Is Student Loan Debt Killing Your Credit Score?


America’s student loan debt exceeds $1 trillion,with many of those debtors struggling to repay their loans. Do you have student loan debt? If so, it could be killing your credit score, especially if you’re in default or delinquent on payments.

Student Loan Delinquencies

Over 8 percent of student loan borrowers are delinquent on their debt, according to the Consumer Financial Protection Bureau. If you fall into this category, it can impact your credit score, and seriously erode your ability to borrow for a mortgage, car loan or even get a credit card. The severity of the impact will depend on various factors, including the quality of your credit score before your account was dinged with the delinquency. If you have a score of 700 or more, a single delinquency can decrease your credit rating by as much as 100 points. One or two missed payments will prompt the lender to report your student loan as delinquent. But you can avoid this by asking the lender for a temporary reprieve from payments,while you sort out your finances. They’re usually willing to do this for a few months without paperwork. If you have a federal student loan and need more time, you may even qualify for a deferment. If it’s a private lender, though, they may be less flexible.

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Student Loan Defaults

After failing to make payments for 270 days, your student loan will be reported to the credit agencies as being in default.  Once that happens, your credit score will plummet. The amount of the reduction is determined by many factors, including the quality of your credit score before the default. If you’re at risk of falling behind on your loan payments, there are other options available for repayment.If you have a federal student loan, the Department of Education offers repayment plans that require you to pay very little each month. There are also opportunities to defer payments or ask for forbearance. Just be careful, because interest will accrue and capitalize on the unpaid student loan.

Debt-to-Income Ratio

The more student loan debt you have, the higher your debt-to-income ratio will be.  If you have a lot of debt in comparison to your income, your credit score will suffer. Borrowers with a high credit score usually maintain a debt-to-income ratio of no more than 36 percent. With the high cost of higher education, many student loan borrowers are finding it difficult to maintain a reasonable number, especially if they have other debts. If you want to minimize the negative impact student loans can have on your credit score, make timely payments on your loan. If you can’t, avoid delinquencies and defaults by taking advantage of available payment plans and deferment.

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Date of original publication:
Updated on: November 10, 2015

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