Does Being Late on Student Loans Affect Credit?
See how late student loan payments affect your credit and financial standing. Understand the consequences and find solutions.
Late student loan payments can significantly impact an individual’s financial health. This action affects credit reports and scores, which in turn influences future borrowing opportunities and financial stability.
How Student Loan Payments are Reported to Credit Bureaus
Student loan servicers and lenders regularly report payment activity to major credit reporting agencies, including Experian, Equifax, and TransUnion. Each loan appears as an installment account. A payment is typically considered delinquent the day after its due date, marking the beginning of a past-due status.
For federal student loans, servicers generally report a delinquency to the national credit bureaus once a payment is 90 days or more past due. Private student loan lenders, however, may report late payments much sooner, sometimes after only 30 days past the due date. Once reported, these negative marks can remain on a credit report for up to seven years.
Direct Effects on Credit Scores
Payment history holds substantial weight in credit scoring models, such as FICO Score and VantageScore, often constituting the largest factor in their calculation. For instance, payment history accounts for 35% of a FICO Score and between 40% to 41% of a VantageScore. Consequently, any negative marks, such as reported late payments, can lead to a noticeable decrease in credit scores.
The severity of the impact on credit scores typically increases with the duration of the delinquency. A payment that is 90 days late will generally cause a more significant score drop than a 30-day late payment. Some analyses indicate that a new student loan delinquency can reduce a credit score by over 150 points. A diminished credit score can make it more challenging to secure new credit, such as credit cards, car loans, or mortgages, and may result in less favorable interest rates on approved credit applications.
Additional Financial Consequences of Delinquency
Beyond the direct impact on credit scores, late student loan payments can trigger other financial consequences. Borrowers may face late fees, which can be assessed if a payment is not received within a specified period, sometimes as early as 15 days past due. These fees are typically calculated based on the unpaid portion of the monthly installment. Unpaid interest can also capitalize, meaning it is added to the principal balance of the loan, increasing the total amount owed.
Persistent delinquency can lead to the loan entering default. For federal student loans, default typically occurs after 270 days (approximately nine months) of missed payments. Private student loan default timelines vary by lender and specific loan terms. Once a federal loan defaults, the entire unpaid balance may become immediately due. Borrowers in default also lose eligibility for future federal student aid and are no longer able to access benefits like deferment, forbearance, or certain repayment plans.
Default can also lead to involuntary collection actions. This includes wage garnishment, where a portion of a borrower’s disposable pay, up to 15% for federal loans, can be withheld without a court order. Federal tax refunds and other federal benefits, such as Social Security payments, may also be offset and applied toward the defaulted loan through the Treasury Offset Program. Additionally, borrowers may be charged collection fees, court costs, and attorney’s fees, and their school may withhold official academic transcripts.
Steps to Take if Payments are Difficult or Missed
Individuals struggling with student loan payments should proactively contact their loan servicer to explore available options. Ignoring missed payments can lead to more severe financial repercussions.
For federal student loans, several options exist to manage payments or address delinquency. Borrowers can inquire about deferment or forbearance, which allow for a temporary suspension of payments; however, interest may continue to accrue and capitalize during these periods. Income-driven repayment (IDR) plans are another option, adjusting monthly payments based on income and family size, potentially reducing them to as low as $0 per month. These plans can also lead to loan forgiveness of any remaining balance after 20 to 25 years.
If a federal student loan has already entered default, loan rehabilitation is a pathway to bring it back into good standing. This process typically involves making nine consecutive, on-time, income-based payments over a 10-month period. Successful rehabilitation removes the default status from a credit report, stops collection activities, and restores eligibility for federal student aid and repayment benefits. Federal loan consolidation is another option that can combine multiple federal loans into a single new loan, potentially simplifying payments and offering a route out of default. For private student loans, borrowers should directly contact their lender to discuss potential relief options, which may include temporary payment adjustments or refinancing opportunities.