Do Student Loan Deferrals Affect Credit Scores?
Borrowers of federal student loans have a default option of deferment to help them in case they are facing difficulties making loan repayments. Although it isn’t a permanent fix, it still helps borrowers delay payments in six-month intervals for up to 36 months.
When you request a deferment, it will be reflected in your credit report, but it doesn’t impact your overall credit score.
Depending on the loan, you may be required to pay the accrued interest during the deferment period. Importantly, if you miss these payments, it’ll hurt your credit rating.
There are quite a few ifs and buts worth considering when discussing the impact on your credit score.
Read on to understand these conditions more clearly.
What Is A Deferral?
Deferment is an approved time where you’re temporarily excused by the lender from making payments on your student loans owing to specific circumstances such as economic hardship, unemployment, military deployment, and more.
When you get approved for a deferral, you don’t need to be making the regular payments on the loan.
The deferral period is typically offered in six-month intervals and can last up to a total of 36 months depending on the lender.
During this period, you’re liable to pay the interest accrued on the loan. If you have a subsidized federal loan, you’ll be eligible for an interest-free deferral.
Once you apply for a deferral, you must keep making regular payments on the loan until you are notified of the approval. If you hold payments without a confirmation, you’ll be marked as delinquent and it will lower your credit score. Additionally, if you have missed consecutive payments for 270 days, you won’t be eligible for deferment.
What Is A Credit Score?
A credit score is a numerical value ranging between 300 to 850 that indicates the creditworthiness of an individual. The higher your credit score, the easier it is to access quicker lending approval, competitive interest rates, and the best financing offers. This credit score is based on your credit history which is a record of the total debts, open accounts, length of credits, types of credits, and repayment history of an individual.
There are different credit rating systems, but the FICO model is widely accepted by lenders.
When you request a deferment, it is recorded directly in your credit history. However, it is neither a positive or a negative addition, but just a generic entry. As long as you keep making regular payments on the loan before and after you apply for the deferment, it won’t hurt your score. However, if you miss payments or are late making payments, it will impact your score negatively.
Indirect Hits To Credit Scores
A deferment or forbearance will be a part of your credit record. There is no direct impact on your overall score, but there can be indirect hits.
Listed below are the prime reasons.
Being Late With Payments Before Requesting A Deferral
You need to keep making regular payments on the student loan before you request a deferral. If you have missed payments before you applied for deferment, you’ll be considered delinquent and it will be reflected in your credit history, thus lowering your score.
The standard limit set by lenders before they mark your account as delinquent for non-payment is 270 days. Even when you request a deferment, you must continue making regular payments on the loan until you’re notified of the approval of your request.
Not Paying Debt During the Deferral Period
If you are approved for deferment, interest will be accrued on the outstanding principal balance. You are liable to make regular interest-only payments during the approved deferment period.
If you have a subsidized federal loan, the government will bear the interest charges. For all other loans, you must make the payments on or before the due date. If you miss these payments, it will show up on your credit history and lower your score.
Higher Interest Accruing During the Deferral Period
When you defer student loans, it will increase the total amount you owe because the repayment term will increase as well. Interest will keep accruing on the outstanding balance, thus increasing the principal. This process is called capitalization and it can increase your total debt manifold.
If you end up with excessive interest and miss payments, you will be marked as delinquent and your credit score will take a huge blow.
A student loan deferment doesn’t directly affect your credit score, but it does not do any good either. It is just a way of temporarily delaying the payment while making interest-only payments until your financial situation stabilizes.
Deferment may or may not be the right strategy for dealing with outstanding debt. Before you choose this option, try considering other alternatives like student loan refinancing or income-driven repayment plans.