April 3rd, 2012

How Student Loan Delinquency Affects Your Credit

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student loans

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

Disclaimer: All information posted to this site was accurate at the time of its initial publication. Efforts have been made to keep the content up to date and accurate. However, Credit Karma does not make any guarantees about the accuracy or completeness of the information provided. For complete details of any products mentioned, visit bank or issuer website.


  1. There are other negative consequences resulting from a defaulted loan. A student who wishes to return to school cannot qualify for federal aid in the United States until satisfactory payment arrangements are made on the defaulted loan or the loan is rehabilitated, a process that can take as long as a full year of on-time payments.

    payment processing at 5:49 am on April 19, 2012
  2. Thanks for sharing. That’s definitely an important bit of information!

    bethy at 9:01 am on April 19, 2012
  3. I go to a pretty expensive private college in Southern California, and even with grants and scholarships and student loans it doesn’t cover all of my tuition and fees. I have been thinking about applying for a credit card online to help with the costs. So you don’t think that would be the smartest step for me to take?

    Brandon at 2:29 pm on August 3, 2012
  4. Very interesting article. Bad credit can really hurt students when they realize the life long implications it has.

    Matt at 3:40 pm on September 26, 2012
  5. What if you’re not defaulted, but you have a lot of late payments? The rest of my credit is flawless, including two cards that have been maxed and are now at zero balances with no late payments.

    But my student loans are another story.

    Although I haven’t defaulted on any of them and even have one of them totally paid off, the other two can get kind of sluggish sometimes and I think a couple of delinquent payments might have been reported to the credit bureaus.

    Fenix at 10:09 pm on December 16, 2012
  6. Fenix, I am in the same exact boat as you. I was late on a couple of payments on one loan and it was reported. It resulted in my score plummeting to 630 from a 775. (This is what my bank told me). There are no other blemishes on my credit. I am currently trying to get a loan on my equity to do some repairs to my house and because of this one thing, I am denied. Have you got any advice on how to go about repairing it? Or does anyone? Initial serious need of some help here.

    Melissa at 7:29 pm on January 4, 2013
  7. *in serious need

    Melissa at 7:31 pm on January 4, 2013
  8. It is important to keep your student loans current or your overall credit score will be decreased.

    offshore merchant account at 9:54 pm on April 8, 2013
  9. Thank you for another wonderful article. Where
    elsde maay anyone get that type of info in such an ideal means of writing?
    I have a presentation subsequent week, and I am on the look for such information.

    Linnie at 1:33 pm on July 27, 2015
  10. my student loans show up on the credit reports and it says charge off/collections but they dont show up on the collections part of my CK report. i just recently started trying to rehabilitate my student loans but the account is closed right now i am wondering if it will make my credit score go down after i rehabilitate it because the account will be open again? my credit was not as bad as i thought 642 but im afraid if the account is open again it might make it go down??

    thomas carson at 7:40 am on October 23, 2015
  11. Enola Guerrero

    Hi Thomas – If you see any errors on your report, you can dispute them here https://www.creditkarma.com/article/dispute-credit-report-errors


    Enola Guerrero at 4:49 pm on October 23, 2015

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