How repaying your student loans can impact your finances

At a glance

• Loan delinquency and default can lower your credit score, affecting your ability to obtain various types of consumer credit for years to come.
• More serious consequences may be garnishment of your wages, withholding of your income tax refund and difficulty finding a job.
• If you’re having trouble making federal loan repayments, you have options, such as switching to an income-driven repayment plan, requesting loan deferment or pursuing loan consolidation.
• University of Phoenix is committed to encouraging responsible borrowing among its students. Learn more about ways to manage student loan repayment!

Once you’ve completed a degree program, you may feel relieved (to be done), elated (to have accomplished it) and excited (about the future). As you transition out of student mode, however, you’ll need to begin repaying your student loans.

How responsibly you approach loan repayment can have a significant and long-lasting impact on your finances. Loan repayments can be especially challenging for adult learners who may already have a growing family, as well as a home and all the expenses that go along with that. 

It’s essential that adult borrowers have a financial plan so they know how they’re going to pay for their education, explains Stacy Tucker, vice president of financial aid operations at University of Phoenix. “Ideally, your plan should include non-loan options for paying your tuition,” Tucker says. “Adopt the mindset that borrowing is the last option for whatever can’t be paid through other means.” ​​

What happens when you make a late payment or skip a payment

When it comes to student loans, always pay the full amount due and always pay on time. If you can’t, you have several options (we’ll get to those in a minute), but don’t ignore delinquency or default notices you get from your federal student loan servicer, which is the company that processes your loan repayments. (If you’re not sure who your loan servicer is, go to your dashboard at StudentAid.gov, and click on “View Details” under the “My Aid” section.)

Once you miss a student loan payment, your loan is considered “past due,” or delinquent. After 90 days of delinquency, your loan servicer will report the delinquency to the three national credit reporting bureaus: TransUnion, Experian and Equifax.

If you fall behind or skip repayments entirely, your loan goes into what’s called default. This incurs a number of serious repercussions, including:

• Collection fees. You could be charged up to 25% of principal and interest on your loan; and, in the meantime, interest will continue to accrue.
• Garnishment of your paycheck.
• Money may be withheld from your income tax refund.
• Damaged credit makes it harder to get other types of consumer credit

Delinquency and defaulting on a student loan could also impact your credit score. This is important because your credit score comes from the data in your credit report. It helps lenders quickly determine whether you’re a good candidate for a loan, based on how likely it is that you will repay one. While there are several different credit scores, the FICO^® Score is the industry standard. It can range from 300 to 850 with anything below 580 signifying a risky borrower, and anything over 800 considered exceptional.

Credit bureaus look at a variety of factors when determining your credit score, with payment history being the most important at about 35% of your credit score. Making payments on time can help improve your score.

Once loan servicers report loans to the national credit bureaus that are more than 90 days delinquent or in default, that negative information may remain on your credit report for as long as seven years, hindering your ability to qualify for the most favorable terms and interest rates on any future loans you may pursue, such as:

• A home mortgage
• An auto loan
• A credit card
• Additional student loans

Additionally, a lower credit score may impact your ability to set up utilities if you move to a new home, qualify for homeowner insurance or even get a cellphone, because all of these activities may require a credit check beforehand.

Late or defaulted loan payments could cost you a job or promotion

Many employers today perform a background check prior to making a job offer, although some states have limited that practice. If an employer does conduct a background check, it usually includes your credit report, so a delinquency or default reported on your student loan could reflect negatively on you. 

Proactively monitor and safeguard your credit

There are steps you can take to monitor your credit and gain a better understanding of how your personal finances can affect your credit.

• Periodically check your credit report for errors or inaccuracies. You can dispute any mistakes, and you’re entitled to view a free credit report once a year at annualcreditreport.com.
• You may choose to put a “freeze” on your credit to prevent any unauthorized or possibly fraudulent access to your credit report. If you plan to apply for a loan moving forward, you can temporarily lift the freeze so that a prospective lender can view your report.
• Many credit card issuers provide you access to your credit score at any time; by viewing it and your credit report, you can learn how your credit behaviors affect your score. On-time payments have a positive effect, as does having a long track record of responsible loan repayments.

You have options if you’re having trouble repaying your federal student loans

If you’re having trouble making payments, Tucker advises asking for help early on and contacting your federal student loan servicer to discuss your options. This should be done without delay, since once you have defaulted on a loan, these options are no longer available to you, including the option to change your payment plan to an income-driven repayment plan.

It’s also best to create an online account with your loan servicer, Tucker adds. This makes it easier to manage your federal student loans and ensures you have current and accurate information.

Four federal income-driven repayment plans are available, three of which have you pay 10% of your discretionary income. The Standard Repayment Plan has a 10-year term with fixed monthly payments designed to pay off your loan as quickly as possible, with the least amount of interest, but there are other term-based plans too. Try out the loan simulator at StudentAid.gov to compare plans and determine which is best for you. ​

You might also consider deferment or forbearance, both of which let you temporarily suspend payments. The drawbacks? Interest continues to accrue during forbearance and on unsubsidized loans during deferment.

Another option is to consolidate multiple federal student loans into a Direct Consolidation Loan, simplifying your repayment schedule. Be sure you understand the pros and cons of doing so. While there is no application fee, consolidation can increase the time it takes to pay off your loan, and may cost more in interest. You may also lose certain borrower benefits associated with your current loan.

If you have already defaulted on your federal student loan (that is, if your loan is more than 270 days past due), you can participate in the government’s Fresh Start program, which helps you choose an affordable repayment plan.

There are additional benefits to doing so:

• The default will be removed from your credit report.
• You’ll be able to apply for federal student aid again.
• You’ll halt collection calls, wage garnishment or withholding of any tax refunds or Social Security payments.
• Unfortunately, the options available to borrowers of private loans are quite limited, and private loan borrowers don’t enjoy the same protections as borrowers of federal student loans. Private loan contracts vary, so read your loan contract very carefully to familiarize yourself with your loan’s conditions, rates, fees and penalties.

It’s important to stay on top of your ongoing expenses and future debts. That oft-heard expression “living like a student” means keeping your bills as low as possible — even when you’re done with school, Tucker says. “If you know you’ll have loans in the future, don’t pile up too much debt that will make it difficult to pay.”  

Remember, your ability to meet your financial obligations can ensure your family’s financial security.

This article is not intended to serve as financial advice. All financial decisions, including investments, should be made carefully and potentially with the guidance of a financial planning professional.