Will Your Credit Score Go Up When You Pay Off a Defaulted Student Loan?

Defaulted Student Loans, Sounds Bad

A student loan behaves just like any other loan – like an auto loan or a mortgage- and must monthly payments should be settled regularly in a period of time with financial need, interest, and repayment plans in mind. But sometimes we face difficulty in paying off the student loan that we skip payments and, hopefully not, end up in loan default.

Defaults happen if we do not pay our loans as regularly or periodically or not pay them at all. It happens when we breech the terms and conditions of the loan set by the creditor. When we try to escape debt, we get into the trouble that is default. For FFEL and Direct Loan program borrowers, default is more specific. It would mean non-payment of dues for 270 days if the current loan is paid monthly (or 330 days if the payment is done less frequently).

The consequences of a loan default are: the loan being turned over to a collection agency; the borrower may be sued for the whole amount of the loan and be liable for the costs in collecting the loan, attorney fees and court costs; wages being be garnished; benefits received because of the loan will be denied; income tax will be investigated; near-impossibility of the borrower to seek federal financial aid until the loan is settled; and, most importantly, the defaulted loan will be mentioned in record making it difficult to avail of auto loans, mortgages and credit cards. Having a bad credit record may also hurt the chances of the debtor to find a job. Other implications that follow will be: the impossibility to avail of deferments and forbearances; loss of enrollment status and professional licenses, if possible; and payment of fees associated with the payment of the loan.

There is a delinquency period before a loan is declared in default. During the delinquency period, the ‘delinquent’ borrower is presumed to exhaust all efforts to contact the borrower. If the borrower does not contact the lender immediately, then the loan is in default. The loan will be turned over to the state guaranty agency or Department of Education. Once the loan is in default statues, the overall payment matures; therefore, the overall payment is due.

Student Loan Rehabilitation and Getting a Better Credit Record

The borrower could simply contact the lender for consultation and arrangements to repay the loan. It is a good thing if you have religiously made your six regular payments in the past. This will give you a greater chance to avail for additional aid. After making twelve regular payments and after availing of “rehabilitation” of your debt, you will no longer be in default status. By then, your default status will be erased from the records of credit reporting bureaus.

Student loan rehabilitation means reversing defaulted student loans. By making 12 consecutive monthly payments on a predetermined agreed-upon amount, you can get that defaulted loan back into action and your credit record back into shape.

It is absolutely necessary for borrowers in default status to contact the lender or servicing agency to set terms and conditions on an agreeable loan rehabilitation program for both parties.

To conclude, defaulted student loans are an avoidable disaster. It is only a matter of paying the right amount on time; understanding the terms and conditions of your loan; borrowing the lesser amount of money; making the most out of deferments, forbearances and other stipulations that could work to your advantage; and keeping in contact with your lending service.