How do Student Loans Affect Credit

If you have a student loan, you may be wondering whether or not student loans can affect your credit. The answer is yes, they can!

If you are in the process of (re)building your credit, it's important to know that regular payments to your student loan can have a positive effect on your credit, but most likely not as positive as other forms of credit. Typically, the agencies managing your student loan report your payments to a single credit bureau, rather than all three. This means that you will likely need another form of credit to build up a well-rounded credit score.

There are also serious consequences if you are not responsible in making payments on your student loan. For instance, defaulting on a student loan could make your lose your income tax return, or suffer a 10 percent loss of your paycheck. In addition, you could be liable for 25 percent in late fees, or even having a lawsuit filed against you.

Obviously, making good on your student loan is important. Luckily, there are many options to do so. Your number one goal should be to protect your credit while paying back your student loan. Here are some keys to keep you on track.

Select a Repayment Plan You Can Stick To

First of all, if you are just setting up your loan, you will four options for repayment. They are:

A standard and fixed repayment that is above $50 and will last for 3-10 years.
A graduated payment that increases with time. This also lasts for 3-10 years.
An extended repayment that can last anywhere from 12-30 years, depending on the overall loan amount, or
An income contingent payment. Your loan payments would be determined each year by your previous year's earnings.

You should think carefully about which type of repayment schedule would right for your life.

If you do find yourself having a difficult time repaying your student loan, you should immediately contact your lender and explain your circumstances. You are considered in default if you haven't made a payment, or tried to contact anyone about it, in 180 days, or approximately four months.

Getting Out of Default

If you find yourself in default it's extremely important that you contact the lender and ask for a new reasonable payment that you can afford. They lender will then submit to you another payment plan. If you make those new payments for twelve months in a row, you would be considered officially out of default. (Once you have paid it successfully for six months or more, you will be free to apply for another federal loan.)

Now, here's the important point. You will be held responsible for accepting whatever payment the lender submits to you, so if you don't feel as if you could do it, you must tell them and ask for another repayment plan. The guidelines don't specify what is a "reasonable" amount, although it usually means $50 and above. (It is sometimes possible to negotiate a lower amount)

It's essential to remember that you will not be allowed to go into default a second time on your student loan without extreme ramifications, such as a lawsuit being filed against you.

Once you are out of default, you will have more options. At this point, you can ask for a deferment of your loan, a consolidation with your other debts or even, in extreme cases, a cancellation of it.

Summary

Agencies managing student loans often only report to one credit reporting agency
Not paying on student loans can have adverse effects on your credit and have more serious consequences
With a variety of repayment plans, make sure to select one you can stick to
After making on-time payments for 12 months, you can officially get out of default
Once out of default, you are free to ask for changes to your monthly payment plan

Next, we offer some general tips and guidelines to send you on down the path of building credit in General Tips for Building Credit.