Students

How Student Loan Deferments Affect Your Credit

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There’s no denying the value of a college education. With countless surveys and studies, there’s more than enough evidence to prove that consumers with college degrees earn more over their lifetimes than those without. The downside, however, is the cost that often comes with earning that highly sought-after degree.

Outstanding student loan debt has topped the $1 trillion mark, and if rising delinquency rates are any indication, more and more Americans are finding it hard to make good on their student loan payments. Unfortunately, as with any other type of loan or credit obligation, falling behind or defaulting on a student loan can wreak havoc on your credit.

This doesn’t stop “life” from happening, though, and despite our best intentions, we can’t always control financial setbacks. If you’re having trouble maintaining your student loan payments, a deferment or forbearance may give you some breathing room while you work to regain your financial footing. Both offer a temporary reprieve on student loan repayments, which is important since student loans are rarely dischargeable in bankruptcy. The key is deciding which option is right for you and understanding the primary differences between them.

Deferment vs. Forbearance

Deferment and forbearance are similar in that they both allow you to put your student loan payments on hold, temporarily suspending your minimum monthly payment obligations. If you’ve suffered a job loss or other economic hardship, you may be eligible for a deferment or forbearance through your lender, though eligibility and terms will vary from lender to lender. In general, the time frames for temporary relief on student loans can range anywhere from a month or two to a year or longer.

Interest Accrual

The main difference between a deferment and forbearance is the interest. In the case of deferments, you maybe able to save on interest depending on whether or not your loan qualifies as an eligible government-subsidized loan. If your loan is a subsidized government loan, the interest is subsidized at a much lower rate and in some cases, you may not be charged any interest at all while the loan is in deferment. For this reason, deferments are often harder to qualify for. With forbearance, even though you aren’t obligated to make the monthly payment, you will continue to accrue the full rate of interest on any outstanding loan balance.

Credit Impact

One of the most common questions about forbearance and deferment is how they affect your credit and which, if either, causes the least amount of damage to your credit scores. The good news? Student loan deferments have no impact whatsoever on your credit scores. The same is true for student loans in forbearance. Both are noted in your credit reports, but neither indicator will
hurt your credit score.

However, if you are late or miss a payment prior to being approved for a deferment or forbearance, your score will suffer. The key to protecting your credit is to act quickly — don’t wait until you’ve fallen behind to reach out to your lender and explore your options. And it’s always a good idea to keep an eye on your score, no matter what. Credit.com’s Credit Report Card is one service that lets you check your credit score every month for free.

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  • Brenda Branch

    My daughter lost her job approx 2 years ago and sent in paperwork to defer her student loan payments until she could find another job. She is a single parent of 2 children. She found a job approx a year later in another state. It seems as if the deferment somehow got lost in the black hole and now interest has been added on to her original loan which has made her balance back up to the original amount even though she has been paying on this loan for several years prior to her losing her job. Who can she contact to straighten this mess out and get her back on track?

    She has tried for 2 years to straighten this out but to no avail. Any assistance in this matter will be greatly appreciated. She is a registered Clinical Dietician at a Hospital and works in the NICU.
    She has gotten frustrated but I believe that there is some Gov. Agency that can help her out. This student loan mess has almost caused her to lose the job she now has.

    • Gerri Detweiler

      It sounds like perhaps she made a mistake that is not uncommon for borrowers to make. They stop making payments before their deferment has been officially processed and, until it is, they are responsible for the full payments and any interest that results from missed payments. If that’s what happened and even perhaps if it’s not – she needs to focus on getting out of default and on an affordable repayment plan. She may be able to lower her payments under the Income Based Repayment Program once her loan is out of default. I’d suggest you and your daughter listen to this interview with a consumer law attorney who explains your rights when student loans are in default.

    • RandalsonMarquette

      if she has unsubsidized loans, which is probably the case since the interest was capitalized (amount accrued over the deferment term added to principle balance, then this is no mistake. Unsubsidized interest is unsubsidized. The gov does not pay for interest on your behalf while in school or deferring payments. So like any loan interest continuously accrues according to the loan terms whether you are paying the thing off or not. It is called slavery via lending. They cannot enslave us by force anymore because that would be so not PC. So now they lend us as much as we want and instead of just repaying what they gave us like we would set up with a good buddy old pal they add a meter to the time the money is in our hands like a yellow cab would do whether we are moving forward or not. Either way you will be serving up that booty at the end of the trip. Unfortunate that our liberal progressive comrades in academia has been so effective at lobbying big corporate to require degree’s in exchange for a $50k per year job; which allows us to go from ramon to mac and cheese while making the bare minimum payment. That is if we do not splurge or treat ourselves to anything nice. Hey for that they have credit cards right? It just keeps piling up. The cost of an education $200k. The cost of your financial freedom? priceless (in other words you will be paying for the rest of your life). For everything else there is mastercard. lol

  • patty

    I applied for a store credit card recently and was turned down because of my student loan. This was because of the “debt-to-income ratio.” My student loan debt is about three times higher than my yearly income. Also, I have no other debt besides the $1,000 that I still owe on my car. I pay off my credit card balances each month and my credit score is in the 800-900 range. Although being declined may actually be a blessing in disguise because it will prevent me from spending more money and creating more debt.

