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Creating Consistency in Educational Finance: A Training Curriculum

Module 1: Customer Service Representatives

Understanding the impacts of an adverse credit history

Knowing the rules and regulations pertaining to loan repayment options is an integral part of a successful conversation with student borrowers. However, in order to have a meaningful conversation with the borrower, and to build a sense of urgency in the borrower, it is extremely important to explain to the borrower the long-term and damaging effects that defaulting on a student loan can have on their lives.

There are a number of consequences to default, but one of the most significant effects is the impact that a student loan default has on an individual's credit report. In speaking with borrowers, it is highly recommended that customer service representatives discuss the implications of a bad credit history on lifestyle.

Credit history plays a major role in an individual's ability to purchase things like a car or a house. It can affect whether a lender will extend credit to a borrower as well as the interest rate the borrower will be charged for the loan. It can even prevent an applicant from getting that dream job. As mentioned previously, the FFELP provides borrowers with a wide variety of options so that repayment of student loans does not have to be a financial burden, and borrowers can maintain good credit histories. Many borrowers do not realize the long-term, damaging effects of not paying back their student loan.

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How repayment history affects a borrower's credit report

By regulation, lenders are required to report repayment history to at least one national credit bureau organization. While lenders must report the repayment status of delinquent loans, they may have different criteria for reporting the initial delinquency of a loan. Student loan delinquency and default can have severe impacts on a borrower's credit report and credit score.

A credit score is a numerical value calculated by banks, credit card companies, auto dealers, mortgage lenders and others to predict the likelihood of certain credit behaviors. While there are many factors that determine a credit score, on-time payments are the most significant contributor to a good credit score. A poor repayment history on a credit report is a potential indicator of future non-payment of debt. Late payments are almost always viewed negatively by credit providers and may result in a denial of a credit application. This means that borrowers who have a low credit score will be unable to make any major purchases on credit. They will have to find an alternative way to buy such things as major appliances, cars, or a house.

Recent or multiple inquiries on a credit report can also negatively affect a credit score by indicating a potential credit risk. Inquiries alone may be viewed differently by credit providers and may not play a significant role in calculating a borrower's credit score. However, when coupled with other issues such as late payments, inquiries become more of a factor when calculating a credit score.

Typically, borrowers defaulting on their student loans do not regularly update their addresses with lenders; therefore, lenders must make inquiries to credit bureaus to locate borrowers. In order to avoid unwanted credit report inquiries, borrowers should be reminded to notify their lender or servicer when they move or change telephone numbers.

Also, it is important to inform borrowers about the effects that periods of deferment and forbearance can have on their credit report. Deferments and forbearances are not reported as negative credit history on a borrower's credit report. However, how credit companies interpret these statuses is subjective. Also, one thing that is certain is that if a borrower is granted a deferment or forbearance or makes a payment to bring a delinquent loan current, this action will not reverse any prior negative credit history.

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Contacting credit reporting bureaus

Speaking with borrowers about the impacts of a bad credit history usually leads them to ask about how to rectify a low credit score. In such instances, borrowers should be encouraged to contact the three credit bureau organizations for credit counseling and/or additional information regarding their credit file.

Also, borrowers have the option of obtaining a free copy of their credit report once a year from each credit bureau by going to the following Web site:

Additionally, if a borrower disputes information reported on his or her credit report, the borrower should contact the credit bureau that is reporting the item in question and file a credit dispute.

Borrowers inquiring about how to file a credit dispute should contact one or all of the three following national credit bureau organizations:

In instances of credit disputes pertaining to a borrower's student loan, the credit bureau will notify the lender of the dispute once the dispute has been filed, including relevant information provided by the borrower. The lender is required to review and respond to the dispute within 30 days of notification. In most cases, if a correction is made with one national credit bureau, the corrected information will also be forwarded to the other national credit bureaus.

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Understanding reporting requirements for lenders/servicers

Lenders are required to report information to credit bureaus within specific time frames, but lenders may choose to report information earlier depending on their company policies. It is important for customer service representatives to be aware of the credit reporting policies for their organizations. For instance, understanding when, how, and why credit is reported is as important as gaining a good understanding of the organization's credit dispute and retraction policies. Knowing this information will help prepare customer service representatives for speaking with borrowers. Following is a summary of the federal requirements about credit reporting for lenders and servicers.

A lender is required to report:

  • Each FFELP loan it makes or holds individually to at least one national credit bureau.
  • The total amount of each loan within 90 days of each disbursement.
  • The outstanding balance of each loan.
  • Repayment status of delinquent loans.
  • Status changes at least on a quarterly basis.
  • Date the loan is paid in full by or on behalf of the borrower within 90 days of the paid-in-full date.
  • Date the loan is discharged due to the borrower's death, disability, or bankruptcy within 90 days of the discharge date.
  • Date the loan is discharged due to a closed school or false certification within 30 days of being notified that the loan is discharged. The lender must also request that the credit bureau remove any negative credit history regarding the loan discharged.
  • Other information required by federal or state law.

Although the above requirements are not something that borrowers will want to know directly, it is information that can help customer service representatives in discussing the implications and serious consequences of borrowing and most importantly the importance of paying back their student loans.

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Want to know more about the Council? Contact Maria Luna-Torres at (800) 252-9743, ext. 4632, or send an e-mail at maria.luna-torres@tgslc.org.
 

© 2008 Texas Guaranteed Student Loan Corporation