Student Loan Reporting Needs to Change

Student Loan Reporting Needs to Change

     When you ask someone how many student loans they have, they'll usually answer 1 or 2.  They may say they have a $30,000 student loan.  What I never hear them say is "I have 1 student loan for $1500, another for $3000, another for $1150, another for $3850, another for $1800, one for $5400, one for $700, another for $8900, one for $650, another for $2100, and finally, one for $950".  Typically, people make one or 2 monthly payments on 1 or 2 separate student loan accounts.

     Unfortunately, and unfairly, that's not how these loans report to the credit bureaus.  Why does it matter?  Because a credit score is supposed to be indicative of the risk a lender is taking in lending an individual money.  More accurately, the FICO is a representative indication of how likely a client is to go 90+ days late on an account.  If someone accidentally misses a credit card payment by 30 or more days, it's going to have a negative effect on their credit score, but it's usually not the end of the world.

     Miss that student loan payment though by the same 30 days?  Oh no, you didn't just miss one payment.  You missed the payment on that $1500, that $3000, that $1150, that $3850.....and so on and so forth...you get the gist.  In reality, missing a student loan payment raises a borrowers risk factor no more than missing a credit card or auto loan payment, but due to the fact that student loans are reported as separate tradelines even if there's only one monthly payment, one missed payment can be devastating to a credit score, especially for a young person with a limited credit history.  1 late looks like 10+ lates.  Personally, I don't think it's fair - to borrowers, or to lenders.  We're supposed to be trying to lend to deserving applicants - someone who's missed 1 student loan payment may well be a deserving applicant, but their credit score may not reflect that because of the way things are currently reported.

     I know, I know...there are those angels out there that say "simple solution, don't miss your payment".  To you, I say 'congratulations on never having life happen at the worst of times'.  The fact remains, that missing one student loan payment is exactly the same (in reality, not in the minds of the credit bureaus) as missing one payment on anything else.  In my eyes it's not even as serious as missing a mortgage, auto, or credit card payment - miss mortgage payments, you risk foreclosure.  Miss an auto loan?  You risk repo.  Miss a credit card payment?  Watch those rates sky rocket and your limits get cut.  Miss a student loan payment?  Well, I haven't seen a diploma repossession yet.

     Admittedly, I have a biased opinion.  I think the ease of access and the willingness to offer up debt to students has contributed to the rising cost of education, and as a mortgage lender if also infuriates me when I see an otherwise perfect young first time home buyer who can't get a loan because of 1 missed payment being reported as 10 missed payments.  Yes, Mr. Student Loan company - there ARE technically 10 different loans, but you accept one payment, on one date.  I understand WHY there are 10 different loans.  I get it.  But that doesn't mean a change shouldn't be made at the credit bureau level in how student loan delinquencies are reported.

     My suggestion?  Pretty simple.  If all of the student loans are with the same company, have the same origination date, and same payment schedule, you count them in the FICO scoring as an aggregate.  That means 1 total balance, 1 total original loan amount, and if a delinquency pops up, it only counts against an individual 1 time.  Student loans are reported as their own type of tradeline with all 3 major credit bureaus - there's no reason this simple change couldn't be made to benefit young people that are trying to build their credit and work toward the American dream.