Is your credit score in shambles because of outstanding student loan debt? Well, you’re definitely not alone.
Don’t believe me? Just take a look at the Student Loan Debt Clock from FinAid.org that is skyrocketing by the second. Fortunately, you may qualify for some form of relief that will give your credit score and wallet a break.
First, let’s take a look at the ways in which your credit score is impacted by student loan debt.
Student loans and FICO:
In the wonderful world of FICO, student loans are simply classified as a type of installment debt and do not qualify for any form of special treatment.
1. Payment history
Have you recently defaulted on your student loans? Approximately 35 percent of your credit score is derived from payment history, so this could be the primary reason why your FICO score is plummeting.
2. Amounts owed
If your student loans are the only form of debt you have in your possession and the outstanding balances are close to the limit, your credit utilization will be extremely high. This figure accounts for 30 percent of your FICO score.
What can you do about it?
Instead of remaining in panic mode, take a deep breath and contact your loan servicer to see what form of relief is available to you.
You may eligible for one of the following:
Once you are approved for a deferment, the federal government will pay the interest on your subsidized loans and defer the principal so you don’t have to make payments.
However, interest on unsubsidized and PLUS will continue to capitalize.
“As you get back on track,
your score will improve.”
A forbearance will grant you a reduced or delayed monthly payment for up to one year, but the interest will continue to accrue on the loans.
3. Modified repayment plan
Over the course of the repayment term, you can modify your payment plan at any time to make the monthly obligation more comfortable for you.
4. Loan consolidation
Consolidating your outstanding student loan debt balances will essentially group them into one new loan and extend the repayment term. While this will lower the monthly payments, you may incur additional interest over the life of the loan.
5. Loan forgiveness, cancellation or discharge
Select occupations and personal circumstances will grant you a release from paying any outstanding student loan obligations. Check out the comprehensive list from the Federal Student Aid website to see if you meet any of the criteria for cancellation.
Assuming all of these roads lead to a dead end, try reworking your spending plan to make room for the monthly student loan payments.
Remember your credit score is not set in stone, so don’t get down on yourself if you can’t get your balances under control right away. As you get back on track, your score will begin to show signs of improvement.
Photo source: affordableschoolsonline.com