I received a call recently from a friend who was trying to get pre-approved on a mortgage to buy his first home. Problem was, my friend had his credit checked by his bank and it came back that he had a defaulted student loan. Bottom line, the bank would not extend him credit even if he went back and refinanced the student loans. For my friend, Defaulted Student Loan = No Mortgage
On one hand I feel really bad for my friend, but I also want to hit him in the back of the head for being clueless.
Student loans may have much more favorable repayment terms than any other type of loan, but they can still be delinquent, they are still reported to credit bureaus, and YES they can still negatively impact your credit score.
The Student Loan Myth
Many people believe that not paying a student loan is ok, and will not affect your credit rating. I honestly do not know where this myth began. Maybe it was a group of lawyers working for education loan collection agencies that created the myth to drum up more business. I don’t know. But I do know that it is completely false. Defaulting on a student loan will have a dramatic negative effect on your credit score. In my example above, my friend is prevented from buying his first home because of his delinquent student loan, and it might take him years to correct the problem.
Do you have years to wait while your credit is being corrected?
Student Loans – What you Need to Know
Student loans come in all shapes and sizes. There are student loans issued by the government, such as the Federal Direct Student Loan, there are private student loans issued by private lenders, and then there are campus based loans issued to you by your school. All of these loans have differing policies and procedures, but one thing they all share in common is that they are reported to credit bureaus when the loans enter repayment. This means that if you miss a payment or if your loan goes into default, this activity will be reflected on your credit report.
It is also important to be aware that since the majority of these loans are managed through either the Federal Government or a state agency, that your tax refund may be seized to help cover your delinquent loans and your wages may also be garnished to pay your debts. One more nifty little student loan tidbit; Federal student loans cannot be discharged in bankruptcy. So you really may never get out from paying your student loans back.
Student loans can have a very negative impact if not managed properly, but they can also work for you. If paid on time, student loans are an excellent source of credit for a young professional. Paying your student loans by the due date each month will begin to establish your credit history and ensure that your life is not put on hold because you failed to meet your financial obligations!
This post is written by our new staff writer DJ. Be sure to look for more of him and check out his author bio under the about section above.
ONce again, glad I didnt’ go to college so I don’t have to worry about this student loan thing! Sounds awful! But it does give people good credit if they pay on time, so that’s something that I’m missing out on for sure.
You might be missing out on the potential good credit boost from successfully repaying your student loans, but there are many more effective ways to boost your credit. I would definitely consider yourself lucky you avoided student loans!
“Student loans may have much more favorable repayment terms than any other type of loan…” Federal loans, perhaps. Private loans, not so much.
You are correct, and there is a vast distinction between federal student loans and private student loans. Most private student loans still have deferment and forbearance options available, which you don’t often find in a traditional mortgage, auto, or personal loan. I would argue that in general, private student loans still have more favorable repayment terms than a loan for any other purpose.
So true about getting “unstuck,” Christopher. Great post.
Not default-able and follow you to your grave. Students loans are so serious. It’s amazing how many people don’t realize (when they’re signing on the dotted line, and even years after the fact) the impact that they can have on your future financial life.
You are completely correct. I am happy that the personal finance movement has addressed the seriousness of student loans. Hopefully we can reach more parents and student before they sign their life away and are mired in overwhelming debt.