Declining student loan default rates is good news, but many
student loan borrowers are still struggling. Estimates show 22 percent of
borrowers haven’t yet defaulted but are between 90 and 270 days past due on
their federal student loans, which means their credit is likely affected.
Education loan |
The consequences of defaulting on a student loan are well
documented, but the ramifications of delinquency, particularly the hit to your
credit score when you fail to make payments on time, are not publicized
enough.
It can be hard to pinpoint specifically how a late student
loan payment can affect your credit score, says Rod Griffin, director of public
education for Experian, a leading global information services company that
helps individuals check their credit report and credit score.
"The answer to that question is, 'it depends,'"
says Griffin. "A 30-day delinquency can have very different implications
for two different people, because credit scores take into account many
variables like the length of your credit history and your utilization rate, or
the total balance-to-limit ratio on your credit cards."
The impact of student debt on your credit report can also
depend on the scoring model being used. "There are at least hundreds of
different credit scoring systems used by lenders," explains Griffin.
"There are credit scores designed only for auto lending, mortgage lending
and even insurance purposes. And, different credit scoring systems have different
scales."
As a result, Griffin points out, it can be really dangerous
to tell student loan borrowers "if you do 'X' with your student loan
payment, your score will drop by 'Y.'"
But while it’s hard to tell exactly how a late student loan
payment may affect your credit, it’s important to know that it most definitely
will.
"Keep in mind that a student loan is a debt obligation
just like any other," Griffin says. "Once that loan is open, the
lender may begin reporting it to the credit reporting companies. Missing payments
affects your credit just like any other debt. Payment history is the most
important factor in credit scores."
The lower your credit score, the harder it is to access
other forms of credit, like a mortgage and auto loans. It can also make
accessing additional credit more expensive via higher interest rates.
And it’s not just your eligibility for additional lines of
credit that could be restricted. Landlords may deny you the ability to rent an
apartment and employers may pass you by for job opportunities if your credit
record has too many blemishes.
Besides keeping your student loan payment on track by
choosing the right payment plan and sending payments in on time every month,
the following are some other tips to keep in mind about student loans and
credit ratings.
• Borrow student loans with plenty of repayment protections:
Many prospective college students and parents shopping for student loans make
their decisions based on interest rates alone, but flexible repayment terms can
mean much more to credit in the long run.
For example, federal student loans offer deferment options
that won’t harm your credit when you can’t repay. Private student loans from a
bank or lender may also temporarily halt your payments if you’re having
difficulty, but it’s at their discretion and is not a consumer right as it is
with federal loans. A good rule of thumb is to always exhaust all of your
federal student loan options before turning to private loans.
• Know how to recover from student loan default: Defaulting
on a student loan is one of the worst entries for your credit report, but there
are ways to recover. You can rehabilitate your defaulted federal student loan
by contacting your loan holder and working out a reasonable and affordable
monthly payment amount, which will be initially calculated as 15 percent of
your disposable income – your adjusted gross income minus 150 percent of the
poverty level for your family size.
Then, you’ll need to make nine consecutive, voluntary,
on-time monthly payments to your loan holder. After nine successful payments,
the loan will be sent to a new lender and servicer and the default will be
removed from your credit history, though the delinquency will stay.
You can also consolidate your federal student loans out of
default in a shorter period of time, but it won’t remove the default from your
record. It’s important to note that both consolidation and rehabilitation will
charge collection costs.
With consolidation, it can be as much as 18.5 percent of the
total unpaid balance of your Education loan, while
rehabilitation collection costs can be as much as 16 percent. Ultimately,
though, getting that default off your record may be well worth the cost.
No comments:
Post a Comment