Rehabilitating student loan won't raise score immediately

It takes seven years to erase the damage, but benefits begin right away


Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Question Dear Opening Credits,
I am in the process of loan rehabilitation to get my federal student loan out of default. My final payment until it is no longer in default is in January. My question is this: How much will my credit score go up once my loan is no longer in default? -- Lindsey


Dear Lindsey,
I am so pleased that you're doing what it takes to rehabilitate your defaulted loans. I'll get to the many benefits of doing so in a moment, but first to address your primary question, about what happens immediately to a damaged credit rating once a loan is lifted out of default.

The answer: It probably won't hike your score as quickly or as much as you hope.

While getting a default notice purged from your credit reports is indeed terrific, what will remain listed is what led up to the event. And that's all those delinquent payments. Evidence that you skipped deadlines will continue to appear until seven years have gone by. As long as they're on your reports, they will be negatively factored into your credit score.

But don't doubt the wisdom or merit of your current and future actions! You are unquestionably doing the right thing. When the loan is out of default and you treat the new loan responsibly, your credit score will absolutely improve over time.

Lucky for you that your student loans were government issued. The ability to cure a default with a series of "reasonable and affordable payments" (a one-time only opportunity to rehabilitate a defaulted federal education loan by making nine out of 10 consecutive payments) is not available for private loans. To clear a bad private loan you have to work with the lender, which may or may not accept smaller payments so you can get back on track.

In your case, after nearly a years' worth of payments that are more aligned with your income, the loan will be primed for perfection. Because it has already gone to collections, it will be bought by a new lender and you will be placed on a fresh 10-year repayment plan. Then you just need to send payments on time every month and all that positive activity will be recorded on your credit reports. In as little as a year or two, the "late" notations will take on less credit scoring weight while the "on times" will comprise more weight.

Also, when the loan is back in good standing, you may accelerate the payoff time by sending more than requested. That will save you a substantial amount of money. A $30,000 loan with a 6.8 percent interest rate satisfied in a decade will cost around $11,400 in fees. Double up on the payments and those fees will drop to about $5,400.

Once your loan is out of default and you make that final rehabilitation payment, you can apply for one of the alternative payment plans that is designed to meet your financial circumstances. For example, you may opt for an extended plan that allows you to send very little each month, though the term will be longer and the fees higher, or one that has payments that increase or decrease based on your annual income.

Oh, and those other benefits of being out of default?  Your wages won't be in danger of being garnished and you'll get to keep your entire tax refund. If you need to take a little break, you may be eligible for deferments or forbearances, which are formal suspensions that will protect your credit rating from harm.

Just heed this grave warning: Do not falter again. If you stop paying when you should and allow the loans to go seriously delinquent, the lender will be forced to declare default. You won't get a second chance to get clean, since this rehab program is a one-time offer.    

See related: Don't expect big score boost when unpaid debt falls off credit report, To boost score, let credit utilization guide your debt payoff, 3 questions to ask before refinancing your student loans

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Published: December 2, 2015

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Updated: 10-23-2016

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