Defaulting on a student loan can have a significant negative impact on your credit score. The exact amount your score drops depends on your credit profile, but defaults can easily knock 100 points or more off your credit score.
What Happens When You Default on a Student Loan?
You are considered to be in default on your federal student loans if you fail to make payments for 270 days At that point, the loan will be turned over to a collection agency The collection agency will then report the default to the three major credit bureaus – Equifax, Experian and TransUnion. This default will remain on your credit report for 7 years from the date you first missed a payment that led to the default.
Private student loans are usually considered in default after 120 days of missed payments. The rules vary by lender, but defaults on private loans are also reported to the credit bureaus and remain for 7 years.
How Student Loan Defaults Affect Your Credit Scores
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Payment History (35% of score): A default will show up as a severe delinquency, which damages this important category. You’ll lose points for each late payment leading up to the 270 day mark.
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Amounts Owed (30%): Your total balances won’t change, but having a loan in default looks worse than an account in good standing.
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Length of Credit History (15%): No major impact here from a default itself, but defaults on newer loans can shorten your credit history.
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New Credit (10%): Lenders may see you as a higher risk and reduce new credit limits. But the default itself doesn’t impact this category.
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Credit Mix (10%): No effect, as you still have the same mix of loan types.
Defaulting is one of the worst credit events you can experience. According to credit rating agency FICO, the average person with otherwise good credit would see their score drop by 105-125 points after a single default.
For someone with fair credit (scores in the 580-669 range), a student loan default typically cuts the score by 90-100 points. Even borrowers with bad credit could go down by 75 points or more.
Keep in mind these are averages across all types of defaults. The specific impact on your score depends on your individual credit profile. The higher your credit score, the larger the drop from a default.
Strategies to Minimize Credit Damage from Student Loan Default
Here are some tips to help limit damage to your credit if you end up defaulting on a student loan:
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Act quickly: Contact the lender/collection agency immediately to try to resolve the default. The sooner you can get the loan out of default, the less long-term impact.
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Rehabilitation: Federal student loans can be rehabilitated by making 9 on-time payments over 10 months. This removes the default from your credit history.
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Deferments: If possible, get the loan back in good standing then apply for an unemployment, economic hardship or other deferment. This pauses payments without hurting your credit while you get finances back on track.
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Payment plans: Your lender may offer reduced payment plans. Making consistent payments, even at a lower amount, looks better than being in default.
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Consolidation: Federal direct loans can be consolidated out of default, while private loans may need to be refinanced. This resolves the default with minimal extra interest.
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Settle: Offer a lump-sum payment to settle a private loan for less than the full balance. Settled accounts still show as negative but not as bad as a default.
How Long Does a Defaulted Student Loan Affect Your Credit?
The default itself stays on your credit report for 7 years from the first missed payment leading up to the 270-day threshold. However, the damage to your credit scores can linger much longer than 7 years if you are unable to improve your credit.
Lenders look at your entire credit profile, not just individual events like a default. After 7 years, the default will fall off your report. But if you haven’t substantially improved your credit, scores may remain depressed due to other negative factors.
This is why it’s critical to address issues leading to the default, including unemployment, overspending or ineffective budgeting. Then focus on rebuilding credit by making all payments on time, keeping balances low and limiting new credit applications. With diligent work, your scores can fully recover within a few years of the student loan default falling off your reports.
Can You Remove a Student Loan Default from Your Credit Report?
Generally, it is not possible to remove a student loan default from your credit report before the 7-year period expires. The Fair Credit Reporting Act requires accurate reporting of payment history by lenders and collection agencies.
Here are two potential options if you believe your student loan default is being reported incorrectly:
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Dispute errors: If the dates, balances or other details are wrong, you can dispute them with the credit bureaus to correct errors. But this usually can’t remove a properly reported default.
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Prove extenuating circumstances: In rare cases, such as identity theft or lender error, you may be able to provide documentation to get a default erased earlier than 7 years. But the bar is high to prove the default is inaccurate or invalid.
