More than 44 million Americans have taken out U.S. government-backed loans to pay for their college or university education. Their total debt is estimated to be $1.4 trillion.
In mid-2017, the Institute for College Access and Success reported that eight-and-a-half million graduates were already in default. This represents an all-time high in the number of defaulted student loans.
If you’re one of them, or worried that you may join their ranks, do you know what the effect will be on your credit rating? The short answer is it might be very significant.
You could immediately lose eligibility for deferment and/or forgiveness of the loan, choice of a preferred repayment plan, and eligibility for additional federal aid. And it doesn’t stop with the federal government either. Your school could also withhold your academic transcript, which could effectively prevent you from applying for advanced degrees and many jobs. As if that’s not enough, default can immediately affect your credit, your ability to purchase a car, put a down payment on a home, or even rent an apartment.
Penalties for not repaying student loans on time
To make matters worse, the entire unpaid balance of your loan and any interest due may become due immediately. And if that’s not enough, should your defaulted loan be turned over to a collection agency, additional fees may be added to your total balance.
If at that point, if you haven’t repaid your loan plus associated costs in full, federal loan agencies can garnish a portion of your paycheck after a 30-day warning. This can deprive you of up to 15 percent of your salary for as long as it takes to repay your debt, and your future tax refunds can be withheld as well.
If you took out a private loan, conditions may be even more severe. You can be sued and may be held responsible for court costs. In addition, missed payment and default penalties written into private loans are often harsher than those imposed by the federal government.
Loan delinquency and credit bureaus
A federal government student loan becomes delinquent the first day after a payment date is missed and will remain so until the past-due balance is repaid or the payment plan is adjusted. If no action is taken after 90 days have passed, the delinquency might be reported to the three major credit bureaus. After 270 days, the loan could go into default.
There are three major credit bureaus in the U.S., and all of them monitor consumer payment records. This includes everything from phone bills to rent, electricity, water, gas, taxes, fines, bank loans, credit cards, and college tuition. They then assign you a credit score that theoretically predicts your odds on repaying future debts. This information is then provided to banks and any and all other lenders to use in order to decide whether or not to approve your request for credit.
For a student or recent college grad worrying about repaying tens of thousands of dollars in loans, all of this may certainly sound intimidating. But, if planned ahead correctly so that all student loan payments are paid on-time, may actually become the most important college lesson you ever had, since it will allow you to establish credit.
Establishing good credit
Say you have found a job and are beginning to repay your loan. You need a credit card. You may be moving to a new city and need to rent an apartment, open a new bank account, preferably with overdraft protection, and pay your utility bills. At each stage the party on the other end of those transactions will be able to access your credit history and see that you don’t have one. What are the chances that you’ll be provided with the line of credit you seek?
One of the few ways available to you to immediately establish good credit is by meeting each and every student loan payment on time, or, if possible, ahead of time. That will be interpreted by the credit bureaus as a promising sign that you take your financial responsibilities seriously. Your credit record will open on a very positive note and your credit score will reflect that and continue to improve with each college loan repayment. That could translate into a lot of money you’ll be able to save once you take out a short-term loan or long-term commitment like a mortgage.
A single missed student loan repayment can impact the rest of your life. Should it be necessary, a short-term installment loan could be the best way to avoid that.