Student loans are a common way for recent college graduates to pay for their education. These loans come with heavy financial obligations in addition to potential chances for both professional and personal advancement.
Fortunately, there are options like deferral available to help borrowers manage their student loan payments. However, borrowers are often concerned about how receiving a student loan deferral will affect their credit score. In this post, we’ll examine the idea of Will Getting a Student Loan Deferral Hurt My Credit Score? and its meaning.
What is Student Loan Deferral?
A student loan deferment allows eligible individuals to temporarily halt their loan payments or decrease them for a maximum of three years. During this deferment period, no interest accumulates on federally subsidized loans because the government covers the interest payments. However, for unsubsidized loans, interest does accrue and is included in the total amount owed at the conclusion of the deferment period.
How Does Deferring Student Loans Affect My Credit?
Your deferment request may be approved or denied, depending on a number of circumstances. Typically, these situations are related to your ability to work, such as temporary total disability, participation in a rehabilitation training program, taking parental leave, or facing unemployment. For those seeking more education, such as through medical school residencies, full-time graduate fellowships, or at least part-time attendance at an authorized institution, deferment alternatives may also be available.
Your credit score is a reflection of how well you meet your financial responsibilities, especially those you owe to creditors. Typically, failing to make payments is a clear indication of not meeting these obligations. However, student loan deferments present a unique situation. When you enter into deferment, it’s not a voluntary decision you make on your own; rather, your lender grants approval to temporarily suspend your repayments. This signifies that you are adhering to the terms of your agreement with your lender. Consequently, a deferral should not directly have a negative impact on your credit score.
How Deferring Student Loans Can Indirectly Affect Your Credit Score
While student loan deferral can offer some temporary relief to borrowers, it’s important to be aware of its potential drawbacks. Here are some disadvantages to consider:
Timing
Delaying your request for a loan deferral until you’ve already fallen behind on payments is not a wise strategy. Once you surpass a 30-day payment delay, your lender has the authority to report this as a “late” payment to the credit bureaus. This seemingly minor label can potentially trigger a decline in your credit score.
As your loan payment extends to a 90-day delay, it officially gets categorized as “delinquent.” If this delay stretches further to 270 days, it escalates to the status of “in default.” These designations carry significant repercussions for your credit score, potentially causing substantial damage. It’s essential to note that the act of deferring your loans itself does not directly impact your credit score.
Increased Debt
Failing to make payments to reduce your loan balance while in a deferral period may gradually lead to a slight decrease in your credit score over time. Your credit score is influenced by the comparison between the total amount you owe and your initial borrowed amount. Generally, having a lower amount owed is more favorable for your credit score. In this case, your debt isn’t increasing, but its age becomes a significant factor in the calculation of your score.
Moreover, if you have a private loan or a federal unsubsidized loan, interest continues to accumulate during the deferral period. This can result in an increase in your loan balance, which has the potential to negatively impact your credit score. If you do not make interest payments during this time and allow them to accumulate, the overall amount you’ll repay over the life of your loan may be higher. On a positive note, if your credit score is lower due to a substantial student loan balance, it should gradually improve once you resume making repayments.
Conclusion
Opting for a student loan deferral can provide temporary relief without directly impacting your credit score. Making early preparations with your lender is essential, and you should be aware of any potential interest accrual throughout the deferral period. Even though your credit score might not be immediately impacted, careful financial planning is still necessary to maintain a strong long-term financial profile. Consider other choices, such as refinancing or income-driven repayment plans, before thinking about this method.
Frequently Asked Questions
What Are the Drawbacks of Deferring Student Loan Payments?
There are various drawbacks to student debt deferment that you should think about. When you hold off on paying off your student loans, you can delay a program for loan forgiveness that you might be eligible for. Unpaid interest costs could increase, and it might take you longer to pay off your loan.
When should student loans be deferred?
There are several circumstances in which deferring student loans makes sense. Delaying student loans may be acceptable if you are a full-time or part-time student. Deferring a student loan might be a better financial choice than not making your payments if you lost your job and are unable to make the monthly payments.
What should I do to maintain a good credit standing?
While a deferment or forbearance won’t necessarily damage your credit, it’s still important to monitor the progress of your loans, ensure that your request is properly handled by the loan servicer, and resume payments as soon as your financial situation improves.
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