Missing Your Student Loan Payment Could Damage Your Credit Score

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StudentsThe student debt crisis comes in at an astronomical $1.2 trillion in the United States alone. About 40 million Americans are burdened by at least one outstanding student loan and approximately one in eight Americans have student loan debt.

The situation is getting worse, not better. In looking at the graduating class of 2015, 71 percent of undergraduate degree recipients are expected to carry student loans.[1] The student loan debt has risen by 325 percent over the past 10 years.[2]

Being shackled by student loans is such a common occurrence it borders on universal.

Add to that the seeming necessity of a higher education for almost any stable employment,[3] the rickety jobs market as a whole and the plethora of macroeconomic issues facing young Americans, it seems almost unfair for credit agencies to handle student loan debt the same as any old credit card or mortgage debt.

Just Because It’s Common, Doesn’t Mean It’s Not Debt

The U.S. Department of Education publicized that 15 percent of student loan borrowers, on average, default within the first three years of paying on the debt. The three-month delinquency rate is 11 percent.[4][5]

It is easy to fall into the mentality that if everyone is sharing this financial burden, someone somewhere somehow should do something about it, have some compassion toward the frequent plight of 40 million fellow Americans and let missed payments or defaults on student loans slide.

Katie Bushor, consumer advocate and credit educator at Quizzle, said, “We often have Quizzler’s tell us they didn’t even know their student loans were due until they saw on their credit report that the loan was negative.”

Sometimes it is easy to forget that student loan debt is not treated as a special debt with extenuating circumstances and clauses upon clauses of forgiveness.

Student loans, just like other consumer debt such as credit cards, mortgages or car loans, can and will affect credit reports. Compliance to the loan’s contractual obligations – payment amounts and frequency – is reported to the Big Three (Experian, Equifax and Transunion), and private and public student loans are treated equally by credit bureaus.

What Are The Differences Between Missed Payments, Defaults, Deferrals And Forbearances?

But, what happens when payments can’t be made? If the situation is so common, why do missed payments affect credit reports?

There’s good news: There are plans in place to help out student loan borrowers who recognize the situation and act.

These plans aren’t handouts, nor will they automatically go into action after a missed payment. You as the indebted have to take responsibility and reach out to your lenders, sign up for a deferral or forbearance and stay on top of it.

Unlike missed payments, forbearances and deferrals on student loans will not damage your credit score.

Financial Empowerment Consultant and Quizzle Contributor Stephanie Halligan explained, “If you decide to postpone your payments and you haven’t signed up for deferral or forbearance, you’re simply missing your payments.”[6]

As a refresher:

  • Deferrals are plans that temporarily postpone when you start repaying student loans.
  • Forbearance is similar to deferrals in that it postpones the obligation to repay, but interest rates are still accrued over the non-payment period.
  • Defaulting means failing to repay according to the terms and conditions of the debt – federal debts are typically considered defaulted on after 270 days[7] of non-payment.
  • Missed payments are any instances of non-payment according to the terms and conditions of the loan.

The Silver Lining

All of that being said, carrying student loan debt does not need to be detrimental to your credit score. Just as properly handled credit can bolster credit reports, responsible handling of student loans can and will improve your credit score.

Pay on time. Pay at least the minimum (more toward the principle if you can afford). Seek guidance if your financial situation changes.

Ignoring the gravity of a situation is no solution. Critically look at your debt and your overall financial situation. Revisit your budget and make sure you can afford regular payments on all debts. Take control over your financial well being and manage your debt so that it works for you, not against you.



[2] http://www.newyorkfed.org/householdcredit/2014-q2/data/pdf/HHDC_2014Q2.pdf

[3] http://www.newyorkfed.org/research/current_issues/ci20-1.pdf

[4] http://www.newyorkfed.org/householdcredit/2014-q3/data/pdf/HHDC_2014Q3.pdf

[5] http://www.ed.gov/news/press-releases/default-rates-continue-rise-federal-student-loans

[6] http://blog.quizzle.com/2014/05/student-loans-affect-credit/

[7] https://studentaid.ed.gov/sa/repay-loans/default

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By Quizzle. Helping You Make Better Financial Decisions.