Keeping Score

How does student loan rehabilitation affect your credit score?

Having the default notation removed from your credit report may help your score, but a significant recovery requires more time


Once a loan is rehabilitated the default notation is removed from the borrower’s credit history. However, all late payments that were reported by the loan holder before the loan went into default will stay on the credit report for a full seven-year period.

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Dear Keeping Score,

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 coming up soon. My question is this: How much will my credit score go up once my loan is no longer in default? – Lindsey

Dear Lindsey,

Congratulations on successfully navigating the rough and murky waters that often surround student loan debt.

Since you sound like you have a good handle on that process, I am only going to remind you that when it comes to recovering from a federal student loan default, you only get one shot at rehabilitation. Now that you are about to be out of default territory, you will need to be extra cautious about making your payments when due from here on out because you will not get a second chance.

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For my readers not familiar with student loan debt terms, a default is the end product of a very long delinquency. Delinquency means that you are behind on payments. Once the borrower is delinquent for a long time (usually nine months for federal loans), the lender declares the loan to be in default. Once that happens the borrower has three options for getting out of default:

  • Loan rehabilitation: An agreement is signed assuring a series of nine monthly payments over a period of 10 consecutive months. The monthly payment amount is based on income. As noted above, a defaulted loan may be rehabilitated only once.
  • Loan consolidation: The borrower pays off defaulted federal student loans by consolidating (or combining) loans into a new direct consolidation loan.
  • Repayment in full: The borrower repays the full amount that is owed. This can be done at any time.

Once a loan is rehabilitated the default notation is removed from the borrower’s credit history. However, all late payments that were reported by the loan holder before the loan went into default will stay on the credit report for a full seven-year period.

If a defaulted loan is consolidated, the record of the default (as well as late payments reported before the loan went into default) will remain in your credit history.

See related:  Pros and cons of paying your student loans with credit cards

Your score may improve, but not overnight

It’s a great feeling to get to the place you are, and one reason is the anticipation of things getting better – in this case, your credit score. Yes, your score should improve, all things being equal. It won’t happen overnight, but if you play your credit cards right (pun intended) you should eventually see a higher score than ever before.

One misconception about how credit works is the time frame of how soon things will happen. On one hand, one misstep can have a swift and devastating impact on a score. On the other hand, even a quick correction to a negative event may take far longer to swing the pendulum back upward.

Mistakes are especially compounded if the consumer has a thin credit file to begin with. Because we are talking student loan debt here, you may very well fall into that category. Getting into the default state takes several months of missing payments and must be factored in as well.

Mistakes like repeated late or missed payments will result in having a negative payment history reported to the credit bureaus. That is what led to your default. Then when you defaulted, that was reported as well.

I have good news and some bad news to tell you regarding these two issues. As mentioned above, once you have made that final payment and your loan comes out of default, the default notation will be removed from your credit report. This might result in a small tick up for your score.

The bad news is those late and missed payments will stay on your report for seven years from the date they originally became delinquent and did not recover (again, as noted above). This is likely to keep your score down for many months.

A whole lot depends on what else, positive or negative, is in your credit file.

See related:  Viewing your FICO score could help you improve it

Used wisely, a card can help you build credit

If you have a credit card, keep it at least until your credit is improved. If you don’t have one, it might be an option for building up your credit file. But you can take some other practical positive actions that won’t put you further in the scoring hole if your card application is rejected or it’s approved and you later find yourself in debt.

Credit cards make life a whole lot easier when it comes to so many of the things we enjoy. The trick is to use them wisely and thoughtfully. This means you need to have a plan for paying off anything you put on a credit card, whether it’s a new couch or a pizza. The new couch might require a few payments, but a pizza never should. You need to pay that off before your next billing cycle ends.

You should also keep your balance well below your credit limit. What I mean by “well below” is less than about 25 percent of your available credit. If you can pay off your balance every month, so much the better. Just be sure it is paid on time, each and every time. These are the two areas of credit scoring that are absolutely within your control, so you need to use that advantage to help yourself.

There are also steps you can take that don’t involve taking on new credit. You might want to look into the new Experian Boost and UltraFICO programs.

Both require you to have a bank account and both will look at certain things that are good for your credit score. Experian Boost specifically looks at utility and cellphone payments, while UltraFICO is more interested in how you are managing your money overall, with regards to spending and saving.

Both programs will only have an effect on your Experian credit file and both require you to grant access to your bank account. You can opt in and out at any time on both programs and both are free.

Good luck as you move into the next phase of your life, without that default hanging over your head. Stay in good standing with your student loans for your own peace of mind and know that doing so will help out with your credit score, too.

There is no doubt in my mind you can overcome this hiccup on the road to a better credit score with patience and perseverance … plus a little extra work on your end.

Remember to keep track of your score!

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The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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