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Don’t Let Your Student Loan Sabotage Your Credit Score

May 1, 2013

For many, the process of applying for, securing, and then paying off a student loan is their first step into the world of money management. How you handle your student loan could sabotage you financially for a long time after graduation if you are not careful. When you first apply for credit, your credit history begins. It will be consulted throughout your lifetime in calculating your credit score. A high credit score will see you able to secure a loan or mortgage with little difficulty, and at prime rates. A low credit score however could see you having a difficult financial time in the future, unable to secure a loan, mortgage, or even a credit card.

One of the greatest negative effects on an individual’s credit score is a failure to pay bills on time, or defaulting on loan or credit card payments. Your bill payment history makes up a massive 35% of your credit score. If you continually make late payments on your student loan or miss them completely, it can seriously affect your credit rating. As you miss payments the amount you owe will increase due to accumulated interest. The amount you owe at any time makes up another 30% of your credit score. As you can see, you can control 65% of your credit score simply by paying bills and making loan payments on time.

How your credit history unfolds is completely in your hands. You can shape your credit history and build a healthy credit rating by being financially responsible. It might be difficult, and you may have to make huge sacrifices, but doing so could save you from serious trouble or financial strain in the future. If you are struggling to make regular payments on your student loan, the sooner you take action to correct that the better.

What to Do if You are Struggling to Pay Your Student Loan


If you are having problems making your student loan payments there are several steps you can take to prevent it sabotaging your credit score. The first thing you should do is contact your loan provider as soon as possible and alert them to the situation. You may be able to arrange a new payment plan that is easier to meet on a monthly basis by extending the repayment period. You may also qualify for forbearance, deferment, or loan consolidation. Deferment and forbearance allow you to postpone or reduce your payments in order to help you avoid defaulting.

During a deferment you are excused from making payments on the principal or interest for a set period, and in some cases, depending on the type of loan you have, the government will even pay the interest (Direct Subsidized Loan, Federal Perkins Loan, or Subsidized Federal Stafford Loan). If you have unsubsidized loans you will have to pay the interest, but not until the deferment period is over. Keep in mind however, that interest will continue to accrue during the deferment period. Ask your loan provider or organization that handles your loan if you qualify.

A forbearance may be granted to you if you can’t make your payments but don’t qualify for a deferment. A forbearance will give you relief from monthly payments for up to one year, but interest will continue to accrue on both subsidizes and unsubsidized loans. There are two types of forbearance, mandatory and discretionary. A discretionary forbearance may be granted on the discretion of your lender due to illness or financial hardship. Your lender must grant you a mandatory forbearance if you qualify.

Taking action now to avoid defaulting on your student loan can save you from financial hardship and future disappointments. Working with your lender to avoid defaulting on your student loans bow will ensure that you can borrow money in the future when you’re ready to buy a house or car. Educate yourself further about deferments, loan consolidation, and forbearance so that your student loan doesn’t sabotage your credit score.


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