Is Your Student Loan Hurting Your Credit?


While you were in college, you probably don’t give a thought to your student loans and your credit as long as your tuition and expenses got paid. But once you’re out of school (whether you’ve graduated or decided not to continue) and payments become due, it’s probably a big weight on your mind.

If you’re having trouble making the payments, these student loans are likely hurting your credit. But, the good news is that your student loans can also help your credit.

How student loans can help your credit

“Paid as agreed”: During school and even six to nine months afterward, your student loans are automatically “deferred” which means you do not have to make any payments yet and the account is reported to the credit bureaus as “paid as agreed.” If you are able to keep making payments on time when payments become due, student loans are reported just like any other loan and contribute to a positive credit score.

Length of credit history: If you are under 21 and don’t have any other credit yet, you likely have a credit report because of your student loans and the longer length of your credit history also contributes positively to your credit score over time.

Types of accounts: Student loans are classified as an “installment” type of loan rather than a “revolving” type of credit and having different types of credit accounts can positively impact your score when payments are made on time.

How student loans can hurt your credit

High credit utilization: Separate from the payment history, student loans take a long time (usually 10 years) to pay off so the loans and future payments also affect the “credit utilization” portion of your score. This means you have a high amount of credit used compared to how much credit is available to you which is a negative towards your credit score and your credit report.

Late payments: As soon as you make a payment that goes beyond 30 days late, your account is reported “30 days late” to the credit bureaus. If you continue making late payments or stop making payments your account falls into the “adverse accounts” section of the report where it negatively impacts your credit for up to seven years.

Continuing Interest charges for specific deferments and forbearance: For all unsubsidized or private loan deferments and any type of forbearance (two types of official payment delay agreements), interest will be charged while you are not making payments causing your balance to continue to grow.

Student loan debt consolidation mistakes: Many students have both Federal Direct student loans (from the U.S. Department of Education, the federal agency that loaned you the money) and loans from private lenders and make the mistake of consolidating both types of loans into one loan. This is misguided because your interest rate average will likely be much higher due to the personal loans and you will lose your subsidy and deferment benefits that come with the Federal student loans. Watch out for student loan “debt relief” scammers who are out to promise to get you out of your payment problems only to charge you higher interest rates, offer you worse terms and charge you unnecessary fees. While all student loan debt consolidation will trigger a “hard inquiry” that could temporarily ding your credit, stick with the Department of Education for Federal student loans and your original lender for private loans.

A student loan default: Your Federal student loan is considered to be in default when no payment has been received for 270 days with no deferment or forbearance agreement to allow you to officially stop making payments. If that happens, the IRS can seize your tax refund when applicable and even your paycheck can be taken (garnished) to pay for defaulted Federal student loans. Beware that defaulted Federal student loans cannot be dismissed in a bankruptcy. And, both private student loans and federal student loans will be sent to collections where you will be at the mercy of the debt collection agencies and the court system. In both cases, your credit report will suffer the negative effects for at least seven years.

Protect your credit quickly if you run into student loan trouble

If you are having trouble making payments for Federal student loans, you are eligible for free loan rehabilitation and debt consolidation programs offered by the U.S. Department of Education. Through a Federal Direct Consolidation Loan you will retain the government subsidy benefits (lower interest rates) and deferment options of your original Federal student loans while lowering your payment amounts and rolling them all into one lower payment with the original, reputable lender, the U.S. Department of Education. These loans offer flexible repayment options and length terms taking into account your unique financial situation with no fees or qualifying loan amounts.

Immediately contact the U.S. Department of Education (for Federal loans) or your lender (for private loans) to ask about deferment options, forgiveness options or forbearance options. Neither will negatively impact your credit because they are official agreements with the lender who continues to report the account as “paid as agreed.”

Federal Subsidized loans will not continue to charge interest in deferment thus effectively freezing your account so it will not grow.

You can use these positive aspects of your student loan payments to build a positive credit history so when the future you goes to apply for a car loan, credit card, a mortgage or even a job you will have an easier time getting approved.

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