Defaulting on a student loan can have a significant negative impact on your credit score This can make it difficult to obtain loans, credit cards, and other forms of financing in the future. In this article, we will explore the consequences of defaulting on a student loan and how it affects your credit score.
Understanding Student Loan Default
When you have not made a payment on your student loan for at least 270 days, the loan is deemed to be in default. The lender will notify Equifax, Experian, and TransUnion—the three main credit bureaus—of a loan’s default. Your credit score will be severely lowered for seven years as a result of this negative mark remaining on your credit report.
The Impact of Default on Your Credit Score
Your credit score may be affected differently by a student loan default depending on a number of variables, such as the amount of the defaulted loan and your credit history in general. But generally speaking, defaulting on a student loan can reduce your credit score by at least 100 points. Because of this, it could be challenging to be approved for credit cards, loans, and other types of funding.
Other Consequences of Defaulting on a Student Loan
In addition to damaging your credit score defaulting on a student loan can also have other negative consequences including:
- Wage garnishment: The lender may be able to garnish your wages to collect the debt.
- Tax refund offset: The lender may be able to offset your tax refund to collect the debt.
- Loss of eligibility for federal student aid: You will be ineligible for any further federal student aid, including grants and loans.
- Difficulty obtaining employment: Some employers may require a credit check as part of the hiring process, and a default on your credit report could make it difficult to get a job.
Getting Out of Default
There are actions you can take to get out of default on a student loan and improve your credit score. These steps include:
- Rehabilitation: You can rehabilitate a defaulted loan by making nine on-time payments within 10 months. This will remove the default from your credit report and allow you to regain eligibility for federal student aid.
- Consolidation: You can consolidate multiple defaulted loans into a single loan with a lower interest rate. This can make it easier to manage your payments and get out of default.
- Repayment: You can repay the defaulted loan in full. This will remove the default from your credit report and improve your credit score.
Defaulting on a student loan can have a significant negative impact on your credit score and your financial future. If you are struggling to repay your student loans, it is important to seek help from your lender or a credit counselor. There are options available to help you get out of default and improve your credit score.
Additional Resources
- Experian: What Happens if You Default on a Student Loan?
- The Pew Charitable Trusts: Student Loan Default Has Serious Financial Consequences
Frequently Asked Questions
How long does a student loan default stay on my credit report?
A student loan default will stay on your credit report for seven years from the date of default.
Can I remove a student loan default from my credit report?
It is possible to remove a student loan default from your credit report if it is inaccurate or outdated. You can dispute the error with the credit bureau or the lender.
How can I raise my credit score following a default on a student loan?
There are several things you can do to improve your credit score after a student loan default, including making on-time payments on all of your bills, paying down your credit card balances, and avoiding taking on new debt.
Disclaimer
This article’s content is only meant to be used as general information; it is not intended to be financial advice. It is imperative that you speak with a licensed financial advisor before making any financial decisions.
Damaged credit—from delinquency or default—for up to seven years
Loans that are in default or more than 90 days past due must be reported by servicers to the main national credit bureaus. These notations remain on borrowers’ credit reports for up to seven years.
According to research, the credit scores of student loan borrowers, many of whom may already be low, typically decline by 50 to 90 points in the time leading up to a student loan default. This could be due to late payments or it could mean that borrowers who default on their student loans are also likely to be behind on other bills. Additionally, borrowers with bad credit will pay more for or have trouble getting credit cards, house or auto loans, and other consumer credit and insurance products for several years, even though their credit scores may somewhat recover soon after they enter default.
Depending on their state of residence and the type of loan, some borrowers who default run the risk of having their professional or driver’s licenses suspended, which would make it difficult for them to find employment. Similarly, security clearances, duty stations, and promotions may be denied to federal employees, contractors, and members of the armed forces who have unpaid or defaulted debt.
Borrowers who default face a range of harmful outcomes
When borrowers are in default, their loans continue to accrue interest. Furthermore, while in default, borrowers who were enrolled in income-driven repayment plans—which give loan forgiveness after 20 to 25 years of qualifying payments and tie monthly payments to borrowers’ incomes and family sizes—lose access to these programs and their benefits. And borrowers in default are ineligible for additional federal student aid.