Student Loans and Credit Scores: What Every Borrower Needs to Know
Everyone knows that the cost of getting a college education is expensive. And unfortunately, costs continue to climb. If you get a graduate degree, your total student loan debt could resemble the amount to buy a home. Yet, many borrowers don’t realize that the status of their student loans can, and will affect their credit scores. The general rule is you should treat your student loans like any other credit obligation to remain in good standing.
A study by the Pew Research Center found that more than 22 million households, or 19%, had student loan debt. That household number is double from what it was just 20 years ago.
According to a FICO study, consumers are also borrowing more. In 2005, loan balances averaged $17,200. In 2012, just 5 years later, average student loan debt jumped to $26,500. This difference is a whopping 54% or $9300 increase in dollars owed.
So, exactly how do student loans affect your credit score?
Deferred student loans are still considered in your credit rating, although the deferment status is neither positive nor negative. A deferred status means your loans are considered current.
Student loans are typically reported as installment loans, meaning repayment occurs in fixed monthly amounts. Therefore, loan balances will factor into your credit score but less so than revolving accounts like credit cards.
Late payments, or loan defaults, will ding your credit scores. Some borrowers mistakenly believe that if you have federal loans, it won’t hurt to make late payments or even miss a few. But that is simply untrue. If loan delinquencies are reported, it will definitely affect your credit rating. Missed payments are more likely to have a big impact on credit scores of borrowers with short credit histories such as recent college graduates.
Don’t ignore your student loans, even if you can’t pay. Default generally occurs when the lender does not receive a payment for 270 days. Once you’re in default, ugly things can happen. Your full loan balance becomes due rather than one monthly payment. This means you are supposed to pay it ALL immediately. Your credit score will take a big hit and your federal or state tax refunds can be taken to repay the loans. The government can also garnish your wages, which means you may not be able to pay your other bills. So, avoid default if at all possible!
Addressing student loan delinquencies/defaults
• Understand the “big picture.” Not only should you know how much total debt you owe, but you also need to know what types of loans you have. There are 3 main types of student loans: direct loans, government-backed loans, and private loans. You can find out which types of loans you have by using the National Student Loan Data System. This website contains information on all federal loans. If you can’t find a loan there, it is likely a private loan.
Direct loans are borrowed from the federal government and typically have lower interest rates than private loans. They may also be subsidized, meaning the government pays your interest as long as you are in school or in a grace period.
Government-backed loans are no longer available but many borrowers still owe these. These loans are borrowed from a private lender but they are backed by the federal government. This means if you don’t pay, the lender will be reimbursed by Uncle Sam.
Private loans are issued by private lenders without government reimbursement. These loans typically carry higher interest rates and offer few options other than the standard repayment plan. Private student loans should show up on your credit report, which you can pull for free once per year from all three credit reporting agencies by going to AnnualCreditReport.com
• Find out if any federal programs can help you. There are several loan program repayment options for federal loans. Visit StudentAid.gov for information about each plan to decide what works for you. Another excellent resource is Student Loan Borrower Assistance.org with FAQs about any student loan topic you can imagine. I also recommend using these resources before borrowing any money to get a better idea what the programs are all about. It is always best to understand what you are getting into before signing on the dotted line.
Finally, if you've done all the research, but want some expert advice on what to do, call LSS Financial Counseling at 888.577.2227 to talk with one of our Student Loan Specialists. We may be able to help you get back on track if you have fallen behind and/or help you review repayment options to find the best fit.
LSS can also help you create a plan of action to improve your overall finances...click HERE to get started. Take action today to create a better future!
Author Barbara Miller with LSS is a Certified Financial Counselor and specializes in Bankruptcy Counseling/Education and Student Loans.