How to Remove Defaulted Student Loans from Your Credit Report

How to Remove Defaulted Student Loans from Your Credit Report

Today, approximately 44 million Americans collectively share over $1.4 trillion in student loan debt. This means that the average amount taken out by a college alumnus in loans is just under $40,000. This amount would be a major financial burden for just about anyone, much less someone who is trying to enter the workforce and define their career for the first time. As a result, millions of former undergrads have had to default on their student loans, sometimes multiple times.

If you’re one of the millions of Americans who have defaulted on their student loans, you’ve probably dealt with a myriad of consequences: your credit has probably taken a major hit, the IRS might have withheld your tax refund, or, in the worst case scenario, you may be paying court-ordered wage garnishments on a monthly basis. Such problems can lead to a debt vortex, in which you’re taking out one loan just so that you can pay off another. And even though it’s always possible to pay off your loans over time, we all know that mounting debt is never a good thing.

Wage garnishments and withheld tax refunds can make your current finances tough to manage, but a damaged credit score can have even more far-reaching impacts on your life. With a bad credit score, you’ll probably have trouble getting approval for other loans, like home mortgages and auto loans, that could be vital assets in paying off your student debt. And even if you are approved for a loan, you’ll probably get hit with higher interest rates to account for your damaged score.

Defaulting on a student loan can be a major financial impediment in the short-term future, but it doesn’t have to ruin your financial outlook for good. Below, we provide are a few simple steps you can take to get back on track and recover your credit score in a matter of months:

Debt Rehabilitation

Even if you’re not sure whether you’re ready to start making regular payments to your debt collector, you should still contact them and ask about their debt rehabilitation program. All federal loan providers are legally required to offer one, which means that as long as the loan isn’t private, this will always be an option. Your provider will ask you to give them documentation of your Adjusted Gross Income (AGI), so that they can determine an amount which you’ll pay on a monthly basis. This amount will be calculated to accommodate your income and essential living expenses, which means that the monthly payments they request should be well within reach—some rehabilitation payments are as low as $5 per month

Once you’ve paid the set amount to the debt collector for nine consecutive months, your loan will no longer be defaulted, and the default will be expunged from your credit report. This is only the first step in the process of paying off your loans and improving your credit score, however: once you’ve finished rehabilitation, you’ll be expected to continue paying the collector according to the payment plan of your choice, and you’ll have to wait a few years before past late payments are stricken from your credit history.

If you do agree to a debt rehabilitation plan, then you’ll want to make sure you never miss a payment. A missed payment could result in a failed rehabilitation, providing another blow to your credit score while your loan remains defaulted. If you pay on time for all nine months of the rehabilitation, though, you’ll be well on your way to an improved credit score.

Other Options

We strongly recommend debt rehabilitation since it’s the only realistic course of action that will help you remove a default from your credit history. However, in the off-chance you have a lot of money stowed away in a savings account, you can always pay off the loan in full and request a loan payoff letter to have the default removed from your account. Needless to say, this is not a viable option for the vast majority of people with student loans.

If you have multiple loans with separate providers, you can also turn to loan consolidation to make your finances more manageable. Taking this step could help you lower your interest rates and keep better track of your bills, but it will do nothing to remove past defaults from your credit history, thus leaving your credit score damaged while you continue to pay off your debts.

The Bottom Line

Defaulting on a federal student loan can cause a major dent in your credit score and credit history, but it’s still possible to recover in a matter of months. By negotiating and fulfilling a debt rehabilitation program with your provider, you should have no problem getting the default removed from your credit history. Once you’ve rehabilitated your loan, you should start researching income-based repayment plans, which are specifically built to accommodate your financial outlook, regardless of how much (or little) disposable income you have.