Five Ways Student Loans Impact Credit. Federal Student Loans are Unique. Federal Student Loans are Unique

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Five Ways Student

Loans Impact Credit

Federal Student Loans are Unique

• Established credit is not needed • No payment due immediately • Variety of repayment options • Ability to postpone payments • Can combine several loans

with one new loan

• Can rehabilitate a defaulted loan

Federal Student Loans are Unique

Therefore….its uniqueness can make it difficult to understand how these loans impact a borrower’s credit report

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We Will Discuss

Five ways student loans impact credit

Payments Delinquency Deferment and Forbearance Loan Default Loan Rehabilitation and Consolidation

1. HOW PAYMENTS IMPACT CREDIT

True or False

Borrower’s loans are not reported to the credit reporting agencies until they go into

repayment.

True

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Student Loans

• Student loans are a type of installment loan – Credit that is granted on condition of its

repayment at installments, over a specified period of time until paid in full

– Credit report will specify that the installment loan is an “education loan”

Before Repayment Begins

• Servicers must report loan information to the three national credit reporting agencies within 90 days of each disbursement

– Reported at the account level, not loan level • Until borrower goes into repayment, the

status is reported as “open/in good standing”

Before Repayment Begins

Great Lakes/U.S. Department of Education

Address: 2401 International Ln Madison, WI 53704 800-xxx-xxxx Account Number: 44999111100

Address Identification Number:

111 11111111

Status: Open/In good standing

Date Opened:

09/2013 Account Type: Installment Type of Loan: Education

Date Reported:

10/2015 Term/Duration: Credit Limit: $0

Monthly Payment: Terms Frequency:

Deferred Highest Credit/Original Loan Amount:

$22,000

Date of Last Payment: Responsibility:

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After Repayment

• Once a borrower enters repayment, the monthly payment amount is reported • Status reported as “open/in good standing” • Repayment plan is not reported

• On-time payments can help a borrower build a strong credit history

– Shows creditors that a borrower knows how to manage credit

How Payments are Applied

1. Late fees (if any) 2. Accrued interest 3. Principal

1. Accrued interest 2. Late fees (if any) 3. Principal

Standard Repayment Income-driven Repayment

Repayment Status

111 11111111

Date Opened:

Date Reported:

10/2015 Term/Duration: 120 Months Credit Limit $0

Monthly Payment:

$275

Terms Frequency:

Monthly

Highest Credit/Original Loan Amount:

$22,000

Date of Last Payment:

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2. HOW DEFERMENT AND

FORBEARANCE IMPACT CREDIT

True or False

Deferments and forbearance are negatively reported on an individual’s credit report?

True

A B False

Deferment and Forbearance

• Deferments and forbearance do not negatively impact a borrower’s credit report • Status is reported as “open/deferred” • Amount of principal could increase due to

capitalization

– Unpaid interest is added to the principal at the end of a forbearance and possibly a deferment

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Deferment/Forbearance Status

111 11111111

Status: Open/Deferred until 12/2015

Date Opened:

Date Reported:

10/2015 Term/Duration: Credit Limit $0

Deferred

$22,000

02/2015 Responsibility: Individual Balance: $20,459

3. HOW DELINQUENCY

IMPACTS CREDIT

True or False

Delinquent loans are reported on a borrower’s credit report once they become 30 days delinquent?

True

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Delinquency

• Department strongly encourages servicers to wait until the borrower is at least 60 days delinquent to report to the CRAs

• However, a loan is considered delinquent 30 days after the due date

Delinquency

• Servicers report delinquent status every 30 days once reported to the CRAs

• Will remain on the borrower’s credit report until seven years from the date the loan was 30 days delinquent

Delinquent Loan Status

111 11111111

Status: Account past due 90 days

Date Opened:

Date Reported:

Monthly Payment:

$275

Terms Frequency:

Monthly

$22,000

7/2015

Responsibility:

Individual

Balance:

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Delinquency

• Factors that negatively impact the payment history

– Number of delinquent accounts

– How late are the payments

– How recently did the late payments occur

35% of the

credit score

is represented by the individual’s payment history

4. HOW LOAN DEFAULT

IMPACTS CREDIT

True or False

Loan default will remain on the borrower’s credit report for seven years from the date the loan was reported 30 days past due.

True

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Loan Default

• Once a loan has defaulted the status will be updated as 'claim has been filed with government’

– For Direct Loans, once it has been transferred to the Debt Management and Collection Systems (DMCS)

– For Federal Loans, once claim has been paid by guarantor

Loan Default

• Defaulted loan will also be reported as a 'collection account’ and will be listed in the collections part of the person’s credit report • Will remain on the borrower’s credit report

until seven years from the date the loan was 30 days delinquent

Default Status

111 11111111

Status: Claim filed with federal government

Date Opened:

Date Reported:

10/2015 Term/Duration: Credit Limit $0

Monthly Payment:

$0

Terms Frequency: Highest Credit/Original Loan Amount:

$22,000

10/2013

Responsibility:

Individual

Balance:

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Administrative Wage Garnishment

• Administrative Wage Garnishment (AWG) – Can withhold up to 15% of an employee's

disposable income

– Garnishments are considered public record and can appear on an individual’s credit report – May remain on credit report

for up to seven years

Treasury Offset

• Treasury Offset Program (TOP) – Department can request the

Department of Treasury to arrange an offset to collect any defaulted student loan debt – Not reported to the credit

reporting agencies

Judgments

• Borrowers who refuse to voluntarily pay may be sued in State or Federal District Court for the outstanding balance plus attorney's fees and court costs

– Judgments are considered public record and can appear on an individual’s credit report – May remain on credit report

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5. HOW LOAN REHABILITATION AND

CONSOLIDATION IMPACT CREDIT

True or False

Once a borrower resolves a default through consolidation, the default status is removed from their credit report.

True

A B False

Direct Loan Consolidation

• Once the consolidated has been completed, the status of the loans that were included in the consolidation will change to

“transferred” and/or “paid in full” • Default notation will not be removed

The new consolidation loan will reflect on the credit report

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Old Loan After Consolidation

111 11111111

Status: Transferred/Paid in full

Date Opened:

Date Reported:

Monthly

$22,000

New Consolidation Loan

111 11111111

Date Opened:

Date Reported:

Monthly Payment:

$205

Terms Frequency:

Monthly

$20,459

Rehabilitated Loan

• Once a borrower has successfully rehabilitated their loan, the loan will no longer be considered in a default status

– The default status reported by loan holder will be deleted from credit report

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Old Loan After Rehabilitation

111 11111111

Status:Closed due to transfer

Date Opened:

Date Reported:

Monthly

$28,640

Old Loan After Rehabilitated

Payment history:

2012 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Status - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 30 60 90

Status 120 OK OK 30 60 90 OK OK 30 60 OK OK

Status 30 60 90 120 150 180 210 240 270 300 330 360

New Loan After Rehabilitation

2222222222

Date Opened:

Date Reported:

Monthly Payment:

$355

Terms Frequency:

Monthly

$25,459

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CONCLUSION AND RESOURCES

Educate Your Borrowers

• Help borrowers better understand their obligations as a borrower

– How and when students loans are reported on their credit reports

– On-time payments helps to build good credit – Change their repayment plan if the one they

have is unaffordable

Educate Your Borrowers

• Help borrowers better understand their obligations as a borrower

– Deferments and forbearance do not negatively impact their credit

– Loan delinquency and default have serious negative implications

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Resources

• Annualcreditreport.com • Myfico.com • Bankrate.com • Optoutprescreen.com • Creditkarma.com • Mint.com • Mymoney.gov • Myeddebt.ed.gov