How Student Loan Debt Affects Credit Scores

What If I Can’t Pay My Student Loan?

No matter how good our intentions, sometimes we are prevented from maintaining regular payments on a student loan by circumstances beyond our control, including losing a job, a prolonged illness or other types of economic hardship. Student loan default is reaching epidemic proportions. According to a recent TIME article, one in four student borrowers are delinquent on their student loans. Under these circumstances, it’s imperative to work with your lender. As soon as you know that you will be unable to make your student loan payment, get in touch with your lender to discuss your options.

One of these options may be forbearance or deferment. If a lender is unable or unwilling to grant a deferment, you may be able to qualify for forbearance. For example, Perkins loans allow forbearance in times of financial hardship. As long as you work out either arrangement with your lender in a timely and responsible manner, a forbearance or payment deferral will not have a negative impact on your credit score, since they will be listed as “paid as agreed” when they appear on your credit report.

The Negative Effects of Not Paying a Student Loan

What if you simply stop payments on your student loan without arranging for either a deferment or forbearance? This has the same effect on your credit as not paying any other account, such as your credit card bill, your car payment or your mortgage. Defaulting on a student loan is serious business, and can have disastrous consequences for not just your credit score, but for other aspects of your life, as well:

• Your loan may be turned over to a collection agency (which is never a good thing for your credit score.)
• Your wages could be garnished. This could also have a serious impact on your ability to maintain your current employment.
• You could be sued for the amount due, as well as any costs associated with taking you to court to collect the money you owe, such as attorney’s fees and court costs.
• Your state and federal tax refunds could be seized to settle your debts.
• You may not be able to renew a professional license that your job requires.
• Student loans are usually not dischargeable in bankruptcy.
• Student loans have no statute of limitations, meaning you are on the hook for life.

More Negative Consequences of Defaulting on a Student Loan

If the direct consequences listed above aren’t enough to scare you into staying current on your student loan payments, consider this: defaulting on a student loan will probably lower your credit score so much that you will be unable to qualify for credit cards, obtain a mortgage without a co-signer or get a car loan. Looking for your first job just out of college? It’s fairly common for employers to check a prospective hire’s credit rating. In short, if you default on a student loan, your financial and professional life could be severely crippled for a long time to come.