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Pay off entire Fed loan or sign up for rehab?

New Visitor

Pay off entire Fed loan or sign up for rehab?

Hello, 

 

I have $45,000 in defaulted federal loans, they were defaulted on 2 years ago, my question is this, I have the money to pay them off in full, but will it be better for my credit if I do the rehab first then pay them off or should I just go ahead and pay them off at once right now? 

 

Credit is currently 616 on creditwise, everything else is excellent except for student loans which of course is killing my score 

 

Thanks

Message 1 of 6
5 REPLIES
New Contributor

Re: Pay off entire Fed loan or sign up for rehab?

I would definatelty rehab first. That was a big boost to my credit. Also when I paid my loans in full later I lost points but it was nowhere near what I gained from the rehab.



EX08 749 EQ08 735 TU08 746 Total Credit Line: $49,100Utilization: 8%Inquiries: EQ2 EX2 TU2
Message 2 of 6
Regular Contributor

Re: Pay off entire Fed loan or sign up for rehab?

i agree with ram8704

 

if you do rehab, it will elminate any notiations in your report that says the loans were ever in default, which will most likely increase your credit score

 

all about whether or not you want to spend the 9 months doing it, and of course, whether or not your financial situation changes by the end of rehab

TU FICO: 778 ||| EQ FICO: 784 ||| EX FICO '08 : 780
Message 3 of 6
Regular Contributor

Re: Pay off entire Fed loan or sign up for rehab?

If you have all the money to pay them off, but want to help repair the credit, maybe pay off most of it leaving a small amount for you to pay off over time..

 

I'm not sure how long it takes to "rehab" a lone, but you'd save on interest this way right? Doubt it's fun paying extra interest on the defaulted loan (unless your interest rate stayed the same).

Message 4 of 6
Regular Contributor

Re: Pay off entire Fed loan or sign up for rehab?

rehab is 9 payments, and it has to be a fixed, agreed upon sum paid on time every month for 9 out of 10 consecutive months. 

 

beazneez makes a good point about the fact that your defaulted loans will accrue another 9 months of interest while you rehab.another thing to consider is that the collection costs for each defaulted loan (limited to 16% of the principal and interest remaining on the loan, I think) get added to the principal after rehab.

 

the only down side to paying them all off in full right now is that the default notation stays on your credit report for 7 years. 

 

i'm sure you'll make the right choice for yourself. 

 

TU FICO: 778 ||| EQ FICO: 784 ||| EX FICO '08 : 780
Message 5 of 6
Highlighted
Regular Contributor

Re: Pay off entire Fed loan or sign up for rehab?

When I completed my rehab in May, they waived the collection costs (about $12,000 if I remember correctly), however, If I default in the future, they can collect that cost.  Thie was wrtitten right in my rehab agreement, not sure if it applies to all federal loans or varies from servicer to servicer. When the loans went to the new servicer, the accrued interest was capitalized, so I was paying interest on a larger amount of money, but no where near what it would have been with that collection fee included!!

FICO8 Scores as of 8/8/17: EQ-643 TU-644 EX-629
Current FICO8 Scores as of 12/7/17: EQ-675 TU-658 EX-652
Current Mortgage Scores: EQ-686 TU-677 EX-641
Goal: all FICO8s above 700
Message 6 of 6