How Student Loan Delinquencies Impact Credit Scores: Everything You Need to Know
Millions of Americans are struggling to keep up with student loan payments, especially after the pandemic-related payment pause ended. As student loan delinquencies are now being reflected on credit reports, many are left wondering how this will affect their credit scores and overall financial health. In this post, we will explore the impact of student loan delinquencies on credit scores and share some strategies to prevent or minimize their negative effects.
How Student Loan Delinquencies Affect Credit Scores
When you fail to make payments on your student loans, the consequences extend beyond late fees. Delinquent loans are reported to credit bureaus, which can cause a significant drop in your credit score. In the U.S., a credit score is an essential measure of a person’s financial reliability, and a lower score can lead to serious financial repercussions.
- Once a student loan becomes delinquent, it is reported to the credit bureaus (Experian, TransUnion, Equifax), negatively affecting your credit score.
- The longer the delinquency, the more severe the credit score drop. Credit scores can suffer major drops after 30, 60, or 90 days of missed payments.
- Lower credit scores can make it harder to qualify for new credit cards or loans, and you may face higher interest rates when borrowing money in the future.
- Interest on delinquent loans continues to accrue, increasing the total amount owed and making it harder to get out of debt.
A person reviewing their credit report on a laptop with financial documents on the table
How Deferred Student Loans Affect Your Credit Score
During the pandemic, millions of borrowers benefitted from a federal pause on student loan repayments. During this time, delinquent loans were protected from being reflected on credit reports. However, as these protections have come to an end, deferred loans are beginning to impact credit scores once again. Here's what you need to know:
- While the pause protected borrowers from having delinquencies reflected on credit scores, that protection has ended, and missed payments will now be reported.
- If you fail to start repaying deferred loans, it could lead to a negative mark on your credit score.
- Consider using federal repayment options or contacting your loan servicer to adjust your payment plan if you’re struggling to meet the new requirements.
Graph illustrating student loan payments affecting credit score fluctuations
Why Student Loans Can Cause Credit Score Drops
- Your student loan repayment history contributes significantly to your credit score, with missed or delinquent payments negatively affecting your rating.
- Large loan amounts mean that missing payments or defaulting on your loan will cause a greater drop in your score compared to smaller loans.
What Happens to Your Credit Score If You Don’t Pay Student Loans?
- Failure to pay your student loans will result in a rapid decline in your credit score, making it harder to secure any new credit or loans.
- The longer you remain delinquent, the more damaging the effect on your credit history, with negative marks potentially staying on your record for up to seven years.
How Student Loan Forgiveness Programs Affect Your Credit Score
- Forgiven loans typically don’t negatively affect your credit score and, in some cases, might even improve your debt-to-income ratio, which can help your score.
- However, not all loans qualify for forgiveness, so make sure to thoroughly understand the criteria and how it may influence your financial standing.
- Set Up Automatic Payments: Many loan servicers offer the option to set up automatic payments, ensuring you never miss a due date.
- Adjust Your Repayment Plan: If you're struggling to make your payments, contact your loan servicer to modify your repayment plan. Options include extending the repayment term or switching to an income-driven plan.
- Use Credit Counseling: If you're overwhelmed, consider working with a credit counselor to develop a plan for managing your debt and protecting your credit score.
- Build an Emergency Fund: Having a financial cushion can help you avoid missed payments in case of unexpected expenses.
Tips to Prevent Student Loan Delinquency
Conclusion
Student loan delinquencies can have a significant impact on your credit score, but there are steps you can take to mitigate the damage. It’s important to stay on top of your financial situation, make timely payments, and explore repayment options or forgiveness programs if necessary. By actively managing your student loans and protecting your credit score, you can ensure better financial opportunities in the future.
