Skip links

Does Paying Off Defaulted Student Loans Affect My Credit Score?

Paying up your defaulted student loans, whether they are federal or private, may help raise your credit score. 

The sooner you can pay your federal loan or a private loan that is in default, the faster your FICO score will rise, but only if the loans are listed on your credit report

However, some lenders still employ outdated credit score formulas that take into account defaulted loans you’ve already repaid.

Will my Credit Score Increase If I Pay Off my Defaulted Student Loan?

Yes, paying off student loans that are in default may raise your credit score. But it is unlikely to result in a large increase

After your late payment history is removed from your report, your score will increase significantly, experiencing its greatest increase in seven years.

What if it isn’t listed on my credit report? Paying the debt won’t have an impact on your credit score if your student loans were removed from your record. 

Due to the fact that the debts were no longer affecting your score negatively, it won’t rise. And it won’t go down because the loan servicer won’t add the loans back to your credit history. 

The benefits of repaying your college debt, particularly for federal student loans that have defaulted, outweigh the fact that it will improve your credit score.

When you get federal student loan debt out of default, you’ll:

  • Be eligible for programs that offer loan forgiveness, deferments, forbearances, and income-driven repayment plans.
  • Protect your wages from being garnished, your tax refund from being taken, and your Social Security benefits from being offset.
  • To be eligible for an FHA loan, get your name removed from the CAIVRS report.
  • Retrieve eligibility to get more financial assistance.

Student loan borrowers who repay defaulted loans only obtain a settlement for less than the total amount due from private lenders and collection agencies. 

Typically, the loan borrower will object if the negative information is removed by the 3 major credit bureaus.

How Much Will Credit Score Increase After Student Loan Default Is Removed?

Your FICO rating will go up by 75 points. The removal of the student loan default status from borrowers’ credit reports raised their ratings by 57 to 74 points.

How To Raise Your Credit Score After Paying Off Defaulted Student Loans

1. Make sure you pay your payments on time: While it isn’t much you can do about the missed payments that have lowered your credit score, you can improve it by paying your obligations on time. Consider signing up for an income-based payment plan if you have additional school debts.

Lenders want a spotless payment history since they want to know that you will also be a reliable borrower.

2. Maintain a low usage rate: Credit usage is the amount of credit that you utilize. Low credit card use corresponds with improved credit ratings since it demonstrates that you utilize your credit cards sensibly and do not rely on them excessively.

3. Low credit usage: It implies that you may be in danger of missing payments due to poor debt management. 

Maintain a credit usage percentage of less than 30% on all credit cards.

4. Diversify your credit portfolio: If all you have on your credit record are student loans, consider getting a secured credit card or becoming an authorized user on someone else’s account. Maintaining a diverse credit mix displays your ability to manage a variety of debts.

What do Lenders Think of Rapid Defaulted Student Loans?

You improve your creditworthiness when you demonstrate to lenders that the debt was carefully managed. It also demonstrates that you have more spare money to pay off a new loan.

The fact that you have paid off your debt after a student loan default does not, however, indicate that you can do so on time. It simply serves as proof that you’ll fulfill your duties in the end.

Lenders may be impressed by your dependability as a borrower if you pay off your past-due student loans. 

However, you can still have trouble obtaining authorization for new credit lines, including credit cards, personal loans, or loans to refinance student loans.

Furthermore, even if you are approved, you probably won’t obtain the finest conditions and lowest interest rates. These benefits are only available to customers with strong credit, according to the lenders.

How long does a paid-off student loan in default have an impact on credit score?

Private student loan defaults as well as the majority of federal loan defaults are reported to the credit bureaus for 7 years following the late payment date.

How to Repay Defaulted Student Loans

Borrowers have 3 ways to get out of default, according to the Department of Education:

  • Repayment: When student loans fail, the whole loan sum is owing. If you have the means, you may pay the debt in full, or you may seek a settlement that is less than the whole sum. But don’t anticipate huge savings. 
  • Rehabilitation: After making 9 monthly payments within 20 days of the due date for ten consecutive months, your debts will be rehabilitated. Unless you specifically want to be charged depending on your own financial situation, the payment amount is typically 15% of your discretionary income. However, you may choose not to make student loan payments throughout the interest-free payment period. 
  • Consolidation: Paying down defaulted loans using a Direct Consolidation Loan makes sense if you can’t afford a settlement and need to address the default promptly. You can combine debts with negative credit instead of refinancing. If you want to repay your new loan using an income-driven repayment plan, you must agree to make three consecutive monthly payments calculated based on your salary and family size.

Your best choice for resolving the student loan default and returning your loans to good standing is determined by your circumstances.

Frenqaly Asked Questions