Credit reporting is a confusing topic for all types of debt, but it is especially confusing for student loans. This is largely because there are so many different types of student loans and they are governed by so many different rules. For example, there are multiple types of federal student loans, as well as private loans, and state loans that fall somewhere in the middle. Some student loans do not have statute of limitations but others do; some federal loans have repayment plans that can result in forgiveness but others do not; some of them can be rehabilitated but others do not.
In many ways, reporting student loans on a credit report is a lot like fitting a square peg in a round hole. The Departments of Education and Treasury, and the Consumer Financial Protection Bureau recently announced that they were going to work with the credit reporting industry to try to fix that hole, so to speak.
It is great that these agencies are paying this much attention to student loan credit reporting. As we stated in our comments submitted to the CFPB, they should improve student loan credit reporting practices based on best practices. We also urge the CFPB, Education Department, and Treasury to seek borrower input throughout the process. Borrowers are a key constituency in this process, and these agencies need to hear how credit reporting decisions impact borrowers.
In the meantime, we get a lot of questions about how student loans are reported and what that will mean for student loan borrowers applying for credit (or any of the other uses of credit reports). Here is a quick rundown of some of the questions we get asked the most:
How long can student loans be reported on a credit report?
This is the question I get asked more than any other and there is a lot of misinformation about how long student loans can be reported. Even though the federal government can collect federal student loans forever, negative information (such as missed payments, collection accounts) must be removed after seven years. The only exception is Perkins loans, which can stay on the credit report until the loan is repaid.
Positive information can stay on your credit report so long as it is accurate (this is true of student loans or any other type of debt).
How are the income driven repayment plans reported?
Generally, a credit report does not indicate the borrower’s repayment plan. However, the report does indicate the borrower’s repayment period. For example, the credit report of a borrower in a standard plan with a ten year repayment period will indicate that the borrower’s repayment period is 120 months. The credit report of a borrower in Income Based Repayment whose remaining balance will be forgiven after 25 years will indicate that the borrower’s repayment period is 300 months even though that borrower may repay the loan in full before the end of the 25 years. Likewise, the credit report of a borrower who is in a 25 year extended repayment plan will indicate that the borrower’s repayment period is 300 months. The credit report will also indicate the borrower’s monthly repayment amount in either repayment plan.
Whether being in an income driven repayment plan is good for your credit depends on the circumstances. Making payments in an income driven repayment plan builds a positive payment history which is generally good for one’s credit score. There are some lenders, however, that are looking at the payment amount and the amount of principle paid. These lenders may not view borrowers with very low payments as favorably as someone who is making larger payments. It is important to remember, however, that being in an income driven repayment plan is always preferable to being in default.
Is it a federal loan or a private loan?
A credit report will not indicate whether a loan is a federal loan or a private loan. However, there may be some items on the report that can indicate whether the loan is federal or private. For example, loans held by the Department of Education will often say both “DEPT OF ED” and the servicer name. However, FFEL loans (which are a type of federal loans) and private loans made by lenders who also made FFEL loans can be hard to distinguish. If you are trying to figure out what kind of loans you have, you should check the National Student Loan Data System for a list of your federal loans.
Will rehabilitation of a defaulted loan help my credit score?
Yes, but maybe not by much. Upon successful completion of a rehabilitation plan, the default notation should be removed from your credit record. In most cases, however, the other negative history will remain until it gets too old to report. The other way to get out of default is to consolidate. When you consolidate, the default notation and other negative history for the old loan will remain on your report until it gets too old, but your report will show you as current on the new consolidation loan. The total impact to your credit score will ultimately depend on what else is on your credit report.
What questions do you have about credit reporting? Let us know!