The Dangers of Student Loans

Sep
16
2011

For all those students who graduated in the Spring and funded their education with student loans, you’re in for a surprise this November…invoices.  That’s right, the 6 month deferment window will be expiring and your loans will become “due and owing.”  This means you’re going to have to start making payments.

Be aware that student loans are very different than any other type of consumer loan product.  Here are some of the more significant differences between the loan types;

  • Multiple Loans – Many times student loans are reported to the credit bureaus on a disbursement basis, which means if you took out six loans to pay for college, then you’ll have six unpaid loans on your credit reports.  If you can consolidate those loans into one then you’ll likely eliminate the damage of having multiple loans on your credit reports, which is good for your credit scores.
  • Missed Payments Sting – A missed payment on a student is just as damaging as any other.  Just because your loans have been in deferment for months or years doesn’t mean that the new due dates are suggestions. Student loan lenders have the same ability to report late payments and defaults to the credit reporting agencies as mortgage, auto and credit card lenders.  Don’t roll the dice…make your payments on time.
  • Bankruptcy Isn’t An Option – Most student loan debt is NOT statutorily dis-chargeable. If your loan is guaranteed by the government then you cannot eliminate it via a bankruptcy.  This means that your student loan debt will likely follow you until you pay it off, or die.
  • Credit Reporting is Harsh – Defaulted student loans do not follow the same rules of credit reporting as other defaults. The amount of time most defaulted debts can remain on your credit reports is governed by the Fair Credit Reporting Act…except for defaulted student loan debt. Student loan credit reporting is governed by the Higher Education Act.  Student loan defaults can remain on your credit reports much longer than the 7 year time limit on non-government guaranteed debt.
  • Collateral Damage – Defaulted student loans can bleed badly.  Unlike almost all other loans, defaulting on student loans can lead to garnishment of wages, seizure of tax returns, Social Security, and the loss of eligibility for federal VA or FHA loan programs.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

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