default itself will be expunged. Rehabilitation requires you to make nine on-time payments of a predetermined monthly amount you can afford. Upon completion of the payments, your credit — the default portion — is given a clean slate and you may be eligible to apply for new loans. Your credit won’t be spotless because your missed payments history will still be present, but a big blot will be removed and your score potentially revived.