Student Loans and Credit Reports

With all the recent press about credit reporting company Equifax’s major data breach, now’s a good time to discuss the intersection of student loans and credit reports. It’s not uncommon to have questions about how student loans affect credit, so lets sort the myths from the facts.

What Shows on a Credit Report?

Federal and private student loans should show on credit reports with the big three companies: Experian, Equifax, and TransUnion. Trade lines, the reporting of a particular debt, will appear for each, separate loan. A borrower with several federal loans will have a trade line for each loan. The trade line should show the origination date, balance, date last reported, company reporting, and payment history.

How Long is a Debt Reported?

Only a closed or defaulted account will eventually cease to be reported, known as “aging off” or “fall off” the report. Open accounts in good standing will be reported until closed or defaulted. While open, the creditor or servicer will update the report monthly.

Normally, a defaulted debt will fall off a report after 7.5 years from the date of the first missed payment. This applies to private student loans. For federal loans, the time is actually 7 years from the date of default OR from the date the loan is transferred from a FFEL guarantor to the Department of Education. And of course, there is an exception. Perkins loans never age off while a balance is due. If a Perkins loan is in default for more than 7.5 years, the trade line will continue to show until the loan is paid off, be it through an actual payoff or through consolidation. At that point, the trade line will simply disappear.

This creates an interesting phenomenon for federal non-Perkins student loans. A defaulted federal student loan, older than 7 years may not appear on a credit report. However, because there is no Statute of Limitations, collections can and will continue.

Even more buggy is the rule that allows a FFEL to reappear. Remember, the age off date is 7 years from the date of default, OR FFEL transfer to Dept. of Ed. Let’s say default occurs January, 2000. The trade line would age off the credit report by January 2007. But let’s say this was a FFEL loan. Let’s say the guarantor transfers the account to the Dept. of Ed January 2010. The trade line can reappear and will not age off again until January 2017.

Can a Debt Reappear?

As stated just above, a FFEL loan could reappear upon transfer to Dept. of Ed. Another event that brings back a trade line for federal student loans would be getting the loan out of default. Once out of default, the loan is in good standing and will reappear on a credit report, if it had aged off. At this point, none of the negative items will return. It will appear as a loan in good standing.

Here’s an interesting thing that may sway your decision on how to get out of default, be it rehabilitation or consolidation. When consolidation occurs, a brand new trade line appears, because consolidation is a brand new loan. If the underlying loans aged off, they stay hidden. If a FFEL is rehabilitated, a new trade line appears, because in order to complete rehabilitation, the holder of the loan is required to “sell” the loan. Technically it’s a new loan, thus a new trade line appears. If the former FFEL loan is still showing a trade line, the word “DEFAULT” is deleted. If the former FFEL already aged off, it stays off. BUT, if a DL is rehabilitated, and the trade line has aged off, the trade line returns as if the default had never occurred. No late payments show, no default shows, nothing. It will look as if you’ve had this loan from the original consolidation date with NO ISSUES! That could help a person looking to improve their credit rating.

How Does IDR Affect Credit?

IDR (Income Driven Repayment), doesn’t affect credit at all. At least, not in a bad way. Many people think that IDR is a less-than-minimum payment, but it’s not. IDR is an acceptable payment plan, allowed by law. As long as the IDR payment is made on time, credit looks just fine.

What if the borrower is looking to make a major purchase like a home? Doesn’t it ruin the debt to income ratio (DTI)? On the contrary, it could help it. DTI looks at monthly payments, not necessarily total debt load. The mortgage company wants to know that the borrower is not over burdened and can afford the mortgage payment in addition to the bills the borrower already has. Since IDR is usually more affordable than balance based payments, the borrower is more likely to afford the mortgage payments. NOTE: I’m not getting into the argument that a person on IDR shouldn’t be buying a house. That’s a statement based on a false stereotype.

SOL and Credit Reporting

It’s not uncommon to confuse the Statute of Limitations (SOL) with credit reporting timelines. The SOL is the time in which a lender has to bring a lawsuit. Federal loans are not subject to an SOL. Private loans ARE subject to SOL, based on either the State where the borrower resides, or the State that controls the contract. Contact a lawyer if you’re trying to figure out what controls your private student loan.

The time limit to report on credit reports has nothing to do with SOL. Just because an SOL has run, doesn’t mean a debt should be removed from your credit. In fact, an SOL may expire with no lawsuit taking place, but you still owe the debt. The lender can’t enforce it, but you still owe it (a bit odd, no?). So, often, a debt is still reportable even though the SOL has run. And the same goes the other way around. Just because a debt isn’t reported on your credit, doesn’t mean you don’t owe it.

Again, credit reporting and time limit to sue are not related.

Monitor Your Credit

Checking your credit is a good idea, especially before making major purchases. It’s also a good idea to check if you ever receive a fraud alert from your bank. Do not get bent out of shape about your score – that’s a marketing ploy. What you care about is accuracy. Is the information on your credit report accurate and true, including any student loans? If not and you live in Connecticut or Vermont, send me an e-mail with your story and let’s see what we can do.