Preventing the default in the first place is always the best option. If you do end up defaulting, focus your energy on getting the loan rehabilitated and diligently rebuilding your credit history. With patience and perseverance, you can eventually recover from a student loan default.
The Bottom Line
Defaulting on a student loan can be devastating for your credit, often causing scores to plummet by 100 points or more. Federal loans can be rehabilitated to remove the default, but damage may persist for years after if you don’t rebuild your credit profile. Avoid default if at all possible, but if you do default, take action quickly to address the situation and limit the impact on your financial life.
The implications of multiple defaults versus long-term default for credit scores
To examine the potential credit effects of these contradictory incentives, we compare credit score trajectories after the initial default for long-term defaulters and for those who default multiple times. We analyze 2010–19 credit bureau data and find the change in credit scores relative to the time of initial default two, four, and six years later.
Over time, an increasing percentage of those with a long-term default saw a large increase in their credit score. Six years after default, 43 percent of long-term defaulters had improved their credit score by more than 90 points, compared with only 27 percent of multiple defaulters. This gap between those with one long-term default and those with multiple defaults grows each successive year after default.
The percentage of long-term defaulters whose credit scores decreased or stayed the same after default is consistently much smaller than the share of multiple defaulters. After six years, just 15 percent of long-term defaulters had the same or lower credit scores than in their first year of default, compared with 31 percent of multiple defaulters.
The difference in default pattern likely plays a major role in these credit score trajectory differences, because those with one long-term default see similar trends in the rate of holding utility and medical collections debt during the years after an initial default as those with multiple defaults. This suggests their overall financial health outside of their student debt may be similar.
These results demonstrate the risk that comes with exiting default and then being unable to keep up with payments. Eighty-five percent of long-term defaulters saw their credit scores increase six years after their first default, with 43 percent of long-term defaulters raising their credit scores by more than 90 points.
For multiple defaulters, redefaulting after attempting to repay may have hurt their ability to improve their credit scores. Only 69 percent of multiple defaulters raised their credit scores six years after their first default, with most of those increases being small or moderate.
The contradictory incentives of defaulting
Leading up to a default, a borrower’s credit score typically drops by 50 to 90 points. If they stay in default for several years, the missed payments that led up to the default may be weighted less in their credit score calculation as more time passes, allowing them to build their credit back up.
However, borrowers who stay in default for many years may also be subject to collections processes like wage garnishments and tax refund offsets and could ultimately see longer repayment timelines. These processes take time to initiate, often don’t begin until years after a borrower first defaults, and may economically strain borrowers. The risk of these involuntary collections and their associated fees may incentivize borrowers to put their loans back in good standing and attempt to voluntarily repay the debt before collections begin.
Because wage garnishment and tax refund offsets take time to begin, a borrower who exits default relatively quickly is at low risk of experiencing these collections. However, if after exiting default the borrower tries to repay the loan but cannot keep up with payments, they have more recent delinquencies reported that affect their credit.
And because borrowers can only rehabilitate a loan once, they cannot erase a second default from their credit record. So, a borrower who attempts to repay, if ultimately unable to do so, sees their credit score suffer. This may discourage the borrower from putting loans back in good standing and attempting to repay the debt.
What to do if your federal student loans are in default | Where’s the Money?
FAQ
How much does defaulting on student loans affect credit score?
Student loan borrowers who faced default in recent months have seen their credit scores plummet an average of 63 points. The impact is even more severe on people with higher credit scores. They’re seeing their scores nosedive by as much as 175 points.
Will defaulted student loans show up on a credit report?
Some defaulted student loans do show up on your credit report, but others don’t. If your default isn’t showing, or it’s marked as “closed,” “removed,” or “transferred,” here’s why: It aged off: Defaults fall off your credit report 7 years after the date of default.
What happens after 7 years of not paying student loans?
Private student loan defaults and delinquencies disappear from your credit report about seven and a half years after your first missed payment.
How much does your credit score drop when you default on a loan?
Our partners have not commissioned or endorsed this content. Read our editorial guidelines here. Defaulting on a loan can cause your credit score to drop more than 100 points. A defaulted loan will remain on your credit report for seven years, even after you’ve paid it off.