Student loans carry low interest rates and have favorable terms, yet even with these benefits many people default on their student loans every year. Unlike other loans such as auto and home, federal student loans are not discharged in a bankruptcy so getting out from under a student loan is difficult. If you find yourself defaulting on a federal student loan you may find that your credit rating will decrease significantly.
Credit Rating Effect
On a credit report, student loans appear as an installment loan. While you are in school and the loans are not repayable, the credit report will reflect the payments as being in a deferred status. Once the deferment period ends, you are responsible for making monthly payments on time. After the ninth missed payment, your credit report will reflect the loan as being defaulted. Like any defaulted loan, the credit score will drop a couple of hundred points according to the Financial Web's site. It is important to note that your score will drop with each missed payment leading up to the default.
How to Avoid Default
If you find you have trouble making your student loan payments, contact the agency that holds your loans as soon as possible. There are options for federal student loans that can assist you. One of the options is deferment which temporarily suspends payments due with no interest charges. To qualify for deferment, loan holders must have mitigating circumstances such as loss of employment or economic hardship. Another option is forbearance which also allows you to suspend payments however interest continues to be charged during this time and the qualification criteria is not as stringent as a deferment. You cannot be in a default status in order to request a deferment, however, you may qualify for forbearance if you are currently defaulted on your loans.
Direct Consolidation Loan Program
The U.S. Department of Education offers a Direct Consolidation Loan Program that consolidates all federal Stafford, Plus and other federal loans into one loan. The benefit to the loan holder is that they now have only one monthly payment to worry about. If a loan holder is having economic difficulty, consolidating the loans may help because interest rates are locked in and the monthly loan amount may be reduced due to the extension of the length of the loan.
Rebuilding Credit Score
If you find yourself in a default situation, contact the collection company servicing the loan to negotiate a repayment agreement. By entering into a repayment agreement, the default status no longer appears on the credit report, which will help your overall score. It is important to keep current on the payments once you enter into a repayment contract. Keeping current means no late payments either. Making your payments on time will make your loan eligible for repurchase by a lender.
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