How Do Loan Strategies Affect Credit?
I would absolutely love to go on a rant about how credit is used to enslave us as human beings making it impossible to make a financial decision without worrying how it will affect credit. As if some arbitrary number has any control over if you will be able to repay your loans or want to. Do you have any idea how many people think they are their credit score? How many people think that they are a bad person, or they are a bad American because they have terrible credit? Anyway, I’m not going on a tangent with this crusade because that could be a whole other book.
Let’s address what happens to your credit when using the strategies College Loan Freedom offers. Absolutely nothing!
Well, pretty much. A federal consolidation and/or changing over to an Income-Driven Repayment Plan will not affect your credit. With a consolidation remember there is a new loan paying off your old loans, but it is essentially the same amount of debt that is being moved from one pile to another. So it is a net effect of nothing. Some people have even reported a slight uptick because the credit report shows loans were paid off, but I never promise that to anyone.
With IDR you are still going to be paying on your loans, so your payment will always be reflected as “Current Status,” even if your new monthly payment is $0 a month. Even with a forbearance you are actively showing that you are working with the lender on your loans so it “should” never be marked as a negative.
All that said your credit is manipulated in so many different ways it often feels that if you sneeze it affects your credit.
In all my years of doing this and helping thousands of people I can say that two rare cases stood out but most of the time if anyone’s credit was affected it was because of inaccurate reporting or internal problems.
The two cases I’m going to warn you about were identical which made me dig into this issue further, keep in mind I am not a credit expert I am a student loan expert, so I sought out some of the best credit professionals in the business. In both client cases there was a massively high amount of student loan debt, we are talking $300,000+. And as if to give me a controlled environment for this study, in both of my clients cases the only debt they had at all was their student loans. Here is what happened, do you remember that student loan debt interest is the most aggressive interest in the world and compounds through an instrument called capitalization? This is where the interest that is constantly climbing gets rolled into the principle amount, all so it can begin climbing even faster. Well the credit bureaus dinged both of my clients for this. They said that the loan had grown beyond what was originally borrowed and that was grounds for negative reporting.
When I spoke to the credit experts they told me a couple of interesting facts about this. First, that it can only happen once meaning once your debt has grown beyond what you originally borrowed the credit bureaus can’t keep hitting your credit score for this over and over. Second, they said that the maximum penalty that can be imposed for this is 35 points. One of my clients got a 20-point hit and the other a 30-point hit.
Because of this I feel I should warn you that this may be a possibility if you use Income-Driven Repayment. Though like I said it is extremely rare. I’ve been doing this for thousands, but it has only happened twice and both on people with massive debts.
After doing this research and talking with several of the top credit professionals we all kind of made a similar conclusion. If not at this moment, possibly in the near future, we believe that the credit bureaus are going to have to change how they report about student loan debt. Because student loans have become such a massive issue affecting millions of Americans they are going to have to loosen up how student loans affect credit otherwise it will begin to affect lending. Just like we saw recently that the Fannie Mae guidelines were loosened in how student loans are calculated in order to get a home because they were seeing so many files rejected because of this issue.
I believe student loan debt will start to be reported with kid gloves just like bankruptcies, foreclosures, and short sales were after the mortgage meltdown. As we have all seen the ability to lend and borrow money is a delicate ecosystem and if everyone with a student loan can’t borrow it will be another factor that grinds our economy to a halt.
If you are interested in the solutions we can offer to lower your student loan debt, don't hesitate to talk to us! During our free consultation we'll educate you about Student Loan Forgiveness & list you your options.