Q: How can a delinquent student loan affect my score?

A: As previously reported, credit lines fall into two major categories: installment accounts such as a mortgage or auto loan, which require consumers to pay a fixed amount each month until the balance has been depleted, and revolving accounts like credit cards, which limit the line of credit, but have balances that fluctuate.

According to Barry Paperno, manager of consumer operations for MyFICO.com, while student loans differ slightly from conventional installment loans in that their interest rates tend to be lower and payments are generally deferred for a period of time, the hit your score takes when you become delinquent is going to be the same.

“If you are 30 days late and your score is a 780, it’s going to go down anywhere from 90 to 110 points,” Paperno explains. “If your score is already low, around a 680, it will go down around 60 to 80 points.”

However, that’s where the similarities end, because unlike an unpaid mortgage, a delinquent student loan that you seemingly can’t repay cannot be discharged by bankruptcy, unless the borrower can prove “undue hardship.”

According to Jennifer L. Berman, an attorney with OAU consulting firm, this is no small feat.

“From a practical standpoint, this means going through a full-fledged lawsuit to prove the circumstances, which costs money,” she explains. “So from both a legal and practical perspective, this makes getting the loans discharged extremely challenging. “

An inability to discharge the loan stems back to the fact that the majority of student loans are backed through government plans and government debt is not dischargeable based on federal law. Additionally, Berman explains that student loan regulations have steadily become more stringent during the past decade as loans increased in both amount and number and delinquencies became more common.

To make matters worse, the Higher Education Act, which governs how long student loan delinquencies can remain on your credit file, essentially lets the credit bureaus decide when they remove the missed payment from your record.
“It could be seven years from the date the loan is finally paid or seven years from the day the delinquency is reported,” John Ulzheimer, president of consumer education for SmartCredit.com, says. “The takeaway here is that if you don’t pay them, they can stay on your credit report indefinitely.”

Mortgages and auto loans, conversely, are governed by the Fair Credit Reporting Act, which defines how long a negative item can stay on your credit report, and the parameters are more clearly defined.

“This is a different animal,” Paperno says, agreeing that a defaulted student loan can plague the borrower for an extended period of time.

The one bright spot here, he points out, is that student loan lenders are fairly flexible with restructuring payment plans so borrowers have options other than just simply defaulting.

“People should really educate themselves on student loans before they take them out,” Paperno says. 

Want to know what affects your credit score? Email your questions to editors@mainstreet.com.

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