Sometimes as a student loan representative its hard to remember that there is life outside of student loans. Any time you talk to a borrower you only focus on their federal loan situation and as a result often times forget how these loans interact with the rest of their life and finances.
One of these key areas where student loans and the rest of life intersect is in regards to credit. While if you ask me on the phone I will tell you to consult with others about how student loans and credit interact (a classic CYA tactic), there are some things I’ve learned about student loans over time. I will address 15 of them in addition to the question, does any of it matter?
How Deferments and Forbearances Affect Your Credit
When it comes to Deferments and Forbearances it is important to remember that 1)Forbearances and Deferments do not hurt your credit score. When we report to an agency we will report it as current and on a forbearance or deferment. But most importantly you will not be reported as delinquent.
While Deferments and Forbearances can’t hurt you in terms of your credit, 2) There are times it can help you. For example if you were delinquent but not yet negatively reported, a forbearance or deferment can keep from negative reporting occurring. In addition, even if you are negatively credit reported, by bringing your account current it will keep from future negative credit reporting and hopefully isolate a one time event.
As I mentioned above credit reporting may not happen right away. In fact 3) While you are eligible to be credit reported from day one, if you have federal loans it can take as long as 90 days before they are required to report you to the credit bureaus. But remember you are eligible at any time so make no assumptions, and get your loans in order as soon as possible!
However forbearances and deferments will not always save you. While many forbearance and deferments back date to cover your delinquency 4)If you were correctly reported as delinquent at the time of reporting, covering that delinquency with a forbearance or deferment (unless it is a certified deferment or forbearance) will not correct your delinquency!
Correcting Negative Credit Reporting
We just mentioned that a forbearance or deferment will not correct previous negative reporting, but will negative reporting ever be corrected? Yes, 5) If it is a certified deferment or forbearance, or if your service made a mistake that is later corrected, your credit will auto-corrected. This is most true for federal loans. For these self-certified updates or corrections, your account basically acts as if the change always existed and anything (such as credit or interest) is updated accordingly.
There are 6 times when a certified deferment or forbearance is auto corrected: 1)Disaster Forbearance 2)Military Deferment 3)In-School Deferment 4)Internship Resident Forbearance 5)Bankruptcy Forbearance 6)Grad Fellowship/Peace Corps/National and Community Service Forbearances.
However one time it is never updated is if the reporting was done correctly. This is because 6)Student loan companies do not offer courtesy corrections.
While we have mentioned that in these situations it will auto correct, if you believe your credit should have been corrected when it wasn’t, 7)You are able to dispute negative credit reporting
To do so simply send in a copy of your credit report (you can black out stuff not relevant to your situation) to your servicer with a letter of what you are disbursing or you can call any of the major credit bureaus to place your complaint.
How will student loans help your credit
To understand how student loans can help your credit you first need to know how credit is calculated. The following is the percentages of how credit score is figured and how student loans impact it.
35% Payment History. This is an obvious one as 8)Student loans establish credit history. It can make a huge difference in fact. My wife never had a car loan, opened up only one credit card she has since closed and has a ton of student loans (we are trying to get rid of) and has a credit score near 800. It also allows you to establish a payment history on these.
30% Amount Owed This is typically more of a debt to amount available and does not apply to student loans.
15% Length of Credit History. Our credit union is always telling us we need to improve in this area. However like any other debt the history can affect your score; but this doesn’t mean you should keep them around like pets!
10% New Credit. Again has some effect but very little overall.
10% Types of credit used. This is where student loans play a big part. 9)Student Loans are considered an installment loan, and thus will give you a different source of debt. The other type of loan is typically revolving which is what a credit card can fall under. Having different types of debt can ultimately boost your credit score. In addition installment loans are not as heavily weighted in your credit score as revolving credit is.
In addition, by industry standards 10) Student loans are considered good credit. This has no effect on your actual score (minus the example above) but here is where it may matter. If you are on the defense with a decision, a bank may go your way since this is more investment and thus “responsible borrowing.”
When Student Loans Can Hurt Your Credit
There are two key ways this can occur. First as mentioned above they are considered to be an installment loan and having one of these can help your credit. 11)If you eliminate your only installment debt, it could cause your score to lower. This is because installment debt is viewed differently than revolving debt. With revolving debt you are looking to make sure you don’t try to use the maximum amount and get over your head. Installment debt cannot go up without getting an additional loan, thus in terms of your credit making extra payments rarely has a positive effect. However keeping it around will cause you extra interest than simply paying it off.
Also 12) Student loans are factored into your debt-to-income ratio. This is huge for banks. My wife works in lending for a credit union and all the time what your minimum payment is for your student loans comes into effect. This doesn’t even account for the numerous calls I get from people getting mortgages trying to make the numbers work by manipulating student loan payments. We will talk more about this in a special installment of Student Loans, Mortgages, and you!
Some other general notes about student loans
We have just hit the tip of the iceberg in terms of student loans and how it affects your credit. There are many other things that are important that we will run over real quick.
First off 13)Companies report much more than just current or delinquent to the credit agencies. They also report if its on a deferment or forbearance, minimum frequency of payments, installment amount, total amount made to borrower, date loan is discharged or paid in full (these take some processing time) along with any other information required by federal law.
In addition you may be shocked to see that even if they are all with one company 14) There can be various sequences listed on your credit report. This is because you can take out several loans a year from your school including a subsidized, an unsubsidized, a Perkins, and a private loan if necessary. This happens each year for school causing some borrowers to have 8 to 12 loans or more appear on their credit.
Finally there is a lot of confusion in regards to Parent PLUS loans and credit. 15)Parent PLUS loans are taken out by parents for the borrowers education, meaning the parent is the borrower. As a result even though many parents have their children pay these loans, the loans will NEVER appear on the child’s credit report and if the child does not pay can negatively affect the parent’s credit.
Does any of it matter?
Honestly I was very apprehensive to write an article about credit reporting, credit scores, and how loans help or hurt. This is because I am personally in a pursuit to become debt free and live my life accordingly. But it is my responsibility to teach you about all levels of student loans, not just what lines up with my beliefs.
However I will put my two cents in. Paying off your loans will help you tremendously in interest and will free up your budget. While I realize this may hurt your credit, the only thing you need credit for is more debt and if you have the cash available often times you can use that cash to buy things rather than using payments. To me spending thousands on interest annually is not worth it when I think of the power of that money in other areas of your life, especially investing down the line.
This is information that is up for debate and I wanted to take the time to provide all sides of the coin. However what is not debatable is what a huge impact, both good and bad these loans have on your credit situation. This is a brief overview of the topics that we will explore further more individually through additional posts on the studentloaninsider.org blog.
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