April 3rd, 2012
How Student Loan Delinquency Affects Your Credit
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Student loans are in the spotlight now more than ever. A new report shows that the outstanding student loan debt balance for U.S. consumers is approximately $870 billion, surpassing the nation’s total credit card debt ($693 billion) and auto loan debt ($730 billion).
Of the 37 million student loan borrowers owing on average $23,300 each, 27 percent of them had past due balances in the third quarter of 2011. And that delinquent number could get worse if the College Cost Reduction and Access Act of 2007 isn’t extended. This law originally reduced the interest rates on subsidized Stafford loans from 2007’s 6.8 percent rate to today’s current 3.4 percent, and is set to expire in July 1, 2012. Students and advocates are already rallying against the impending interest rate raise, but unless Congress decides to extend the current rate, they’ll be out of luck come July 1, when interest rates reset to the higher rate and threaten even more student loan debt.
Struggling with higher debt loads, impending boosted interest rates, and increased delinquencies, student loans could hurt borrowers where it hurts in the long-term: their credit scores. How can late payments affect your credit? We’ve compiled a quick list to show you the impact of loans on your credit.
How student loan debt affects your credit
Diversity of credit. Having a student loan in your credit line-up is a great way to show that you can manage multiple types of credit. Student loans are installment loans, while credit cards are revolving credit. Your student loan will help build your credit over time and populate your credit history in a positive way, as long as you make timely payments.
Percent of on-time payments. When it comes to your credit score, this percentage tells creditors how often you make loan payments on time. Since it’s a heavily weighted factor in calculating your credit score, just one or two late payments can significantly affect your score. Conversely, a record of flawless on-time payments goes a long way to improve your credit health. Read more about how late payments affect your credit.
Accounts in collections. If you’ve failed to make your student loan payments for at least a year, your lender will consider you defaulted and can send your debt to a collection agency. Having an account in collections will show up on your credit report and significantly impact your credit score. For instance, according to Credit Karma’s Credit Simulator, an account in collections dropped a good credit score of 742 a whopping 77 points to 665.
Wage garnishment. Once your student loan is with a collections agency, the collector is legally allowed to deduct a percentage of your wages to be put toward your student loan balance. For federal loans, your wages could be garnished up to 15 percent. For private loans, it varies from state to state, but they could be garnished as much as 25 percent. What’s more, the wage garnishment will be reported to the credit bureaus as a public record, and your credit score will be negatively affected. To see how your credit score might be affected by wage garnishment, visit the Credit Simulator.
Bankruptcy. It’s very difficult to get a student loan discharged in a bankruptcy. In order to do so, you have to prove that you’re experiencing “undue hardship.” Not having enough income to make your monthly loan payments is not considered undue hardship, unfortunately. Even if you manage to discharge your student loans in bankruptcy, you’ll be dealing with one of the worst financial situations to impact your credit. A bankruptcy can remain on your credit report for up to ten years, making it difficult for you to gain access to other credit lines in the meantime since many lenders have “bankruptcy filters” in their underwriting. Bankruptcy is typically a last-resort measure.
Bottom Line: Before you become delinquent on a student loan, know that you have some debt repayment options that might work for you. Check out this article for more information. If you already have a default on your credit report, you might be able to take advantage of the Higher Education Opportunity Act, which helps borrowers with federally backed loans get one-time default relief. This article outlines the process. Lastly, if you feel that your student loan repayment or rates are unfair, make your voice heard. The CFPB is now taking student loan complaints; all you have to do is fill out the online form.
Have a Karmic Day!
Bethy Hardeman, Social Media Maven