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  • Mark

    Your credit score isn’t in the 800 to 900 range, I guarantee that. No store credit card would ever decline an applicant with a score that high. Plus, scores cap out at 850 so if you are in the 900 range thats really impressive

    • juan

      Credit maxes out at 893. And yes you can be declined with a great score because of debt to income ratio. Though surprised that a store would deny you.

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  • Hollygolightly1105

    In 2004, I received a private student loan through a local bank. The local bank approved the loan through their education subsidiary. In 2007, I graduated college and obtained a job. In early 2009, I was laid off, and was approved by the education subsidiary for a loan deferment. I obtained a new job in late 2009. In 2011, I was laid off again, and was denied a loan deferment, as well as a loan forbearance, and a reduced payment schedule. I was specifically told that I could no longer negotiate deferment, et al. with the education subsidiary, but had to call the local bank directly. I called the local bank directly, and they told me that even though I was on unemployment with no job prospects yet, I either had to make the full payment each month or risk going into default, unless I was able to prove (by sending a copy of a job offer complete with salary information) that I could begin making full payments again within 6 months. Putting myself in financial straits, I continued to make the full payments until I found another job in 2012. In 2013, I was again laid off, and was again given the same story about having to call the local bank instead of working with the education subsidiary, whom I called and was again denied deferment, and forbearance, and reduced payments, unless I could prove that I would be able to make full payments again in 6 months. However this time I was informed that the bank only allowed deferment or forbearance or reduced payments once every 5 years, and since I had taken advantage of that in 2009, I was no longer eligible, regardless of my income/job circumstances.

    Is this legal? I don’t understand why this bank is treating this loan as a personal loan rather than an education loan, and denying me the ability to either delay or reduce payments.

    • Gerri Detweiler

      Private student loan lenders are not required to offer flexible repayment options, unfortunately. In addition, the loan may have been securitized – packaged and sold to investors – which means the bank has less flexibility to modify the loan even if it wanted to.

      I wish I had a better answer for you, but there are minimal consumer protections for these loans. You may want to contact the Consumer Financial Protection Bureau which is looking at whether certain consumer protections can be extended to private loans. It won’t help you in the short run, but if enough students speak up, then hopefully something will change.

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  • http://www.Credit.com/ Gerri Detweiler

    Contact a consumer law attorney familiar with student loan law. You can find one at TheStudentLoanLawyer.com. I’d start there if I were in your shoes – let us know what happens.

  • http://consumerrecoverynetwork.com/ask-a-question/ Michael Bovee

    If you fell behind with payments, and even though the loans were later put in deferment, the non payment sounds like it is still accurate reporting.

  • http://www.Credit.com/ Gerri Detweiler

    I have never encountered this situation before so I don’t know. I recommend you monitor your credit reports to see what happens and let us know what happens. I am sure other readers will be interested too.

    Longer term, make sure you check out Income Based Repayment to see whether that may be a better long-term solution for you.

  • Jill

    I have a question that I can’t seem to find the answer to. I’ve been keeping up with my score, and I’ve noticed that when my student loans are reported after the interest accrues that my score drops, which I understand because my debts have increased. My question is will my score decrease each and every single month? I’m just very confused, since I make my monthly payments-I have them set up on auto-draft so that I don’t forget.

    I make monthly payments that are being reported (I checked to make sure they were). I’m probably going to have to buy a new to me car in the next 18-24 months, and I don’t want to pay an arm and a leg in interest and I want my score to improve, not decrease.

    Thanks so much!

    • http://www.credit.com/ Credit.com Credit Experts

      Jill —
      It might. Part of your credit score is based on the amount of debt you have (and approval of a car loan also depends partly on your income relative to your credit obligations). And a student loan payment that is going to go up means both less cash available for a car payment and a higher debt load. If you are financially able to make payments that would decrease the balance, it might be wise to rethink your payment plan. A credit counselor with training in student loans may be able to help.
      You can read more here:
      I’m 58 & Have $65K of Student Loan Debt. What Can I Do?

  • Jonathan Mckenzie

    Hello Deanna Templeton, would be able to answer some questions about credit reports?
    From an auto accident, and divorce, I dropped from a 850-900 credit score. And recently built it back upto a 729. 702, and 706.

