Do Federal Student Loans Affect Credit Score?
How Does Federal Student Loans Impact Your Credit Rating?
Borrowing federal student loans to finance a college education is quite prevalent in the current generation. With tuition and fees rising at a rate even higher than inflation, it has become almost inevitable for students to incur debt to pay for their college education. This brings us to the next crucial question: Do federal student loans affect your credit score in any way? Let us take a closer look.
An Overview of Federal Student Loans
Federal student loans are money lent by the federal government to help students pay for college, vocational training, or any other kind of higher education. Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans, and Federal Perkins Loans are the many forms of federal student loans. Although the US Department of Education funds the loans, the Department of Education controls their conditions.
Federal student loans differ from private loans mostly in terms of their rather low fixed interest rates, flexibility in terms of repayment, possible loan discharge, and absence of borrower credit check requirements or collateral needed for loan issuing. Consequently, one of the greatest methods to pay for college education is seen to be federal government-sponsored student loans.
Will Federal Student Loans Help to Establish My Credit?
To answer this question briefly, the response is yes, federal student loan borrowing and responsible repayment can help build credit gradually. However, some of them require clarification.
Federal student loans are of the installment type of loans. This makes them enables you to pay back the borrowed amount in small installments over a longer period known as a repayment period. It is important to note that a favorable repayment history of installment accounts has positive implications for credit scoring.
For instance, timely payment of federal student loans every month is an aspect of responsible credit usage. This tells creditors that you are capable of incurring and managing debts appropriately. For this reason, it leads to incremental positive changes in your credit scores.
However, it is worthy of note that federal student loans are not reported on credit bureaus as long as the loans remain in deferment which usually covers the duration of the college education for a student who is attending college at least half time. Thus it can be concluded that merely having federal student loans and not making any payments for them yet has no impact on credit scores.
They are not reported to the major consumer credit bureaus until later once you graduate and enter the loan repayment phase. From this point, your payment behavior starts to get reflected on standard credit scoring systems.
Thus, based on the repayment conduct, federal student loans can either help or hinder credit. Credit building arises from timely payments while credit deterioration stems from delayed or non-payment.
The Special Rules for Reporting to Credit Bureaus in Regards to Federal Student Loans
Different from other types of conventional loan products, federal student loans operate specific credit reporting procedures agreed upon by loan servicers and credit bureaus. These include:
Federal student loans: the origination or balance changes are not reported on credit reports. Once more, only the payment history is that which is passed on to the credit reference agencies.
If payments are delayed or placed on hold, these durations are not even considered negative or positive in credit scores.
Federal student loans that have been defaulted are not forwarded to collection agencies to be collected on behalf of private entities. They are kept under federal jurisdiction for more focused debt collection instead.
Federal student loans that have been rehabilitated that is, the loans that have been brought out of default through nine on-time monthly payments no longer reflect negative default status on credit histories. A user can set a default record and the default record gets deleted.
Federal student loan consolidations also result in prior negative marks or delinquencies being washed off credit reports, giving clean records.
Select federal student loan forgiveness programs result in the remaining loan balances being wiped, resulting in no account balances stated without affecting the credit score.
These provisions suggest that federal student borrowers receive some additional leniency or flexibility about credit reporting compared with other conventional credit instruments.
Utilizing Federal Student Loans for Credit Rating
As earlier highlighted, federal student loan borrowing builds credit naturally as you prove good credit repayment behavior; however, you can take advantage of federal student loans purposely to build on your credit. Strategies include:
Pay in monthly installments through auto-debit so that the loan balance is automatically debited. This eliminates the chances of missing payment dates due to forgetting.
Should one have difficulties in making payments, it is advisable to talk to the loan servicers before loans go into default. This is a clear indication of intention to pay back the borrowed amount.
Pay off defaulted federal loans to prevent information from being reported on credit reports.
Thus, federal student loans should be considered as any other installment loan where timely repayment helps to build credit history.
The Takeaway
Unlike federal student loans, federal PLUS loans affect a borrower's credit health if payment on the loans starts. But if properly utilized they make a very significant positive contribution to building sound credit scores in the long run. On the other hand, federal student loans if not managed properly can affect the credit status of the borrower through regular or systematic delayed payment or even failure to pay back the loan as agreed. It is therefore important to be an informed and strategic borrower.
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