21 Aug Considering Not Paying Your Student Loans? BAD IDEA!
Student Loans Your Credit Score
Your student loans are a reflection of the dreams you had when you started school. But now your financial goals are at risk because of those loans.
You may have heard that paying off student loans too fast can hurt your credit score, or that getting a deferment will do the same. But those dings are nothing compared to the damage you’ll do if you default on a student loan. Putting a loan in deferment is much better than not making your payments.
What is default?
Private lenders each have their own way of handling delinquent and defaulted loans. They may sue you, for one. We’re just going to focus on federal loans here.
If you miss one payment on a federal student loan, you’re delinquent. After 3 months of no payments, the three main credit bureaus will hear about your delinquency. The official line in the sand where you achieve default is when you don’t pay for 270 days.
In 2015, the Wall Street Journal reported that almost 7 million Americans hadn’t paid on their federal student loans for a year. Millions more are behind on payments but hadn’t hit default yet.
How does defaulting on a student loan affect my credit score?
The biggest part of your credit score is calculated on how well you pay back lines of credit. Having a delinquent or defaulted loan is very bad for your credit score’s health. The actual numerical impact varies depending on how good your credit was before you began missing payments and if you’re managing your other accounts well. Let’s just say that it may be very difficult or impossible to get a mortgage if you’re in default on your student loan.
Can I fix my credit if I’ve defaulted on a student loan?
Yes, you can. The government offers three options to help you.
- Repay the student loan in full
- Rehabilitate the loan
- Consolidate your loans (if you have more than one)
Paying the loan in full
Pay back the whole amount you owe and your debt shows as closed on your credit history. Your credit report will unfortunately continue to show that you were previously delinquent or in default. At least you won’t have collections agencies harassing you anymore, and you can begin to rebuild good credit history.
Rehabilitate the loan
Promise to make 9 monthly payments equal to 15% of your discretionary income and you can rehabilitate your loan. This might be a good option to dig yourself out of the default hole. If you can’t afford what they ask for, renegotiate. The official student aid website says payments could be as low as $5 a month.
You can only rehabilitate a loan once. The record of the default will be erased from your credit history, but any late payments before the default will still show.
Consolidate all your federal student loans
Combine them into a single fixed-interest rate loan. You’ll need to make 3 consecutive payments on the defaulted loan first to prove you’re ready to handle the new loan. This option does not remove the record of the default from your credit history.
Best option for repairing your credit after a loan default
Rehabilitation is the only way to erase that red flag of default from your credit report. Plus, the payments tend to be lower than your old payments were. On the other hand, you’re paying the loan back more slowly, so the interest is still building.
Be wary of “student debt relief” companies
If you’re having trouble paying back your federal student loans, talk to your loan servicer first. As tempting as it sounds to let someone else manage your loan, don’t give away your PIN and don’t pay a fee to “take care of” your debt woes. “Debt relief” companies try to lure students into scams that don’t pay off and don’t solve anything.
Use a professional credit repair solution to rebuild good credit
Credit repair companies do what you could do all by yourself. For one, they dispute errors to raise your credit score. Why use one at all? It’s like asking why you would hire a car mechanic to fix your car when you can just read some manuals and do it yourself!
Call Honore’ Credit Consultants today so we can discuss options for helping to improve your credit profile! (844) 967-3724