    • http://www.credit.com/ Credit.com Credit Experts

      Most models don’t go all the way to 900. You may want to check again. Particularly after a divorce, it’s important to check your credit reports to make sure your information is current and accurate. Here’s how to get your free annual credit reports. You can also get a free credit report card from Credit.com, and it includes personalized suggestions for improving your score.

      • Jonathan Mckenzie

        The credit score was during my marriage. The problem I have been seeing would have involved credit score ratings 10 years after divorce, most recently after financing a car, I went to purchase a piece of jewelry about 6 months ago, and I get one report stating the score had fallen to a 100. Have you seen anything like this?

        • http://www.credit.com/ Credit.com Credit Experts

          We have heard about credit scores falling dramatically after car loan inquiries. Most scores do not go as low as 100, though. Are you saying it fell 600 points, from a 700 to a 100? Or fell 100 points? (That could happen, but would be uncommon). See An Auto Loan Inquiry Dropped My Credit Score 80 Points
          .

  • Diana Magers

    My credit report dropped my score 124 points after my grace period on my student loan was reported as a late payment. I quickly got my loan in forbearance. My question is if I pay what I missed would my score recoup some of the 124 points on my credit score. I had a 678 score.

    • http://www.Credit.com/ Gerri Detweiler

      Unfortunately it is going to take time to recover. This article explains: How Long Does It Really Take to Improve Your Credit?

      Is the information reported accurate? If it’s not you should dispute it.

      • Mary Hood

        My credit score just dropped 100 points in two months and Im waited to get my credit history from my bank. My concern is with regards to getting late notices, that suddenly stopped a month after my student loan deferment went through. If that ends up being the cause for the change who do I report it to? Is there any real consequence to the leader if they filed against my credit when they should not have? Is there any agency or professional that can help graduate students with little income in these maters?

        • Jeanine Skowronski

          Generally, deferments may involve a cease of negative credit reporting related to the loan, so depending on your specific situations, you may want to contact them if the loan continues to be reported as delinquent during the deferment period.

          Thank you,

          Jeanine

  • Tamika

    Income Based Repayment (IBR) Plan INQUIRY:
    My BK was discharged in 7/2013. By 01/2014, my credit score was Fico was at 621. However, after transitioning my skills from working as a mortgage professional, my income is still below the amount of tge Standard Repayment, therefore, since April 2014 I have been approved and re-approved for the IBR plan with a monthly payment of $0.00. I have NO late payments on any of my new tradelines, no collections, no new outstanding debt what so ever, however, Navient (previously Sallie Mae) continues to report my payments as “PAID AS AGREED”, but each month is marked with an X, indicating a LATE PAYMENT. There was nothing disclosed that this form of reporting would take place and when I contact Navient they informed me that this is the way they report to the bureaus. Outside of resending my initial IBR Agreement to the 3 credit bureaus to re-investigate, which was unsuccessful, what would you suggest? My credit scores are in the mid to high 500’s, shamefully. I honestly could have bipassed the BK and remained in debt. Feels like back pedalling, instead of starting fresh.

    Thank you for any assistance you may be able to offer.

    Tamika

  • Mary Hannon

    Ok. I told my son I would pay off his student loans, from the beginning. They did come due and I was paying them. My son went into the ARMY and we had a POWER OF ATTORNY NOTORIZED at his bank, so I could take care of anything that was needed.but then I had financial difficulties. I put the loan in forbearance for 6 months. Resumed paying but once again I had trouble and was unable to work the amount of hours that I always had and was unable to keep up, once again in forbearance for 6 months, but this time I wanted to do it on income based as he was in the Army not making as much as he used to. I sent in request and POA, but they said about a month later that it was not the correct paperwork. I called to clarify, but you cannot talk to their legal department So a REP and I that had no clue what the legal Dept. was saying was missing was sort of a mute point, because we had no idea what they were asking for. This POA had allowed me too take care of all matters for him that arose, EXCEPT the student loan. In the end I screwed up, due to my inability to keep things in line because I could not even get out of bed. I should have told my son but I wanted to take care of the loan. I was on the phone with them several times, some Reps helpful and others not, then many very rude. In the end I lost track of time and my son was given negative reports on his student loans. Now I had called to make a payment on 10/31 and did so, but because it was a weekend it had to be made for 11/2 instead. So it was reported to agency. The worst of it , My son had immaculate credit and he found this out when he applied for a mortgage. I ruined it. I have spoken to many Reps as has my son but there is nothing they can do, they say. I am devastated and don’t know what to do to clear it.

    • Jeanine Skowronski

      Hello, Mary,

      Sometimes, if it’s a first missed payment and your track record has otherwise been solid, you can ask the creditor if they will consider not reporting it. If they are reporting it, you (or in this case your son) can minimize the damage done to the credit score by making all future payments on time, keeping credit card balances low and limiting inquiries. You can find more about late payments here: https://www.credit.com/credit-reports/late-payment-secrets-revealed/

      Thank you,

      Jeanine

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