Conquer your student debt. Refinance now.
This post was contributed by Andy Josuweit, founder of Student Loan Hero and an Earnest client.
I had 16 student loans when I graduated from college, totaling $74,000 across four different loan servicers. It was a mess. Staying on top of my debt and monthly payments was way more confusing and difficult than I thought it would be — or should be.
Even so, I made my best efforts to keep up with my student loans. I used a spreadsheet that listed all my student loan accounts (or so I thought), along with details like balances and interest rates. I checked my credit scores monthly and reviewed my annual credit reports. And when I couldn’t afford payments on my federal student loans, I switched to an income-driven repayment plan.
Even with this diligence, however, I still defaulted on two student loans. Here’s how it happened — and how I got out of default and repaired my credit.
How I Defaulted on My Student Loans
Defaulting on a loan doesn’t always mean the borrower is a deadbeat or trying to dodge their payments. There are plenty of easy-to-make mistakes that can land you in student loan default or delinquency. I know because I made some of them. In fact, I literally lost two student loans. I moved from the United States to Asia for business and the servicer for those two loans didn’t have my current contact information.
Ultimately I wasn’t super clear on what exactly was happening with my debts. There was no easy way to keep track of all my student loans in one place. (That was actually my main motivation to found Student Loan Hero and create the kind of tool I needed when I was managing my loans.)
As for those two loans I mentioned, they completely fell off my radar. I didn’t make late payments, I just missed payment entirely. They weren’t on my student loan debt spreadsheet. I never saw them on my free credit report from Transunion, Equifax, or Experian. And because of my move, I never received any notices from the initial servicer of those loans or credit reporting agencies. So I didn’t realize I still had these debts, let alone that I was delinquent on payments and heading towards default.
My student loans were probably in default for three to nine months before I realized it. It wasn’t until I started getting emails and calls from a collection agency in April 2013 that I knew something was up.
Getting Out of Student Loan Default
At first, I was skeptical of this collection agency that claimed to have $16,000 worth of defaulted student loans in my name. After all, I had been tracking my student loans pretty well, and this agency said I owed a debt I couldn’t trace.
Wary of a potential scam or servicing error, I didn’t want to be on the hook for loans I didn’t actually owe. I did my due diligence to verify the debt and the lender to make sure it was legitimate. I got the original promissory note to verify that the student loans they were trying to collect were actually mine. In all, it took me three months to wrap my head around the fact that I was, in fact, in default.
When you find yourself in default on your federal loans or private loans, the faster you can get out, the faster your FICO score can improve. You’ll also be able to get onto an income-driven plan or another affordable repayment plan faster.
“It’s never a good idea to kick these things further down the road.”
My one regret is not getting started faster on a plan to rehabilitate my defaulted loans. It’s never a good idea to kick these things further down the road; it just damages your credit and payment history more and allows interest and fees to continue racking up.
There are typically three options for getting out of default: 1) pay the debt off in full, 2) consolidate your student loans and begin making payments, or 3) rehabilitate your loans. I chose to rehabilitate my loan.
Under the rehabilitation agreement, these debts were put on an income-driven repayment plan that lowered my monthly costs to just $25. I made these payments on time for nine months in a row to rehabilitate these loans. In April 2014, a full year after I got contacted about the loans in default, they were successfully rehabilitated. My debts were then transferred from the collection agency to a traditional student loan servicer.
Next Step: The Credit Repair Work
With a student loan default under my belt, my credit score got beat up. At one point, it was in the low 400s! All of the major credit bureaus would call that a bad credit score.
Getting on a rehabilitation plan for my defaulted student loans was a big first step in repairing my credit and making on-time payments. From there, I made every effort I could towards making extra payments and getting rid of my debt ahead of schedule.
Another thing I did that helped boost my credit score was get a secured credit card. A secured card is easier to get than a traditional credit card when you have poor credit. The main difference is that you put down a deposit as collateral, which essentially becomes your credit limit. You pay the balance each month like you would with a regular credit card, and your credit improves over time as the payment activity is reported to the credit bureaus.
Refinancing Student Loans With Earnest
By April 2015, a year after my loans were rehabilitated, my credit score had improved to a little over 630. That was right on the cusp between subprime and good credit. I had been interested in refinancing some student loans at the time, and through my work at Student Loan Hero, I saw firsthand that it could produce significant savings.
But the biggest motivation for me wasn’t the savings. It was getting away from my awful loan servicers. The Department of Education doesn’t allow students to choose their servicers when you start repayment. And my servicers were always really hard to get ahold of when I needed help. When I could get someone on the line, it seemed like they barely listened and offered me very little help.
Unfortunately, most student loan refinancing companies and private lenders at the time had credit requirements I couldn’t meet. If I’d applied, I would have been rejected flat out. When I learned about Earnest and their flexible underwriting process, I wanted to put that to the test. I applied to refinance about $33,000 of my student loans.
On paper, my credit score said I wasn’t a safe bet to lend to. But Earnest looked at other factors. Student Loan Hero was doing well, and my income had grown. My free monthly cash flow was good, my accounts were in good standing, I kept spending under control, and my debt-to-income ratio was low, too.
An Earnest underwriter also called me while they were processing my application. Obviously, there’d been a few bumps in my credit history. But the underwriter listened as I explained my situation, how I’d fixed it, and how I was managing my money.
With the explanation of the negative marks on my credit history and my newly improved finances, I got approved by Earnest and a new loan. The $33,000 in student loans I refinanced went from around 6.8% to 5.93%, saving me about $280 in the first year. Even more important to me, however, was that I had a much better customer experience and a servicer I trusted.
A year and a half after refinancing with Earnest, I am finally free of student debt. I sent in my last student loan payment in September. And my credit score has risen by over 100 points to the mid-700s — well into the “excellent” range.
I’m proof that student loan default doesn’t have to ruin or even define your finances. It will take time, but start the journey now and in a few years, you could be writing your own student loan success story.