Does Student Loan Forbearance Affect Credit Score?
Common these days, especially for students seeking a college education, borrowing money to cover education demands is somewhat prevalent. More than 43 million Americans reportedly have outstanding student debt liabilities of nearly $1.5 trillion. Many graduates today struggle to pay back student loans given skyrocketing rates of tuition and cost of living. Borrowers may eagerly await student loan forbearance, which lets them either put their loan payment on hold or lower it, in rough times financially. Nonetheless, the problem is applying for forbearance, thus one should be aware of how it would damage their credit.
What is student loan forbearance?
Loan deferment enables a student not to pay until after a particular period, pay a lesser amount for some time, or take a longer time to make the repayments. In other words, it enables you not to pay the loan for a while. It is normally given in small chunks of three months to one year and is renewable for up to three years in the life of the loan. Forbearance is not an automatic option where borrowers have to apply for it and the lender may approve it if the borrower is facing some form of difficulty in paying his or her dues due to financial reasons or other circumstances. Some of the reasons that may warrant a forbearance include; losing a job, high medical bills, income fluctuations, deployment, or pursuing higher education.
How Does Forbearance Impact Credit Score?
When you cease paying for a student loan via forbearance, your loan goes to a non-payment status. However, it should be noted that while amounts that are placed into forgiveness programs or loan defaults are eliminated, amounts placed into forbearance are not. It means that you still need to pay back the loan in full after the forbearance period is over.
However, while forbearance halts your payments, the account remains open and continues to show on your credit report. As stated by Experian, a consumer credit reporting agency, student loan forbearance does not have a direct impact on your credit scores. The impact of forbearance on credit reports relies on the condition that the account does not lapse into delinquency and default due to missed payments. It should also be noted that the account age and history will also remain constant and accumulate while maintaining loan forbearance.
Possible Effect on Credit Utilization Ratio
There is a way student loan forbearance can affect your score and that is through credit utilization ratio; the total amount you owe divided by the total credit available. When you stop payment with forbearance your student loan balances are not reduced, but your usable credit is still the same. Depending on the size of your loans, this could increase your credit utilization which in turn may reduce your score by a few points. Nevertheless, because payments are made after forbearance, your utilization should get to the previous state as your balance drops.
Other Ways Forbearance May Affect Your Credit
Forbearance itself does not hurt your credit report, however, there are some risks to credit if one is unable to bring up timely payments after the forbearance period lapses. If forbearance was utilized as a result of temporary difficulties and the position has not changed later, it is possible to miss payments, become delinquent, and possibly default on the student loan. In any loan, defaulting is very detrimental to your credit profile for at least seven years of your life. Avoid taking forbearance if you are sure that you will be able to catch up with your payments in the future.
Moreover, while in forbearance new credit checks or applications for loans or credit cards may consider your temporarily higher utilization ratio as a risk factor which might reduce your chances of approval or worsen the terms of a loan. Not being able to pay off student loans could also be viewed as how the candidate would manage new debts.
Some Things You Should Know about Student Loan Forbearance
Student loan forbearance is one of the choices that can be beneficial for borrowers who experience some issues. However, it is crucial to understand how it works and which aspects of your credit it may influence in the first place. Key things to keep in mind include.
- Being on the right side of the law and wanting to get back on the right track and make payments on time.
- Some of the features include understanding that higher balances due to stopped payments may affect credit utilization ratio
- Measures that can be taken to enhance your financial status before the forbearance period elapses
- Not applying for more credit when you are still struggling to make the monthly payments to minimize the risk.
Deferment should be applied as a short-term tactical decision for managing student loan repayment options. When it comes to the future and credit, forbearance planning allows borrowers to avoid negative credit impacts on their student loans. It can also be discussed with a financial planner to determine whether forbearance is in line with your objectives and capacity to discharge student debt commitments in the long run.
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